Leading UK firms still wary of debt despite market pressures
Lawyers retain traditional fear of debt with 64% of respondents stating that it should not exceed 10% of turnover
August 27, 2003 at 08:03 PM
2 minute read
Top UK law firms remain highly adverse to debt despite the demands of costly international expansion and the pressure of current market conditions, according to a new survey.
The latest Legal Week/EJ Legal Big Question survey of more than 100 partners confirms that dramatic changes in the profession have done nothing to erode lawyers' traditional fear of debt, with 64% of respondents claiming debt should not exceed 10% of turnover.
In addition only 32% of the panel were happy for debts of 10%-30%, with just 4% claiming it was 'acceptable' for debt to rise to between 30% and 50% of turnover.
Not one lawyer felt that it was justifiable for a firm's debt to rise above 50%.
Tony Williams of legal consultancy Jomati, and former managing partner of Clifford Chance and Andersen Legal, told Legal Week that law firms should make a distinction between raising capital for investment and simply relying on debt.
"I would be less concerned about a specific level of debt and more concerned about what the reason for that debt is. If it is to fit out new offices, then that is fair enough, but if it is because the firm is bringing in no money, then that is a reason for concern," he said.
EJ Mergers director Ian Mouland added: "Ordinary firms would find debts of 10%-15% acceptable. More than 30% would be inadvisable unless the firm was carrying a lot of work in progress."
The survey also shows that lawyers remain deeply conservative about financing their practices, with respondents agreeing that the bulk of debt should come from partners' capital contributions.
Thirty-nine percent argued that up to three-quarters of a firm's debt should come from partners' capital, while 42% backed an equal split with the firm's debt facilities.
The panel was more split on the treatment that law firms receive from their bankers, with 69% saying that firms were treated the same as other commercial borrowers. A further 21% said they received better treatment than other businesses, while 10% considered they were treated worse.
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