Featuring an interview with Robin Charrot, Director and Co-Founder of Evolve Family Law
Succession planning is an integral part of a law firm’s business strategy. It becomes particularly important once the owners of a law firm reach a certain point in their career and start to think about how and when they will exit the business.
To date, the common solution for law firm owners has been to sell to a larger law firm, sell to private equity, or bring up new equity partners from the ranks to replace the outgoing owners.
Nowadays, however, more and more business owners are turning to employee ownership as their exit strategy of choice.
It is currently the fastest-growing ownership model for private companies; in the last three years, the employee ownership sector has more than doubled. In December 2022, there were 1,300 employee-owned businesses in the UK, including the John Lewis Partnership, Richer Sounds, Go Ape and Aardman Animations. So, what can law firms learn from this model?
What does employee ownership mean?
Employee ownership is where all employees have a meaningful stake in a business. Not only do employees have a financial stake in the company by, directly owning shares, or via an employee ownership trust, but they also have a say in how the business is run.
According to the Employee Ownership Association, employee-owned businesses “achieve higher productivity, greater levels of innovation and are more resilient to economic turbulence”. There are significant benefits in terms of safeguarding the company’s future independence, company culture and employee engagement, as well as tax perks (business owners selling a majority shareholding to an Employee Ownership Trust (EOT) pay no Capital Gains Tax, and employees can receive tax free payments of up to £3,600 per year).
Do any law firms operate under this model?
While law firms have been slow to adopt employee ownership compared to businesses in other sectors, some have made the move. There are now about 15 employee-owned law firms in England and Wales. Firms include Oliver & Co in the North West and Ison Harrison in Yorkshire, with more expected to follow suit.
Evolve Family Law has also adopted this model. We spoke to Founding Director Robin Charrot to learn how employee ownership works at the firm, and why he and fellow Founding Director Louise Halford decided it was right for them and their employees.
Evolve Family Law became an employee-owned business in June 2022. Why did you decide to adopt an employer-ownership model?
It was primarily a combination of three things that made it a really attractive proposition for us: Empowering employees, sharing more of the fruits of our success with them, and preserving the business for the long-term.
First of all, we saw employee ownership as an attractive way of planning for succession and ensuring the longevity of the firm.
We’d seen over the last 10 or 15 years that the traditional succession model for small-to-medium law firms just wasn’t working. In the old days, becoming an equity partner was much more risk-free than it is now – you’d climb up the ranks, get an offer of partnership, then mortgage your house, raise a couple of hundred grand and buy into the partnership. But that didn’t seem to be working anymore because law firms started failing left, right and centre, and employees didn’t want to take the risk of ‘buying in’ to a partnership because of this risk factor. Also, there seems to be less desire amongst younger lawyers to climb the greasy pole to partnership.
Over the last few years, we were approached by bigger law firms and by private equity investors. However, through our experience working at previous firms, we knew what being acquired could look like in terms of a loss of culture, a loss of identity, profit becoming paramount, the employees becoming very unhappy, and so it just wasn’t for us.
Louise and I had built something from scratch with a clear ethos, with client service rather than profit at the core of what we do, and a very positive, collegiate working environment with people we like working alongside. Although it might have benefited myself and Louise financially to go down the ‘being acquired’ route, we didn’t want that for the firm, for our co-workers, or for our clients.
We came upon the employee-ownership model as an appealing alternative and saw it as a way of maintaining the strong culture we’re so proud of.
The second reason was that it was a way of us doing the right thing for our employees. We saw it as a way of rewarding our employees in a way that incentivises them, collectively, to do well and be successful. A good salary and a personal bonus are all well and good, but it doesn’t make everyone feel really invested in the company they’re working for.
If our team feel that they are an integral part of the business and that they own the business, that gives us a better sense of cohesion and drives everyone to make the company more successful. We also think the model will attract good-quality candidates (with the right attitude) to Evolve in the future.
The third reason is related to the financial wellbeing of the firm and that of our employees. Selling the firm to an Employee Ownership Trust is tax-efficient, so more money can be retained in the business, and by the ex-owners and the other employees.
This does mean, however, that unless a firm has a huge amount of money in the bank when the transaction happens, the ex-owners can’t be paid out straight away for our shares and, instead, are paid out of the future profits of the business. We don’t get our hands on all of the capital up-front, but this benefits the business overall because it means that, even as ex-owners, we’re motivated to stay at the firm and to make it a success; we’ll only get all of our money if the firm continues to do well in the long-term. It is possible for the business to borrow in order to pay everything to the ex-owners up front, but we didn’t think it would be fair to burden the business in this way.
Why do you think law firms have been so slow to adopt this model?
For large law firms, they don’t need it because there are different alternatives open to them: they can go public, or they probably have a sufficient number of lawyers for the next generation of law firm owners to come through. Also, if you have a large number of owners (for example, national firms are likely to have hundreds of equity partners) it would be hard to persuade all those people to get on board. Some owners might feel that becoming employee-owned would mean that they’d lose out on profits or that they’d have to surrender some control.
