Warning signs to look out for before firm closure.
Career Tips for Lawyers from Kayresha
The past 24 months in the South African legal market have been quite interesting, we saw a lot of growth in certain areas such as the energy practice areas, and we have seen more firms adjust to hybrid working and not completely revoke this. Â
We have seen a lot of big moves within the market, and we have also seen that some exceptional firms in the industry have shut down.
I am certain that many junior attorneys, and even seniors, felt a little pang in their hearts over the past few months, every time another closure made the news.
This made me ask myself the question, is there a way to spot if a firm is in trouble and perhaps start creating an exit strategy for the average attorney to have some sort of protection, especially on a junior level? Senior attorneys often are well sought after and have a stellar reputation to back themselves which doesn’t take away from the fact that they are still deeply affected, but a senior attorney, usually one that is performing well will be met with a softer landing.
To address the pressing question:
What are the warning signs that a law firm might be struggling and could be at risk of closure?
Let’s dive deeper into each warning sign of a firm at risk of closure:
Financial Instability:
The most obvious indicator would be Cash Flow Issues: This could be regular difficulties in meeting payroll, paying bills, or maintaining day-to-day operations suggest financial instability. This may be due to declining revenue, poor financial management, or unexpected expenses. This won’t always be easy to spot as a junior because the higher levels would usually keep this very hushed, but you might notice some budget cuts here and there.
Rising Debt: An increasing level of debt, especially if it’s outpacing revenue growth, can be a red flag. High levels of debt can lead to financial strain and reduced flexibility.
Declining Client Base:
Loss of Major Clients: Losing significant clients or key accounts can severely impact a firm’s revenue and stability. If the firm cannot replace these clients with new business, it may struggle to sustain itself.Â
Reduced New Business: Difficulty attracting new clients or securing new projects indicates that the firm might be losing its competitive edge or reputation in the market.
Staff Turnover:
High Turnover Rates: Frequent departures of senior lawyers, partners, or key staff can disrupt operations and impact client relationships. High turnover may reflect dissatisfaction with management, working conditions, or firm stability. We have seen a significant amount of turnover over the past few years, ranging across various firms.
Difficulty in Hiring: Challenges in recruiting talented professionals can also signal underlying issues, such as a diminished reputation or poor working environment.
4. Unpaid Bills and Credit Issues:
Outstanding Payments: Accumulating unpaid bills or overdue invoices from suppliers and service providers can indicate cash flow problems or financial mismanagement.
Credit Problems: Difficulty securing credit or lines of credit due to poor financial health or credit history can restrict a firm’s ability to operate effectively.
 5. Reduced Productivity and Quality:
Decreased Output: A decline in the volume of work completed or the speed at which projects are delivered can be a sign of operational inefficiencies or morale issues.
Lower Quality of Work: If the quality of the firm’s work deteriorates, it may lead to client dissatisfaction and a loss of reputation. This can result from a lack of resources, ineffective management, or internal conflicts.
   6. Legal or Regulatory Problems:
I think out all of the factors to consider this might be one that isn’t too common, well at least not within the South African market.
Ongoing Legal Disputes: Frequent legal disputes or litigation involving the firm can drain resources and distract from core operations. These issues might indicate deeper systemic problems or compliance failures.
Regulatory Compliance: Failure to adhere to industry regulations or ethical standards can result in fines, penalties, or damage to the firm’s reputation, impacting its long-term viability.
7. Lack of New Business:
Struggling with Business Development: If the firm is unable to generate new business opportunities or expand its client base, it may struggle to grow and sustain its operations. This could be due to a lack of effective marketing, an outdated business model, or declining market demand.
If you suspect that the firm you are a part of might be facing closure, here are some practical tips for you to consider :
Assess the Situation Thoroughly:
Review Financial Health: Examine financial statements, cash flow projections, and any outstanding debts or liabilities. Identify any signs of financial distress, such as declining revenue, increasing debt, or cash flow issues.
Evaluate Operational Efficiency: Look into the firm's operational processes to determine if there are inefficiencies or areas that need improvement.
Communicate with Key Stakeholders:
Inform Partners and Senior Management: Share your concerns with other partners and senior management. Open communication is crucial for collaborative problem-solving and decision-making.
Consult with Employees: If appropriate, communicate with employees about the situation to maintain transparency and manage morale. However, be mindful of how much detail you share to avoid unnecessary panic.
Develop a Strategic Plan: This might be more relevant to Directors and Senior Lawyers.
Identify Immediate Actions: Develop a plan to address urgent issues, such as improving cash flow, reducing costs, or renegotiating debts.
Explore Business Development Opportunities: Look for ways to attract new clients or expand services to generate additional revenue.
Consider Restructuring: If the firm is facing significant challenges, a restructuring plan might be necessary. This could involve organisational changes, cost-cutting measures, or changes to the business model.
Seek Professional Advice:
Consult Financial Experts: Engage financial advisors or accountants to help with assessing the firm's financial situation and developing a recovery plan.
Legal Counsel: Consult with legal advisors to understand any potential legal implications and to ensure compliance with regulatory requirements during any restructuring process.
Evaluate Options for Future Sustainability: Once again,another consideration for senior management
Consider Mergers or Acquisitions: Explore opportunities to merge with another firm or to be acquired. This can provide a pathway for continued operation and growth.
Look into Selling Assets: If necessary, consider selling non-core assets to improve liquidity and financial stability.
Prepare for Contingencies:
Develop an Exit Strategy: In case closure becomes unavoidable, prepare an exit strategy that includes managing client transitions, handling employee layoffs, and addressing any legal or financial obligations.
Communicate with Clients: If closure is imminent, develop a plan for transitioning clients to other firms to maintain professional relationships and ensure a smooth handover of ongoing work.
Focus on Personal and Professional Preparation:
Update Your Resume: If the firm's closure seems likely, start updating your resume and exploring other career opportunities. Networking with industry contacts can also be beneficial.
Stay Informed: Keep abreast of industry trends and market conditions that might affect your career prospects and the legal industry in general.
By taking these steps, you can help navigate the firm through challenging times, mitigate potential risks, and prepare for any necessary transitions.
These kinds of challenges can be quite daunting and I think its quite important to remember to reach out to your therapist as well, it's incredibly difficult to wrap your head around and sometimes a comforting person that is able to lend you an ear and give you practical solutions to manage stress during a highly stressful situation can be equally as helpful as creating exit strategies.
Whilst to some firm closures can look like chess moves, it's important to remember that this is your very real life, and that comes with very real feelings and fears, which is why it's so important to approach these matters firstly and most importantly with kindness, don’t put pressure on yourself to have it all figured out. Start with the baby steps and like I have said above, reach out to a professional to help you cope with the stress too.
Should you feel like you need a professional to assist you with your exit strategy, please reach out to any of the consultants who have been trained to assist with these kinds of situations.
At GRM, the most important thing is ensuring our candidates are okay mental health-wise, that you are being taken care of and not just shoved over to different roles, because we understand that this kind of situation comes with stress, anxiety and needs a level of care and gentleness that we genuinely prioritise.
To anyone that has experienced this or suspects that their firm might be struggling, I hope you take a moment to breathe, take a deep breath, remember that there is always going to be a solution and something inevitably good will come out of this, even if it feels like it might take a minute to get there.
For more information, contact Kay, at kay@thegrmgroup.com