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.

Succession Planning in the Age of Coronavirus

The increased importance of succession planning that preceded the onset of coronavirus may only ramp up as a result of the pandemic. The difficulties of running a law firm or other professional services company remotely may be the straw that breaks the camel’s back for some practitioners nearing retirement. And as many practice areas experience declines in demand, firm management may need to consider transitioning or acquiring new ones to pick up the slack.

With stiffening competition, we’ve already seen an onslaught of Big Law mergers over the past several years. At the same time, the attorney population has continued to age, resulting in a disproportionate number of practicing lawyers over the age of fifty. Recent losses in the stock market will undoubtedly motivate some more senior attorneys to push back their retirement date. But, as we’ve witnessed in just these first few weeks, the uncertainty of COVID-19 is leading others to expedite their decision to retire now.

It’s more important than ever to consider succession planning options in your business development strategy. In the coming months, there’s a very real likelihood for many firms that current clients will generate less revenue than they did a month or two ago. While some assistance is available to supplement these gaps and maintain payroll, the reality is that you will need to continue generating new business as the current situation unfolds. While adding new clients should be part of your plan, succession planning, mergers, and acquisitions present especially powerful opportunities to grow during this crisis.

Free Webinar on April 14th: How to Grow During a Crisis Through Succession Planning and M&A

We will be addressing this topic in depth during our next webinar on Tuesday, April 14th at 2 p.m. PST (4 CST/5 EST).

To join us for this no-cost Zoom webinar, please register using the link below:

We look forward to sharing ideas and best practices for this crucial aspect of business development in a crisis.