The more you can plan ahead before starting up, the more likely it is that your new firm will be a success. Your plan should set out what the firm offers, how it will operate and what the financial implications are, as Andy Harris of Hazlewoods and Andy Poole of Armstrong Watson explain. (24 March 2021)
Thinking through the key issues is vital, and as part of this you should put together a written business plan. You’ll need a business plan to win backing from funders and to apply for professional indemnity insurance (PII) and SRA authorisation. A business plan can also help you convince landlords, key suppliers and colleagues to work with you.
But the plan is not something that you shelve once the business starts. It is the yardstick against which you measure your progress, with objectives, tasks and deadlines that are checked regularly. Schedule an annual update at the outset, to ensure that you keep thinking strategically despite the pressure to focus on client work and everyday tasks.
Aim to create a realistic action plan rather than a sales pitch. Above all, you want a plan that convinces you that the firm will succeed and explains what you need to make that happen. A realistic plan – addressing potential problems and how you will overcome them – is also likely to be more convincing to outsiders.
You should check what different audiences are looking for from your plan – for example, some banks and insurers may have templates they require you to complete – and if necessary provide different versions. You’ll want to work with experienced advisers to put together an effective plan and for help with financial forecasts.
This guide sets out the main elements your plan should include
"Build a support group of people who you respect, so you can run your ideas past them. Learn by their past mistakes, rather than your own."
Martyn Jennings, chief executive, Burcher Jennings
Start with basic facts: what the firm is called, where it is based, and how it is structured (for example, as a traditional partnership or a limited company).
Move on to explain what the firm is about. What services will you offer, to what types of client? What makes your firm different from other firms offering similar services to your target market? Why is there an opportunity for your firm? What is your vision for the future of the firm?
Include a quick explanation of what you think the key trends are, and why these support the business model you are proposing. For example, you might summarise why there is a growing number of potential clients looking for what you will offer. You can go into more detail later, when you set out the firm’s approach to sales and marketing.
Whether you choose to include it in the plan or not, it’s a good idea to work out a one or two sentence ‘elevator pitch’ that explains the firm – the sort of thing you might say at a networking event when someone asks what you do.
Management and personnel
It’s a cliché, but law is a people business. Anyone who chooses to back your firm is choosing to back you. Financiers and insurers typically base their decisions on the track records of the key individuals involved in a start-up.
To a large extent, your legal credibility will be taken for granted. It’s worth covering the basics – years of experience, areas of expertise – but more detail can be relegated to an appendix. You should, however, highlight anything that could be seen as giving you a marketing or business edge: for example, your glowing Chambers review, or how you have grown turnover in your practice area at your current firm.
The people reading your plan may well be aware that lawyers aren’t always the best managers. If you and your team have got management experience, make it clear. If you haven’t – or there are particular areas where you might come up a bit short – explain how you will deal with that.
For many start-ups, working with experienced suppliers is crucial. For example, if none of the team has detailed financial experience, the right accountant and legal cashiering service can provide the skills and credibility you lack – without the salary cost.
Potential backers will also want to be convinced that you are truly committed to the new firm. The most concrete way of demonstrating this is through your personal financial commitment – putting up capital and limiting your own drawings (at least in the short term). Your personal investment can have a significant bearing on the amount of external financing you can raise.
Set out your vision and core values for the firm, because these are important drivers for success. What is the purpose of the firm, what drives you and what does success look like? What are the core values, what they mean for clients and colleagues, and how will they be brought to life and evidenced? Without such an underpinning, employees and clients may feel that they are just there to be exploited.
Larger start-ups will need to go into more detail on personnel plans. For example, setting out the staffing levels you expect, and how you will approach recruitment, training and development, and personnel management.
Sales and marketing
Create a convincing case that there is a viable opportunity for your new firm. Often start-ups choose some form of niche strategy, allowing them to set themselves apart from traditional generalist firms and more tightly focus their marketing efforts. Many aim to make better use of technology and to create services that are more responsive to today’s customer demands. Your plan should set out:
- what services you will provide, to what types of customer (eg older wealthy individuals in Nottingham, or high growth tech Midlands technology companies)
- what the key characteristics of these customers are – what influences their legal services purchasing behavior, where you can reach them
- any significant differences between different target customer segments
- how large your target segments are, how much they spend on the sort of services you offer
- key trends such as market growth, pricing trends, developments in new technology
Provide a summary of who your key competitors are and why you will be able to convince clients to use you instead. You should have a detailed sales and marketing plan, even if you only provide a brief overview of it in the business plan. You may also want to include a SWOT analysis – setting out your strengths and weaknesses, and the opportunities and threats you face – as an appendix to your business plan.
