How Can an Economic Downturn Impact Your Firm?

Let’s set the stage with a presupposition with which you may or may not agree. It is the natural order of things that when as much was done to stimulate the economy during the pandemic, the bill will come due. I think we are about to pay the piper to some extent. That means rough waters in the form of a recession. Even if you agree, the bigger question is how deep and how long. To know the answer to those two things we would have to know policy decisions going forward, as well as the extent of the Federal Reserve’s actions.

This is a risk management feature not an economic newsletter, so let’s look at what you can do to prepare and to fend off impacts from a downturn. First, cash is especially king in a downturn, so get rid of revolving debt like credit cards. Any debt where interest rates can rise or fluctuate, will rise and probably quickly in these times. Think about trading credit card debt with a line of credit (LOC). Establish the LOC as soon as possible to beat any future interest rate increases. If you happen to have a low interest rate loan (i.e., SBA loan) do not pay it off early. Instead hoard the cash. Remember, cash is king.

There may be opportunities that arise in which you can take advantage of if you are in a good position with excellent liquidity. Historically, many of the wealthy people in this country did very well during down economic times because they were able to acquire assets at excellent prices. So, weathering the storm might also include improving conditions for the firm in a few areas. This could come in the form of improved lease arrangements, furniture and fixtures, and even upgrades to your team. We have seen an incredibly tight labor market. Often the labor market loosens, and people become available as a result of layoffs or closings.

If your firm was not in existence prior to 2005, you may not have practiced during a time when a recession approached. Even if you practiced prior to that time and have since gone out on your own, you may not now have older partners from whom you can seek advice. However, you do have experience from practicing through the COVID shutdown, which in many ways was relatively short but a fairly deep preview of the coming recession. Most law firms were actually very busy during the pandemic. The concern was the ability to fill the pipeline of future work.

We know and can be prepared for people to hunker down and money will be tight for anything in which they feel they can wait. But courts won’t close, discovery will not be delayed, and people can and will come to your office.

Is there good news? Legal services are somewhat recession-proof. People will still need lawyers. In fact, some areas of practice actually do better during tough economic times. As long as life goes on, people will still have needs for lawyers to help them with different aspects of the law. Even if there is a slowdown, there has always been a boomerang effect where a boom follows a bust. Delays or slowdowns in seeking legal services will always bring about increased activity from “pent-up demand.”

Let’s go back to risk management issues. One thing that has been proven historically is that there are more claims against professionals arising out of down economic times. People seek to recover money. Be especially careful to not procrastinate on legal matters where values or assets are dropping. Examples might involve the sale or acquisition of real estate, foreclosures where money is lost during the length of time it takes to finalize the foreclosure, and even divorce proceedings where joint assets might be declining. Secondly, make sure to document communications with your clients. As I always say, “I know you did not become a lawyer to do CYA letters, but it is going to be a lot more fun if you do.”

Finally, be prepared and enter the last quarter of 2022 and the first of 2023 alert and aware of any opportunities that might present themselves to you. Be timely and push matters through to conclusions and resolutions.


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