Law firms have long being envied for the huge profits often noted in the industry, prompting many people to want to actually know what a typical law firm is worth. Going by the analysis of earning in the industry, it can be said that law firm profit margins are generally high. The highest-earning lawyers identified intellectual property as their primary practice area.
They made an average of $240,000 in 2017. They are followed by personal injury lawyers ($237,000); employment lawyers ($225,000); Workers Compensation lawyers ($219,000); and business lawyers ($217,000). Lawyers who primarily provide legal services to businesses earned more money on average than lawyers who primarily provide legal services to consumers.
In a survey conducted, twenty-seven percent of the responding lawyers said their earnings had increased by up to 10 percent over the prior year, while 18 percent said their earnings had increased by more than 10 percent. This shows that things are going well in the law business, or are things really as rosy as they seem? Let’s find out.
Are Law Firms Profitable? What is Their Profit Margin?
It has been realized that the primary reason law firms look so much more profitable than other businesses is that their profits are reported before equity partners are paid. The rationale behind this is that equity partners are entitled to everything that’s left over after other expenses are paid, since they own the firm.
This is the primary reason why it seems like law firms earn quite high. Traditional law firm partnership structures are effectively unable to retain any earnings at the end of each fiscal year. Except for any planned investments, all remaining profit is distributed among the equity partners in full.
Compared to companies in other industries, this gives law firms an artificially high profit margin, since from an accounting perspective; equity partners receive no above-the-line salary and therefore represent no cost to the business.
It also means that the most popular metrics used to assess law firm profitability—profit margin and average profit per equity partner (PEP)—are susceptible to distortion by leverage. The high profitability rate is something that has seen firms shooting themselves in the foot by publishing artificially high profit margins that fail to account for the cost of equity partners.
The explanations given above pretty much explains the profitability of law firms, but in the aspect of figures, it is pretty hard to find a law firm that publishes its earnings, so it would be a herculean task trying to figure out what a typical law firm can earn, or what their profit margin is.
Law firms are typically tight lipped on this matter, thus further fueling the insinuation that law firms earn exceptionally high profit. In this article, we will discuss some very important factors that can influence the income a law firm can generate.
Factors That Influence the Income and Profit of a Law Firm
Table of Content
- The Advertising and Marketing Strategies of the Law Firm
- 2. The Size of the Law Firm
- 3. The Reputation and Brand Recognition of the Law Firm
- 4. Niche or Practice Areas
- 5. The Location of the Law Firm
- 6. The Market Competition
- 7. Staffing and Labor Costs
- 8. Your Billing Rates and Fees
- 9. Your Clientele Base
- 10. Financial Management
The Advertising and Marketing Strategies of the Law Firm
One of the major factors that can greatly influence the income and profit of a law firm is the advertising and marketing strategies that the law firm deploys to win clients.
Interestingly, you can advertise your law firm business both on online and offline local directories. You can advertise your law firm on various social media platforms, local newspapers, and TV and radio stations with minimal cost. With that, you can rest assured that people that need your services will find you and patronize you.
2. The Size of the Law Firm
Another major factor that can influence the income and profitability of a law firm is the size of the law firm. This is so because, the larger a law firm, the larger the number of people that work there and of course the higher the number of services they offer.
In essence, if you want to increase the income and profit of your law firm, then you must be ready to play big. Interestingly, most high-paying clients usually do business with firms that are considered large. They usually assume that if a firm is large and has several employees under its payroll, then it must be doing something right.
3. The Reputation and Brand Recognition of the Law Firm
The reputation and brand recognition of the law firm is yet another key factor that will influence the income the law firm will generate. In the legal industry, reputation and brand recognition matter a lot. People usually prefer to do business with law firms with good reputations and easily recognizable brands.
Of course, it takes years of dedication, commitment, and sacrifice to build an enviable brand, but the result you will get will be worth it at the end of the day.
4. Niche or Practice Areas
In law, there are different niche or practice areas and it is important to note that some niche or practice areas pay more. Interestingly, there are different niche or practice areas such as immigration law, property law, civil law, litigation attorney, intellectual property law, family law, energy law, and cybersecurity law amongst others.
These different niches or practice areas generate different income levels. For example, depending on where you are practicing, it is safe to say law firms that are into corporate law and intellectual property law are always smiling to the bank.
But in Canada, immigration law firms are generating massive income and making profits. So, if you want to increase the income and profitability of your law firm, then you should consider choosing a niche or practice area that will guarantee you that.
5. The Location of the Law Firm
Another important factor that influences the income and profitability of a law firm is the location where the law firm is practicing or doing business.
For example, if you operate your law firm in a location filled with people of low purchasing power, a location where people don’t care about suing people or patronizing the court, then you are in for a long ride. You will struggle to convince people to hire your services and that will translate to low profit for your law firm.
6. The Market Competition
Market competition is yet another major factor that can influence the income and profitability of a law firm. It is as simple as this; if your law firm is the only law firm in a location, then you will have less competition and that will likely translate to more profit for you.
But if your law firm is in a city where the competition is high, then you must deploy enough resources to be able to win a client, and that in effect, will deep into your profitability.
So, if you want to increase the income and profitability of your law firm, then you should try as much as possible to avoid unnecessary competition. Although, there are competitions that will help you to grow and stretch beyond your limits.
7. Staffing and Labor Costs
The budget you have for your staffing and labor cost is yet another major factor that will influence the income and profitability of your law firm. This is how it works, if you have a robust budget for staffing and labor costs, it means you will not just only hire quality employees, but you will also be able to retain them and give them the training required for them to perform optimally.
8. Your Billing Rates and Fees
Your billing rates and the fees you charge are other factors that can influence the income and profitability of your law firm. No doubt, there are senior lawyers who have been able to cut their teeth in the industry and can bill a client more than ten times above the average rate for handling a case, and in most cases, these clients are ready to pay.
Of course, it takes a lawyer that has years of experience and outstanding results to command such pay, but the truth remains that it is a factor that can influence the income and profitability of a law firm. If you have what it takes to hire such senior lawyers in your law firm, then you can rest assured that there will be an increase in the profitability of your law firm.
9. Your Clientele Base
Another factor that can influence the income and profit a law firm can make is the clientele base of the law firm. It is as simple as this; in business, the more clients you have, the more income you will generate and of course the higher the profitability of the business.
In essence, if you want to increase the income and profitability of your law firm, then you must be ready to work hard to increase your clientele base.
I will add, you should not only work hard to increase your clientele base, but also make sure you win over quality and high-paying clients, and also ensure that you close your backdoor. It is one thing to win clients over and another kettle of fish to retain them.
10. Financial Management
Lastly, another factor that can influence the income and profitability of a law firm is the financial management of the law firm. If a law firm lacks sound financial management, no matter how much they generate, it will always struggle to meet its financial obligations.
As expected, you might not have expertise when it comes to financial management, but you can hire professional financial managers to help handle the finance of your law firm. It might cost you more, but the results you get will be above what you paid for.