Many start-up business plans rely heavily on the team’s ability to bring existing clients to the new firm. Be realistic. How long-term has the relationship been? How engaged are you with corporate clients – how many different individuals do you have relationships with? Do current clients work with you on a continuing (eg retainer) basis – or is the relationship more transactional?
Someone reading your business plan isn’t going to expect to see every detail of how you will run the firm, but they will want to be convinced that you know what you are doing. Identify the key issues, providing an overview of how you will handle them.
Premises may be an important issue, not least in terms of cost implications. Flexible or home-working, and the use of outsourced services, may mean that your start-up does not need large and expensive premises. At the same time, you may need to address data security and other compliance issues if you plan to allow remote working, home-working or use of shared space in serviced offices.
Other key areas to address include:
- client and case management systems
- compliance systems and processes
- financial management and management information systems
- how you will manage any employees and external suppliers
The business plan can present a summary drawn from more detailed plans for operations and systems and for handling compliance. You need to be ready to provide more in-depth information for professional indemnity insurance applications or SRA authorisation, or if you face questioning as part of the fundraising process.
You need to work through your plans in enough detail to justify your forecasts for capital expenditure and operational costs. Identify any critical suppliers you will rely on.
"If you fail to review your business plan and track cashflow you may find yourself in financial difficulty. Use the plan as a budget to measure your progress against, and keep tweaking your forecasts as you win (or don’t win) new instructions."
Jon Davies, vice president, Travelers
Finance and risk
Start-up financial forecasts are notorious for being overly optimistic. Putting together conservative forecasts helps protect you from unpleasant surprises and can help convince external backers that you know what you are doing.
In terms of fee income, be realistic (and prepared to justify your claims) about:
- how many existing clients you can expect to bring with you to the new firm
- the levels of fee income these clients represent – particularly if the new firm will not be offering all the services they use from your current firm
- what the pool of potential new clients is, how many you can expect to win over from their current legal advisers, and how long this will take
- clients’ prospects and plans (particularly for corporate clients) and what this implies in terms of future fees
- what hourly fees or other charging levels you expect – taking into account whether clients will expect lower fees from your new, smaller start-up
- capacity utilisation – given the marketing and management demands on your time, particularly during the early months
- lockup – how long it will take to actually receive payment, particularly in legal areas involving drawn out cases and work for potentially slow-paying corporates
On the expenses side, you should be able to build up reasonably accurate forecasts based on your plan. For example, how many employees you expect to recruit and what salaries you can expect to pay, what IT and other equipment you will need to acquire, and so on. Identify any opportunities to reduce initial capital costs – for example by using subscription-based outsourced services.
Work with your accountant to draw up detailed cash flow and profit and loss forecasts. Larger start-ups raising external funding will also need future balance sheet projections. The more concrete you can make your forecasts – for example, with price quotes from potential suppliers – the better. These should be appended to the main plan and updated at least annually, along with the KPI targets that you monitor as part of your ongoing management information.
It’s a good idea to produce a range of forecasts, covering most likely, best case and worst case scenarios (‘sensitivity analysis’). What will happen if your best client stops using you? What would be the impact on cash flow if all payments were delayed by a month?
The plan should set out:
- how much funding the new firm will require
- how much additional funding you should have available to cover unexpected contingencies
- how much funding you will put up yourself
- how much you and the other principals plan to draw from the firm
- when you expect the firm to reach cash flow breakeven
- the cash flow and profit (or loss) outlook for each of the first three years
Explain the most important factors and assumptions underlying your forecasts. Be prepared to justify any figures that are out of line with industry norms; for example, if your plan implies unusually low lockup or rapid fee growth. Full, detailed financial forecasts should be included as an appendix.
As part of your business plan, you should identify the most significant risks to the firm and what your business continuity plans are if disaster strikes. Not only is this an important part of your compliance obligations, but again it will help convince others to back you.
Business planning top ten
- Be honest and realistic, even if you want to present your plans in the best light.
- Set out what makes your firm special and why it will succeed.
- Demonstrate that you understand the legal services industry and the key trends affecting it.
- Emphasise the principals’ experience and expertise; show how you will compensate for any shortcomings.
- Set out a clear marketing strategy and a convincing explanation of how you can outcompete established firms.
- Create a practical action plan for launching the firm and managing its day-to-day operations.
- Make your business plan as concrete as possible – include evidence and facts wherever possible, rather than assumptions.
- Base your financial forecasts on what you realistically expect – not on what you need to make the numbers work.
- Allow for unexpected setbacks and delays.
- Add an executive summary at the start of the plan, summarising what the firm is about and why it is worth backing.