Law firms seeing steady growth, strong margins Jul 28th 2013, 10:40
Photo credit: Pawel Loj via Flickr Creative Commons
Recent reports proclaim troubled times for law firms and newly graduating lawyers, although other reviews of legal industry conditions suggest giant law firms in the U.S. remain very much alive and profitable.
New data from Sageworks, a financial information company, suggests privately held law firms and other legal services firms (NAICS 5411) are generating sales growth on par with other industries, and profit margins remain among the fattest of all industries.
Sageworks conducted a financial statement analysis of privately held legal services firms, a category that includes law firms, notaries and title companies. The Census Bureau's most recent data indicates that there are roughly 191,000 firms with payrolls in this industry and another 256,000 lone practitioners.
Sageworks' industry data indicates that sales have seen steady growth since the recession, including a 9.3 percent average increase over the past 12 months. That's in line with private-company sales growth across all industries, according to the latest Sageworks Private Company Report.
Growth in 2011 and 2012 totaled nearly 7 and 9 percent, respectively, according to financial statements from privately held companies.
Law firms in general are more recession proof than some other industries, Sageworks analyst Brad Schaefer said. While some aspects of legal services will decline during recessions, he said, "There's always going to be demand, and some businesses probably increase their demand for legal services in tougher times."
The industry's average net profit margin was 19.5 percent over the last 12 months, Sageworks' data shows. Private companies overall have been generating net margins close to 7 percent as of May 31, the most recent data available. And earlier data from Sageworks found that the only industries that have had higher profit margins recently are accounting and payroll services and oil and gas extraction companies.
"Law firms typically have larger margins, even during harder times," said Sageworks analyst Brad Schaefer. "Between 2008 and 2010, margins barely took a dip. People are their biggest expense, and they bill clients based on hours of service. It would seem their salaries would decrease if they're not getting as much business, so margins can remain steady."
Through its cooperative data model, Sageworks collects financial statements for private companies from accounting firms, banks and credit unions, and aggregates the data at an approximate rate of 1,000 statements a day. Net profit margin has been adjusted to exclude taxes and include owner compensation in excess of their market-rate salaries. These adjustments are commonly made to private company financials in order to provide a more accurate picture of the companies' operational performance.
Most of the legal services firms included in Sageworks' database have annual revenues of less than $10 million, and Schaefer said those firms may have used their size to their advantage during the downturn. Small businesses are often able to adapt more quickly to changes in business conditions or changing industry climates, he noted.
"Now that the economy is improving, you'd expect that, as with any other kind of business, demand for law firms would start picking up," Schaefer added.
Sageworks, a financial information company, collects and analyzes data on the performance of privately held companies and provides accounting and audit solutions.
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