Fishes in group leadership concept.

COVID-19 Will Hasten the Decline of Small Law Firms

Everyone knows that “small businesses are the backbone of the U.S. economy.” This notion is so widespread that it obscures what has actually been happening over the last two decades.

The Small Business Administration regularly promotes the idea that almost all jobs are created by small businesses. But the SBA defines small businesses as those that employ fewer than 500 employees. By that measure, more than 99% of workers work for small businesses.

But once you examine employment data at a granular level, a more interesting and complicated pattern emerges. According to a report from JPMorgan Chase, since the early 2000’s, small businesses have come to account for a minority of the U.S. workforce. Only 18% are employed at organizations staffed by fewer than twenty people, and the share of GDP represented by small businesses has fallen since the late 1990’s from over 50% to below 45%.

COVID-19 is likely to speed up this trend. It has been estimated that at least one million companies with ten or fewer employees will go belly up as a result of the pandemic. The effects of federal measures like the Paycheck Protection Program, designed on its surface to bolster smaller entities during this crisis, are actually likely to exacerbate the gap between organizations with fewer than ten employees and their larger counterparts.

So what does this suggest about law firms?

In many ways, law remains an industry dominated by small employers. The State Bar of California reports that approximately one in five of its members are solo practitioners and 42% work at firms with between two and ten attorneys.

But the same trends that have caused a reduction in employment by truly small institutions throughout the U.S. economy will almost certainly impact the legal services industry as well.

As the benefits of size continue to increase, boutique law firms may find themselves at a further disadvantage. Smaller firms, and especially solo practitioners, should therefore consider growing by either merger or acquisition. And for younger professionals, inheriting a practice is an increasingly relevant strategy. Being proactive in considering these options may make the difference between thriving and failing to survive in the coming years.