Competitors’ big fee earners could be tempted to move jobs instead of having to keep their current workplace afloat with cash support
Thursday 30 Jul 2020 Author: Ian Conway

The crisis has created something of a structural shift in the legal sector, with many traditional Top 100 law firms having to ask partners to put up cash to keep their businesses going.

This has provided legal and professional services business Knights (KGH:AIM) with a unique opportunity to tempt senior fee-earners away from the big law firms, together with their client base.

Knights was one of the first UK law firms to move away from the old-fashioned partnership model to a corporate structure in 2012. It has a strong presence outside London, particularly in Birmingham and the Midlands, where the market is highly fragmented and under-supplied.

It used the cash raised from its stock market listing in June 2018 to consolidate, taking over nine regional firms and increasing its number of fee earners from 350 to more than 930 at the last count.

Knights specialises in corporate and commercial law and has a roster of over 18,000 clients. Its average case size is £3,000, which paired with its geographic spread and its diversified client base means revenues are not highly dependent on a single sector or client.

As chief executive David Beech is keen to point out, Knights is highly focused on cash collection with an industry-leading time until it gets paid of just 85 days against an average for the UK Top 100 law firms of 145 days.

In the year to 30 April, turnover grew by 40% to £74.3 million with 10% organic growth and 30% coming from acquisitions. On an underlying basis, pre-tax profit rose 45% to £13.6 million as the firm moved quickly to cut costs.

Having deferred all non-essential capital spending as well as stopping all discretionary spending, reducing staff numbers and salaries, Knights is set to emerge from the near-term uncertainties in a strong position, according to chairman Bal Johal.

The market for legal services stabilised in June after an initial fall in April and the firm is seeing early signs of a recovery. Its recent acquisitions are integrating faster than management expected, but the focus for the first half of the current financial year is on organic growth.

Analysts at Numis see revenues to April 2021 growing more than 35% to £102 million and pre-tax profits also rising by more than 35% to £19.4 million, while cash generation is set to improve as management bring the speed at which recently-acquired companies are paid by clients down sharply to the group average.

Analyst Rachel May at Shore Capital points out that the regional legal market is worth £2.6 billion per year, so there are plenty of ‘interesting opportunities’ going forward.

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