Now more than ever, your firm needs to have a plan to deal with best-case, moderate-case and worst-case revenue impact scenarios. Forecasts that will allow you to plan for how to cut expenses and identify any gaps in your revenue channels. Your practice will have a much better handle on how you’re weathering the coronavirus storm if leadership has a solid understanding of billable hours, collectability, and the state of the new business pipeline.
In this Q&A, Truist Legal Specialty Group advisors Ben Hunter, Andrew Crais and Wendy Inge provide insight on how legal practices can manage cash inflows during this time.
Q: How are different sizes and types of firms generally experiencing impacts from the coronavirus?
A: Some, like trial lawyers, see intakes slowing as court proceedings remain slowed, so their pipeline will continue to have patches at least through the first half of the year. Closely held boutiques and midsize practices are as busy as they have ever been and the outlook is currently strong, but they still could experience periodic dips. Corporate practices have experienced slight decreases in demand, but diversification is a huge deterrent. Some firms are looking for additive credit access to buy more insurance capital, or to right-size undersized facilities. Cost of capital is up and new tranches cost more both in spread and non-usage fees. Depending on credit structure, however, this isn’t as much of an issue for small- to mid-size practices.
Q: How can law firms make strategic use of financing options, such as lines of credit or traditional loans?
A: If firms are willing to pay for increased access to capital, then we are often comfortable with advancing it to them. The cost of the overabundance of insurance can be higher. However, when broken down on a per-equity partner basis, the cost isn’t that significant. Many firms are continuing to have partners add in capital, so weathering the storm is built off of partners taking compensation deferrals first in order to maintain staff and limit any furloughs or cuts.
There are various customized ways to help capitalize a firm based off inventory levels and perhaps recapitalizing recent capital expenditures or term debt structures. We’ve had all those discussions, including having new partners buy into a small or boutique practice to help capitalize a practice and start a transition plan. Many principals looking to retire or sell their practices in the next five to 10 years are interested in the next generation stepping in. We’ve helped with ways to structure those transitions from self-financing, carve outs of distributions and debt.
After the last recession, many firms began slowly injecting capital to reduce their debt reliance. Firms that have done that and built capital aren’t as concerned right now. This environment is a good time to continue to push that conversation, even if it needs to be paused for a bit. We have also recently helped with growing capital loan programs.
Q: If a business receives an influx of cash, regardless of the source, how can firms ensure they’re using it to their advantage?
A: For small practices, focus on accounting for funds. Hire a reconciler or outside partner if needed for the management, so certifications can be passed with no issue. Some firms continue to park cash in order to make partners feel better by drawing down on credit facilities. For firms not doing this, keep debt in check by using cash most efficiently. Small or mid-sized practices should match short-term needs with short-term debt and long-term needs (capital expenditure, buyouts, technology, etc.) with products that have three, five, or seven-year terms. This approach helps with cash flow and with matching depreciation and amortization.
Q: Even as we emerge from the crisis, we’re likely going to continue facing a recessionary environment. Do law firms need to reconsider the amount of cash they have on hand at any given time?
A: Many legal practices have moved to establish minimum requirements of cash on hand to support stability and bring confidence to the partners. This depends on the size of the firm, but it helps to manage how and when to pull various levers of distribution deferrals, cost cutting, CapEx deferrals, retirement/cash balance plans or other operating expenses before moving to heavier furloughs or cuts to staff.
By working closely with a solid team of specialty bank advisors, law firm leadership can benefit from seeing the broader landscape of debt capital markets and fine-tuning cash management strategies. In combining our expertise with their insights, firms have the opportunity to support their professionals, maintain and perhaps foster client engagements, and remain well positioned for future increases in demand for legal services.