Consolidation is set to escalate in the West Midlands legal sector as struggling small and medium-size law firms face being swallowed up by larger organisations.
The ongoing trend of mergers in the sector in the past year comes as firms face substantial payouts to renew professional indemnity insurance.
Premiums have risen by as much as 400 per cent – leaving some SMEs having to find £100,000 to ensure they can keep practising.
It has now emerged that a PI bill was a major factor in the demise of north Worcestershire practice Brownings Solicitors, which was bought out of administration by Solihull firm Harris Cooper Walsh.
Insolvency expert Matt Hardy, of Birmingham-based Poppleton & Appleby, handled the administration of Brownings and said more firms may suffer the same fate.
He said: “The firm was kept alive thanks to another practice taking it on. It would have faced a PI bill in excess of £100,000, one of the key factors which proved too much for it to continue trading.
“There has been a dramatic rise in the number of solicitor’s PI claims being handled and as a result premiums have risen. In the worst cases, we have heard of some firms simply being refused cover because the risk if too high and that prevents them trading.”
Mr Hardy added: “The sector has already seen several examples of smaller firms being either taken over entirely, or having to merge with others simply to survive.
“The downturn may have taken longer to hit some of the law firms than it has the rest of the economy but we are finding that it is really taking its toll.”
Mike Gahan, is the managing partner of the new firm Harris Cooper Brownings, following the takeover, and is looking at further options to take over another two companies.
He said: “It is combining strategy to ensure we have the right team in place or a bigger team with in-depth knowledge of specialist areas. I think the days of the high street solicitors operating across multidisciplines have gone – specialist knowledge is required. By having a bigger team we are able to offer expert in-depth knowledge because we have specialists.
“I am looking at another two firms at the moment. I think people have seen what we have achieved over the last year in the middle of the recession we opened two offices and acquired three. We are now getting multiple approaches from other firms who like what we do.”
Mr Gahan added that firms struggling to change would be ideal targets.
Harris Cooper Brownings is now a seven partner practice with five offices and 45 employees.
Fergal Dowling, partner at Irwin Mitchell, which has 300 employees and 20 partners in Birmingham, said: “The issue is three fold – the PI and the fact that any commercial firm in the city is struggling with the threat of a double dip recession. There are pockets of activity but law firms are in the doldrums,.
“Add to that the deregulation and Legal Services Act which will bring in non lawyer entrants to the market place – Tesco law – and that will further erode the market place.
“This is added to the fact that banks are not lending and will remain cautious about law firms on the back of Halliwells and Brownings going under. And Birmingham is overlawyered – there are too many firms chasing the same work.”
He added: “A lot of firms, including us, will see the changing market place as an opportunity. Someone like Irwin Mitchell which has a great reputation in a commercial legal process driven market will see it as a great opportunity to work with alternative business structure organisations.”
Dean Parnell, president of the Birmingham Law Society, said consolidation would be the only way to survive for some firms.
“Given that some firms will have been hit so hard during this renewal process, I suspect that some form of consolidation will be the only way they will be able to survive next year’s renewal process.”