Law firms are a lucrative $400 billion market that has long been shielded from outside ownership. In search of fresh turf, buyout firms may soon be hunting among the gray flannel suits.
It's rough being a lawyer. And no, that’s not the set-up for a joke.
Landing a job at a top-notch white-shoe law firm offers a mix of glamor, prestige, and a hefty paycheck. But that money often comes with a high cost to personal happiness.
On the flip side, going solo promises more control over your life and might even lead to actually enjoying your work. But there’s an under-discussed challenge with going it alone: figuring out an exit strategy when you’re ready to retire.
Several factors play into this, but one is unmistakable: the legal sector might just be the only field where private equity has yet to stake a claim. Lacking access to the deep pockets, operational expertise (and to some extent, a cutthroat, profit-first mentality), the industry lags. Unlike say medicine or dentists practices, law firms tend to be stubbornly set in their ways and, at the big firms at least, operated mostly for the benefit of partners whose concerns for the future may wane once they retire—if they ever do.
Brandon Kochkodin, a reporter for Forbes, joins “Forbes Talks” to discuss why law firms could be private equity’s next conquest.
0:00 Introduction
0:18 Who Are Three Big Names Practicing Law Right Now
2:43 The Challenges Of Selling A Law Firm As A Private Equity Gain
5:00 The Key Factors That Hinder Growth In The Law Field
6:19 About Lee Minkoff, Renovus Capital- Managing Director
7:26 Why Private Equity In Law Firms May Not Be Favorable
11:41 Colleges Interested In External Investments At Key Law Firms
Read the full story on Forbes: https://www.forbes.com/sites/brandonkochkodin/2024/02/26/why-law-firms-could-be-private-equitys-next-conquest/?sh=15ca39eb2f5c
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It's rough being a lawyer. And no, that’s not the set-up for a joke.
Landing a job at a top-notch white-shoe law firm offers a mix of glamor, prestige, and a hefty paycheck. But that money often comes with a high cost to personal happiness.
On the flip side, going solo promises more control over your life and might even lead to actually enjoying your work. But there’s an under-discussed challenge with going it alone: figuring out an exit strategy when you’re ready to retire.
Several factors play into this, but one is unmistakable: the legal sector might just be the only field where private equity has yet to stake a claim. Lacking access to the deep pockets, operational expertise (and to some extent, a cutthroat, profit-first mentality), the industry lags. Unlike say medicine or dentists practices, law firms tend to be stubbornly set in their ways and, at the big firms at least, operated mostly for the benefit of partners whose concerns for the future may wane once they retire—if they ever do.
Brandon Kochkodin, a reporter for Forbes, joins “Forbes Talks” to discuss why law firms could be private equity’s next conquest.
0:00 Introduction
0:18 Who Are Three Big Names Practicing Law Right Now
2:43 The Challenges Of Selling A Law Firm As A Private Equity Gain
5:00 The Key Factors That Hinder Growth In The Law Field
6:19 About Lee Minkoff, Renovus Capital- Managing Director
7:26 Why Private Equity In Law Firms May Not Be Favorable
11:41 Colleges Interested In External Investments At Key Law Firms
Read the full story on Forbes: https://www.forbes.com/sites/brandonkochkodin/2024/02/26/why-law-firms-could-be-private-equitys-next-conquest/?sh=15ca39eb2f5c
Subscribe to FORBES: https://www.youtube.com/user/Forbes?sub_confirmation=1
Fuel your success with Forbes. Gain unlimited access to premium journalism, including breaking news, groundbreaking in-depth reported stories, daily digests and more. Plus, members get a front-row seat at members-only events with leading thinkers and doers, access to premium video that can help you get ahead, an ad-light experience, early access to select products including NFT drops and more:
https://account.forbes.com/membership/?utm_source=youtube&utm_medium=display&utm_campaign=growth_non-sub_paid_subscribe_ytdescript
Stay Connected
Forbes newsletters: https://newsletters.editorial.forbes.com
Forbes on Facebook: http://fb.com/forbes
Forbes Video on Twitter: http://www.twitter.com/forbes
Forbes Video on Instagram: http://instagram.com/forbes
More From Forbes: http://forbes.com
Forbes covers the intersection of entrepreneurship, wealth, technology, business and lifestyle with a focus on people and success.
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LifestyleTranscript
00:00 Hi, everyone. I'm Rosemary Miller here with Brandon Kutchkoden, a reporter here at Forbes,
00:08 here to tell us why law firms could be private equities next conquest. Thank you so much
00:14 for joining me today, Brandon.
00:16 Happy to be here.
00:18 So Brandon, there were three main players in your story about this topic. It was Eric
00:22 Pessofici, Lee Minkoff, and Eric Hsu. So we're going to start off with Eric Pessofici. Could
00:30 you tell us who he is and what prompted Eric to explore entrepreneurship through acquisition
00:36 as an alternative to traditional law practice?
