Part-owning your firm

Many firms may feel that the traditional partnership (or LLP) model remains the best fit for them, with ownership confined to a select group of lawyers. There may be discussions to have about how to share profits - lockstep, individual contribution or a hybrid – but no compulsion to consider wider ownership.

Clearly, however, many firms are now either considering wider ownership or have already embarked on it, with steady growth in the number with alternative business structure approval, in some cases with external shareholders already on board. 

4 July was employee ownership day, intended to raise awareness of the potential benefits for businesses of making their employees part-owners. For a law firm considering widening its ownership (whether a traditional law firm or ABS), should it be looking first at involving its employees (or some of them) in its ownership? 

A firm’s chief executive can often make a contribution at least as valuable as that of any single partner, and most firms will have many talented lawyers who are not in the partnership. If these people can become part-owners, not only may they be more likely to stay but the firm may also be more attractive to recruits, and their motivation and fulfilment may also grow.

There is no reason in principle why ownership should not also be extended to a broader range of employees, with a raft of research evidence showing positive performance results where this happens.

Partly linking employee reward to performance through ownership brings flexibility, making it easier to weather tougher times with the prospect of greater reward when conditions improve.

I do not argue that this is a panacea for all firms. Some law firms continue to perform well and have a business model that they don’t believe demands ownership change. Business development may be the most important focus for new firms, and for international firms, extending ownership tends to be complex. But for other firms where enabling their people to realise their potential is key to business success (ours being one of them), we believe it makes good business sense to have wider ownership.

How we are extending ownership

Broader ownership can take many forms and there is no universally perfect model. How are we going about it?

Our objective has been to enable all or most of our lawyers to be shareholders. As a niche firm whose specialism is employee share ownership advice, it may give us a competitive advantage to be practising it ourselves, but that is not the driving reason. We see a strong contribution to our business coming from everyone in our team. Where possible we believe this merits an ownership stake, with the goal of improved performance. 

The first thing we decided was to become a company. We might have considered a different route if tax planning had been to the fore, but this was not the case. Amongst other attractions, share ownership enables our staff to become owners without giving up their status as employees. 

There are three main routes to share ownership: buying shares; free shares; and options. We do not expect most of our lawyers will have much spare cash to buy shares, so while this may be a component it is unlikely to be a significant one. We do not favour free shares, partly because this will create a tax bill for anyone who receives them and partly because we think the shares will be more valued if they have been paid for. So we have decided to grant options to purchase shares, under which each participant will have the right to purchase a maximum number of shares from a future date (three years after the option is granted), paying a price equal to today’s value. 

The number of shares each person can buy may increase depending on our profit levels over the three year period. If profits do grow, then we would expect our share value to rise, so that when the individual does eventually buy their shares they will be paying a discounted price. 

Once options have been exercised, the shareholder will be eligible to share in profits through dividends, and potentially further capital growth. By obtaining HM Revenue & Customs approval to our share-option plan, any growth in share value will be subject to capital gains tax, payable if and when the shares are eventually sold.

We may also make the grant to each employee of some of their options conditional on them also subscribing directly for some shares, so that to a limited degree they do become immediate shareholders. 

There has been much talk in recent months of the UK building a ‘John Lewis economy’, in which many more companies involve their employees in the ownership. We aren’t planning to emulate John Lewis’s ownership, which would involve ownership of our entire company by a trust. Instead, we have identified a relatively simple approach that we believe will work best for us, using individual share ownership.

Any law firm interested in widening its ownership must find its own route. Hopefully this summary of what we have done is useful.

Robert Postlethwaite is managing director of Postlethwaite Solicitors