Why CFOs of PE-backed companies are choosing virtual law firms

11 January 2021

With a potential recession, renewed restrictions and further legislative changes from Brexit on the cards, agility will be instrumental to the success of PE-backed businesses. If they are to meet the high-growth expectations set out by investors, CFOs must adopt an unrelenting focus on cashflow and margin improvement as we gear up for the new financial year.

Driving value has always been the priority, but amidst a global health crisis and volatile economy, concerns regarding market conditions and exit readiness are understandably weighing on the minds of CFOs in these high-pressure environments.

For companies reliant on traditional law firms as their partner of choice, this is a problem. Perhaps in the past, the extortionate hourly rates charged by City firms was seen as an acceptable expense. In exchange for an outsized legal bill, C-suite executives received reassurance that a company’s interests were protected through each and every transaction, that contracts were watertight and worked in their favour; that no glaring gaps existed where risk could thrive.

Much has changed in the last 20 years. Not only are belts tighter throughout the business landscape, but expectations around value for money have shifted.  In light of investor scrutiny, CFOs in PE-backed companies must be able to justify that every transaction will be worth the outlay. Rather than cutting back on critical legal support required to navigate a risk-heavy landscape, many of these companies are now calling on the newcomers to the industry – the virtual law firms.

We believe this trend is occurring for a number of reasons:

 

1.    Ability to budget

Above all, investors seek certainty; they seek reassurance that the company is performing in line with the investment strategy. In addition to monthly management information, PE firms require their portfolio companies to provide a detailed overview of any potential variances or divergences on the businesses’ overheads, liquidity and cashflow. Unpredictable costs are the enemy of exit readiness; they prevent CFOs from delivering accurate forecasts to investors.

Since most traditional firms bill by the hour or even charge for minor tasks taken on by paralegals, predicting legal expenditure becomes a challenge. The billable hour is hardly a foreign concept to CFOs, but it’s a model that relies on trust from a CFO that the work-rate of the lawyer will not result in spiralling costs. While many virtual firms do operate on an hourly rate model, their reduced overheads allow them to offer fees that are realistic and accurately reflect the time taken. Further, since models like ours don’t rely on junior staff, the work is carried out fully by experienced lawyers, reducing the costs from administrative fees that are typically added on to the bill to afford their salaries. With a more palatable bill from either a lower hourly rate or a fixed subscription fee for top rate legal services, CFOs are better able to forecast for the future spend.

 

2.    Reduction in sales cycle time

While the sales team will usually have control over establishing the sales process, legal needs to have input – particularly at the bottom of the funnel.  In the hurry to sign a new client to the books, this critical step can be left out in fear that either the in-house legal team or law firm the company is working with will take too long in drafting contracts to the point that it dissuades the prospect from coming on board at all. If your business is to close a deal quickly and prevent a potential client from looking elsewhere, it needs a legal team that can move fast to turnaround contracts and reduce the time involved in the sales cycle. Pass the work on to a traditional firm, and there’s no doubt that they will be perfectionists in their approach to protect you from risk – however, the time in which they will turnaround this piece of work may not be ideal. A virtual firm, on the other hand, will usually have a specialist lawyer available within their network to get started immediately and make your contracts their sole focus, keeping your sales cycle short and your clients onboarded quickly.

3.    Scalability

If the investment strategy involves global growth, PE-backed companies need a legal team who they can rely on for expertise not only in domestic laws but of those that govern the jurisdictions in which they intend to scale to. For companies working with a virtual firm whose presence extends beyond one country to a vast global network of expert lawyers, that’s hardly a problem. The moment the need to expand into a new territory is expressed, a virtual firm can assign the work to a specialist lawyer based and operating in this particular territory – one who is well-versed with the ins and outs of how the laws here will govern how the business runs and identify any potential risks regarding compliance with country-specific regulations. Moreover, they provide CFOs with the certainty that costs will stay the same – no matter where in the world the lawyer is situated.

4.    Cost savings

Unfortunately, even if they wanted to, traditional firms are usually unable to reduce their fees due to the financial weight of the overheads involved in running such a business model. Costs for offices alone see clients paying more to help firms cover the rent, let alone the salaries of the support staff they hire to help tackle the so-called grunt work.

Working with a virtual law firm removes the need for clients to foot the bill of expensive offices and support staff. On average, our clients save approximately 60% on their legal costs by shifting from a traditional legal partner to our virtual firm. For a CFO under pressure to drive cost efficiencies across all areas of the business, savings of this scale can make all the difference: instead of cutting legal expenditure altogether and leaving the business open to risk, they slash the price tag while retaining the same level of service from specialist lawyers.

5.    Expertise

One of the key reasons that keeps companies bound to top City firms is the expertise on offer. Naturally, working with a partner of an esteemed firm who boasts a proven track record and back-catalogue of big-name brands gives CFOs certainty that the price they pay in legal fees will be a worthwhile investment. However, you don’t have to work with a traditional law firm to get access to this level of expertise. By operating on a low-overhead model, virtual law firms such as ours have the budget available to recruit the best legal talent available. In turn, clients benefit from the same exceptional standard of advice they would expect to receive from a prestigious, traditional law firm without paying the exceptionally high price-tag that traditional firms would charge.

At 360 Business Law, we can proudly say that each of our lawyers across our globally dispersed network all have 5 years post qualifying experience under their belt. That means our clients benefit from a guaranteed, high quality service and faster turnaround times without the staggering costs they’re used to paying. As the virtual model continues to gather momentum, we are seeing an increase in the volume of private equity backed companies calling upon us for advice and support on an ongoing basis. Considering the advantages in doing working with virtual firms, we don’t see that changing anytime soon.

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