00:39 Yeah, so Eric's the founder of SMB Law Group. And what they do is they specialize in small
00:47 business acquisitions. And that's not them buying companies, but helping people in their
00:53 negotiations, the contracts, if they want to buy a small business. So think of things
00:59 like a person wanting to buy like an HVAC business, or a plumbing business or something
01:05 like that. Their law group steps in and helps with the negotiations, all that sort of stuff.
01:13 And the way he came to that was, you know, he was an associate at some pretty big law
01:17 firms, Kirkland and Ellis among them, the biggest law firm in the country. And I think
01:22 he was just, you know, he was tired of big laws. A lot of people do, they get burned
01:28 out. He's got kids and wanted to spend more time with his family, wanted to be able to
01:34 live where he wanted to. And he was exploring the small business space himself. He was thinking,
01:41 maybe this is my way out. Maybe I buy, you know, a company and run it and get out of
01:46 law altogether. And he, as he was exploring that, he realized like, wait, there's no,
01:55 there's no, you know, large law firms that are helping people across the country do this.
02:01 And he was like, aha, maybe, maybe that's my way into this, you know, into having my
02:06 own business and still, you know, staying in law. So, you know, like in 2022, he started
02:15 SMB Law Group. And, you know, as part of that, he's kind of taken a different path from a
02:22 lot of lawyers in that he's built up a social media presence. He's got, you know, a hundred
02:26 some thousand Twitter followers. He's got, it's a very engaging account. I mean, that's
02:30 how I came across him. And yeah, through that, he's built up a pretty big practice already.
02:38 They've helped negotiate over a billion dollars in deals in a little over a year.
02:43 Well, Brandon, what challenges does Eric highlight regarding selling a law firm? And what are
02:49 the key reasons behind the difficulty?
02:52 Yeah, I mean, so the big ones are, you know, law firms as, as you can tell from the names
03:00 of law firms, they're usually named after the founders, the key partners. If you're
03:05 selling a firm, it's what are you really buying? Law firms don't exactly have assets, you know,
03:11 like they're not other businesses. They don't have the, the assets are the people themselves.
03:18 So if you're going to buy a law firm, you know, one of the big problems is law doesn't
03:23 allow non-compete agreements. So if you have a law firm, you go to sell it, you can't
03:30 guarantee the buyer that the lawyers on staff are going to stay. There's really nothing
03:37 you can do to prevent them from saying, oh, you just bought this business. Imagine they
03:42 paid, you know, a two or three X multiple, which would be really high for law. There's
03:48 nothing stopping one of those lawyers being like, wait, if it's worth this much, why don't
03:52 I just go and start my own and try to cash in that way? And I know some of these clients,
03:56 why wouldn't they come to me instead of coming, you know, there's, you know, staying with
04:01 this firm that's going to have new lawyers and new ownership. So that's one problem.
04:06 The other one is, you know, kind of the big one that he's highlighting is where does the
04:11 money come from? Because the American Bar Association has this rule, it's called rule
04:17 5.4 that says only lawyers can own law firms. And so there's no outside capital. It's all
04:25 coming from other lawyers, which, you know, lawyers obviously have money, but it's not
04:32 that much money, you know, like there's just not that big pool of buyers as you'll find
04:38 for other businesses. So, you know, when a law firm goes to sell, the standard multiple
04:44 is only like one X, whereas, you know, like an HVAC business will get three, four or five
04:52 X. I mean, that's a huge difference. I mean, so that's one of the big, you know, those
04:57 are the two biggest problems.
05:00 Yeah. Speaking of rule 5.4, I mean, in what ways do some legal professionals argue that
05:06 it hinders innovation and access to capital in the legal sector?
05:11 Yeah. So basically what they're saying is like, without that outside capital, well,
05:17 okay, so I guess number one is the way law firms traditionally work is the money comes
05:22 in, the money gets paid out to the partners, right? This is why it's a lucrative profession.
05:27 You bring in the money, you yourself get it. So there's not necessarily a ton of investment
05:32 back into the law firm, which means there's a lot of technological advancements that maybe
05:40 haven't been taken up. And, you know, it sort of sounds crazy, but things like back office
05:48 technologies, library management, billing, you know, these sorts of things where like
05:56 the argument is basically like, these firms really haven't had to compete and to advance
06:05 themselves in that way. And these are the type of things where like outsiders might
06:10 be able to add additional capital to do those things. But the model itself doesn't necessarily
06:16 incentivize it right now.
06:19 So let's move on to Lee Minkoff. Before we go into him, could you just give us a little
06:23 bit of background on who he is?
