Year-End Uses of Legal Finance

Year-end collections are one of the most critical, yet challenging, business activities for a law firm.  Most law firms use the cash method of accounting, meaning revenue is only recognized when payment is actually received.  Thus, when a firm is closing its books for the year, only fees earned and collected show up on a law firm’s bottom-line.  That means partner distributions, associate and staff bonuses, and even law firm rankings (based on profits or revenue per partner) are dependent on collections.  Yet collections are distracting and can create negative attorney-client dynamics when billing partners press to get paid by year-end.

Statera Capital is uniquely equipped to help law firms address these year-end issues.  With our flexibility on financing size and structure and our efficient decision-making process, Statera can help law firms recognize revenue, achieve year-end objectives, and avoid year-end collection processes with clients. 

No one became a lawyer to be a bill collector.  Yet at the end of the year, billing partners become responsible and accountable for collections.  The most profitable firms rely on partner-driven collections as they work to lower accounts receivable and convert contingency interests to cash before the fiscal year ends.

The phenomenon is driven by law firm accounting, which is generally done on a cash basis.  Thus, fees earned but not collected by year end do not count toward a lawyer’s and law firm’s bottom line.  And, regardless of how diligently firms pursue collections year-round, a large percentage of revenue is always collected in the final few months of the year. 

The drive to collect fees by year-end can fundamentally alter a lawyer’s relationship with a client.  A lawyer is no longer a client’s trusted advisor and counselor, but instead is a bill collector interested only in payment.  A lawyer may offer a client steep discounts on its fees in order to realize at least some revenue by year-end.  Those discounts can boomerang in future fee negotiations with a client, who remembers that the lawyer is actually willing to accept less in compensation.  And of course, time spent on collections is time not spent on other (billable) matters.

Well-managed firms consider different options to smooth the year-end collections process.  One such option is third-party legal finance.  Legal finance providers like Statera Capital offer a range of solutions that enable lawyers to focus on what they do best – representing clients – and allow law firms to receive revenue for fees they have earned or are likely to earn in the future.  These options also help keep clients happy by eliminating painful end-of-year collection calls and negotiations.

Importantly, these financial solutions can be non-recourse.  If a client never pays its fees or a contingent fee is lost because of a negative case outcome, the law firm does not have to repay Statera.  Statera bears the risk of non-repayment.  It also means that Statera’s financing is a purchase, not a loan.  That allows a law firm to recognize immediately the revenue and utilize it for partner distributions, external rankings, and other purposes. 

Statera’s solutions are bespoke and customized to the unique circumstances of each transaction, but our end-of-year solutions are generally structured as a monetization of a firm’s receivables (either earned or contingent). 

Statera can purchase a portion of a firm’s outstanding receivables.  This purchase converts those receivables into cash.  Statera can purchase receivables from either an hourly fee engagement or from a contingency engagement where revenue realization is delayed pending resolution of the case or appeal, settlement agreement payments, or court approvals.  This solution allows firms to de-risk all or a portion of their exposure and to recognize earned fees immediately, regardless of when the client actually pays or whether the contingency matter is ultimately successful such that a fee is received. 

The best way to begin exploring year-end revenue realization opportunities is to contact Statera.  Statera is a nimble, flat organization.  From the very beginning of an engagement, a law firm will engage directly with our investment committee and those responsible for approving the financing.  There are no opaque or convoluted approval processes to navigate with us. 

Statera employs an efficient, two-phase transactional process that enables us to close investments quickly, reliably, and cost-effectively.  The entire process can be completed in as little as three weeks, enabling firms to meet year-end objectives.

• Phase 1: After identifying potential receivables for financing and entering into a non-disclosure agreement, Statera reviews case materials or billing records. If appropriate, Statera will then propose pricing and financial structure terms in a non-binding term sheet.
• Phase 2: After entering into that non-binding term, Statera completes diligences and prepares legal documentation. Upon execution of legal documentation, Statera wires funds to law firm.

• Hourly. An AmLaw100 firm wants to maximize revenue recognition before the end of the year to meet financial projections and improve external rankings.  The firm has outstanding receivables from an hourly engagement worth $1 million.  Statera agrees to purchase the receivables.  The firm remains the collection agent but no longer faces the pressure to collect from the client by year-end.  Statera does not insert itself between the client and law firm, and the client does not even need to be aware of Statera’s role.  Statera’s financing saves the law firm valuable time, strain, and considerable money compared to negotiating a discount with the client.  As importantly, the client relationship is not damaged.  
• Contingency. A litigation boutique seeks immediate capital for end-of-year bonuses and to maximize partner distributions.  The firm recently negotiated a successful settlement for a client worth mid-seven figures on a full contingency matter.  The boutique will not receive payment of its contingency fee until the second quarter of 2022 due to the timing of certain conditions for payment and obtaining court approval.  Statera agrees to accelerate half of the contingency fee.  Statera wires the litigation boutique half the contingency fee in December 2021, allowing the firm to recognize and use that portion of the earned contingency fee in fiscal year 2021 for those strategic purposes.
• Contingent Receivable. A law firm needs working capital for various growth and marketing activities.  The firm has invested millions of dollars in several matters on full contingency.  Those matters are at least one year from resolving (through settlement or trial), but the firm expects to receive contingency fees in the mid- to high seven figures.  Statera agrees to purchase a portion of the firm’s contingent interests in those cases.  The law firm receives the purchase amount, providing it immediate access to working capital for various firm needs. 
  

Leading lawyers are not only mindful of solving their own business objectives but also those of their clients.  Statera provides similar year-end solutions that solve for a client’s business needs – whether within the legal department or across the organization.  Clients engaged in litigation can offload the risk and future expense of a billable hourly engagement or can monetize future potential recoveries in order to realize and use that capital in the current fiscal year.  A client can utilize this solution to realize revenue, fund growth or other strategic objectives, or offset the cost of the legal department. 

For additional information about how financing can help your firm and clients, please contact Stewart Ackerly at sha@stateracap.com.