For those reasons, employee ownership is more suited to the smaller firms, like one-to-twenty partner/shareholder entities.
Also, the legal profession has always been much more conservative than other sectors, particularly when it comes to how we run our businesses and how we treat/how much we trust our employees. Employee ownership is something new and unknown, so I think that’s why we’re behind the curve.
This isn’t true across all professional services, however, as architects’ practices seem to have embraced the concept. I think once lawyers better understand the benefits, employee ownership will be the way forward for a lot of small-to-medium firms in this country.
How does employee ownership work practically at Evolve Family Law?
In larger organisations, you might set up employee forums and a shadow board of directors for employees; but for smaller firms like us, those formal structures aren’t necessary.
Although Louise and I are ex-owners, we are still the managers of the business and the two directors, so we still make all of the major decisions about the operation of the company; but we get more input from our co-workers, any major financial decisions are subject to oversight from the board of directors of the Evolve employee ownership trust, and over time, the decision-making process will be broadened out.
We are inviting our co-workers to take a greater role and a greater responsibility in running the business. As ex-owners, who will be around for a long time but won’t be running Evolve forever, so we’re paying much closer attention to what our co-workers are saying to us.
We also share a lot more financial information with our co-workers, so that they understand more about the financial health of the business, and appreciate the impact of decisions on the cost of doing business, or on the level of income the business will generate, and which it needs to have in order to survive and thrive.
Before we converted to an EOT, we talked to everyone about what we were doing and why. We then identified different areas of the firm, including marketing, administration and client care, and put together groups of people who we thought might have interesting ideas about how we could do things differently. That was the first stage of the process.
As we develop this employee-owned model, people will have a greater say and a greater sense that they own the business and are responsible for its future success, which should encourage an atmosphere where they are more forthcoming with ideas on what we can do better. This is probably the biggest practical change, but it’s a gradual process and a journey – we’ve only just started.
How have your existing staff reacted to the change? How has it benefited them?
Initially, the feedback was “What on earth is employee ownership? It sounds good but we don’t really understand it.” Once we explained what it was and how it was our way of preserving the firm and their working lives within it, our team were relieved because, in today’s market, a lot of law firms are being acquired, and employee ownership meant preserving their jobs and the firm’s culture.
They also wanted to know what was in it for them, so we explained the intangibles: how they will play a greater role in, and have greater responsibility for, the future running of the business.
We also explained that they will receive additional tax-free cash bonuses if the business continues to be profitable and grow. These bonuses are dependent on profitability, so we won’t necessarily always pay them out, but all employees have had two quarterly cash bonuses so far, so people are feeling a lot better off.
There are various ways in which bonuses can be calculated. You can’t discriminate between individual employees, but you can calculate bonuses depending on years of service, whether they work full-time or part-time, or salary levels. So far however, we have chosen to use a completely flat bonus structure and reward everyone equally; regardless of their role. We’re all in this together, and everyone at the firm has a vital role to play.
Are there any challenges associated with being employee-owned?
One of the challenges is that you need to have a lot of openness, in terms of information sharing, in the business. This might be another reason why many law firms have resisted this model, because traditionally, information about, for example, a firm’s profitability, has tended to be kept close to the owners’ chests.
This could have been a challenge for us, but it’s actually been easier than it might be at other firms because we’ve always had a high level of openness, ever since Louise and I set up Evolve. But we have been even more open than we used to be; every quarter, we share the management accounts with all co-workers, to show the firm’s income and what our costs have been. Overall, this has been really positive, as it means everyone has a better idea of how we’re doing as a business.
The other challenge is about changing employees’ mindsets, to get them feeling like they have a stake in the business and that what they do to save money or make money and their success more generally, is vital to the firm. It is common, particularly for more junior employees, to have the mindset of “I’ll do my hours, do what I’m told, I’ll bill and that’s it”, so the challenge is to get individuals who might have this mindset to start thinking like business owners.
I think that will take time, but if junior lawyers can adopt that mindset, their career is going to be extremely successful.
How has the fact that Evolve Family Law is now employee-owned positively impacted your ability to recruit talent?
Not yet, because nobody really knows what it means!
However, one of the reasons we decided to become employee-owned is that we thought once candidates knew about employee ownership and understood what it means in terms of our approach and ethos, more people, with the right attitude, would be attracted to Evolve.
When we speak to candidates and explain the concept to them, they are extremely keen. So, in the future, I think it will be a big attraction factor for us.
Might employee ownership be the ideal exit option?
It is evident that for small to medium practices, employee ownership is one way of rewarding individuals and maintaining the longevity of a law firm, both from a financial and a cultural perspective.
As employee ownership becomes more well-known, it is likely that more and more law firms will choose to adopt this business model. Those pioneering firms that do so will be better able to attract and retain the right talent for their firm: individuals who are not only committed to their roles, but invested in the long-term success of the business, and of their own career, without the pitfalls of the traditional model of law firm ownership.