There is growing evidence that small and medium-sized practices are wilting, amid a welter of cost and other pressures
When the advisory firm Taha Capital stress-tested 66 small and medium-sized firms in a recent assessment of the legal sector, the results were alarming.
Taking away the client account interest – as the government has mooted – and adding a 7% National Insurance charge on partner profits was enough to plunge 24 firms into severe strain or an existential crisis. Most of these would struggle to last a few months.
Seven of the firms assessed held less than a month of costs in cash reserves, with costs growing faster than revenue at two-thirds of the practices.
Tightening margins already appear to be terminal for more than a few.
At least five firms have been involved in insolvency proceedings this month alone. Consultancy firm Mezzle, Halifax-based Rahman Ravelli, City firm MSR Solicitors and media boutique Thomson Heath Jenkins & Associates having all called in the administrators, while Harrogate firm Berwins Solicitors has filed a notice of intention to appoint an administrator.
The reasons for each collapse will vary. Mezzle came to the market in the last 10 years and held itself out as a disrupter which would attract younger associates seeking a fee-sharing arrangement. Other firms that have closed are more traditional and have been established in their communities or practice areas for decades.
The figures are not as gloomy as the headlines might suggest: according to SRA figures, in the first six months of this calendar year, 222 firms closed compared to 250 in the same period in 2025 (though the overall number of firms reached a record low of 8,899 by the end of last month). But there is a sense that the dam preventing so many firms from going under is about to burst, as costs pressures become insupportable.
'Remarkably, equity partners of certain firms have continued to pay themselves full freight, when all the data we have points to a change needing to happen, which should start at the top of the firm'
Adil Taha, Taha Capital
Adil Taha, founder and managing director of Taha Capital, said: ‘We believe hundreds of small firms will either cease to exist or stumble into a last-minute life-saving merger, but ultimately many corrections are coming and we are already seeing them materialise in the market now. We expect December will be tough given the fall in trading and cash collections.’
A new report by Taha Capital found that many investors are not prepared to work with firms where revenue is below £50m because of those same cost pressures.
Even revenue growth is not necessarily a sign of a healthy firm, the report states: prices rose 24% between 2021 and 2025, so any business not matching that rate has gone backwards in real terms. Taha said these problems are commonplace across firms where revenue is less than £25m, but in many cases owners are too slow to make the changes or sacrifices needed.
‘This has not been a sudden problem that has materialised, firms will have (you hope) seen the margins being squeezed more and more each year,’ he added. ‘Remarkably equity partners of certain firms have continued to pay themselves full freight, when all the data we have points to a change needing to happen, which should start at the top of the firm.’
There is no getting away from the fact that client account interest is an increasingly significant factor in partner drawings. In his budget this week, chancellor John Healey gave no further details about government plans to transfer to itself 75% of the interest on pooled client accounts and 50% on individual accounts. But the policy has not gone away, and risk analysts fear for firms if they lose this funding stream.
Eloise Butterworth, founder of specialist risk adviser All Things Risk, said: ‘The reality is that margins are already incredibly tight. I know there are firms where this interest makes the difference between making a profit and making a loss. Take away 75% of it and what happens to those businesses? What happens to their clients? We’re already seeing fewer law firms, more solicitors moving into consultancy, and smaller practices feeling increasingly squeezed out.
‘My biggest worry is that this ends up accelerating consolidation, with more firms closing, merging or turning to private equity just to survive.’
Taha Capital found that almost half the firms evaluated earned at least 20% of their profit from client account interest.
Taha added: ‘Client account interest has been keeping firms open in some cases, but in many more cases it has allowed equity partners to continue to draw high amounts. As bank debt creeps up over time, the interest on the debt is neutralising any benefit from client account – and then their true position becomes their reality.’
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