06:26 Yeah. So he's a private equity professional, Renovas Capital in Wayne, Pennsylvania. And,
06:37 you know, what he specializes in there is legal tech. So he's helped put together deals
06:45 for this umbrella company they've created called Harvard Global. And, you know, what
06:51 they specialize in are these sorts of things I just talked about. So like billing management,
06:57 intelligence services, things that like every other industry has already taken up, like,
07:05 you know, putting your data in the cloud. Like there's some issues there with sensitivities
07:11 because of law. And so there hasn't been great services. So they've, you know, put those
07:16 sort of things together and they're trying to build a single ecosystem that it's easy
07:20 that law firms can go to and someone will just, you know, handle all of that for them.
07:26 Well, Brandon, according to Lee, what potential benefits and opportunities does investing
07:31 in law firms offer to private equity and why might law firms return returns be attractive
07:37 to investors?
07:38 Yeah. So there's two big things. The first is pretty simple. Law has great margins. Like
07:47 it's if you look at the IBIS world stats in there in the story, it's something like 20
07:53 percent. That's as good as software. Like that's pretty fat margins, you know, like
07:59 running a law firm. The expensive part so far has been paying lawyers. So there's that.
08:06 I mean, there's money to be made. The other one, though, is why it's a perfect fit for
08:12 private equity, which is that it offers or potentially offers uncorrelated returns, which
08:20 is the reason a lot of people go to private equity investments anyway. So law is going
08:25 to make money if the stock market's going up or if it's going down. And, you know, maybe
08:29 the easiest example to think of, it's like if we're in a bull market, companies are doing
08:35 acquisitions. They need lawyers to help with M&A activity and acquisitions. If the market's
08:41 going down, companies might be going bankrupt or going through restructurings. Guess what?
08:47 You need lawyers for that, too. And then there's other things like, you know, just on a personal
08:52 level, like divorces don't really change if the market's going up or going down, which
08:58 actually kind of counterintuitively, I found some data. I think it got cut from the story.
09:04 Divorces actually tend to go down during bad markets. You would think they'd go up as the
09:11 stock market goes down, but it's actually slightly, slightly different than that, maybe
09:16 because people don't want to pony up the money for a lawyer in those times.
09:20 Right. And that joint income definitely helps.
09:24 Yeah. Yeah. So, so, I mean, that's kind of the big idea for private equity is that no
09:31 matter what the market's doing, like if you need a lawyer, you need a lawyer. And if the
09:36 market's great, you need them for one thing. If the market's bad, you need them for another
09:40 thing. Well, moving on to the third player in your
09:43 story, Eric Hsu. Who is he and what's his perspective on investing in law?
09:50 Yeah. Eric's a lawyer in Washington State. And he's like Eric, he runs a business, a
09:57 law firm that specializes in small business acquisitions and helping people through that.
10:04 Eric's a bit more critical about whether private equity would be interested. And his reasons,
10:15 he makes a compelling argument because what he basically says is that because law is this
10:22 traditional stodgy profession, that it's ripe for disruption, that it's just missed a bunch
10:30 of technological advancements. There's things that haven't been implemented. And he thinks
10:36 that basically once law firms do start implementing these things, and in our conversation, he
10:41 highlighted AI, for example. He says, basically, when they implement these things, it's going
10:48 to be much cheaper. You're going to need fewer lawyers and law as a practice will be more
10:54 commoditized than being this like specialty service. Of course, you'll still need lawyers
11:00 for a big M&A acquisition. But for a lot of the smaller firms, like your simpler things
11:07 like divorce, for example, or like personal bankruptcy is probably a better example. He
11:15 basically argues like, look, you probably in the near term future, you might not even
11:19 need a lawyer, you might just need to go pull up a simple form, and an AI will do it for
11:24 you. So he thinks, you know, the margins for law firms are going to go down because of
11:31 technology, which, you know, if you believe the trends, what happens historically, that
11:37 should be true, but you know, to be seen.
11:40 Well, Brandon, how let's talk about historical challenges. How does the historical evidence
11:47 from Australia, England and Wales challenge concerns about external investments compromising
11:53 professional standards in the legal profession?
11:56 Yeah, so I guess the first thing would be, before answering that is that what we've seen
12:06 in those countries is that there hasn't been a huge flood of private equity, right? So
12:11 it hasn't like totally remade the industry, the stats I saw were something like 10%. So
12:17 substantial, but not like, totally overtaking the industry. But what studies point to is
12:24 that the firms that have these alternative business structures do not see any higher
12:33 complaints, and they don't have any higher rates of like, of like, legal incidents, like
12:43 they're not getting fined by regulators or anything at a higher rate than firms that
12:48 are still owned wholly by lawyers. So I mean, at least what it points to there is that it
12:56 doesn't necessarily change the ethical standards.
13:00 Well, Brandon, thank you so much for joining me today.
13:04 Yeah, thank you.
13:05 Bye.
13:06 Bye.
13:06 Bye.
13:07 Bye.
13:07 Bye.
13:08 Bye.
13:08 Bye.
13:09 Bye.
13:09 Bye.
13:10 Bye.
13:11 Bye.
13:12 Bye.
13:13 Bye.
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