Until fairly recently the only viable third-party buyers for law firms were friendly (or not-so-friendly) competitors in the seller's area. Sellers tried to identify firms that were seeking to increase market share or expand into a new practice area or geographic location. As a practical matter, doing that confidentially was nearly impossible, time-consuming, and, for many, a hit-or-miss strategy. Today, it's a whole new world out there, with opportunities to sell to non-lawyers. You read that right; that was not a typo. There are buyers out there who are NOT lawyers. Who are they?

They are private equity (PE) investors using a workaround to Rule 5.4 that prohibits non-lawyer ownership of law firms. That workaround is the Management Services Organization (MSO). In short, borrowing from a model long used in medical, dental, and accounting, investors create a separate entity to handle all back-office functions (e.g., HR, accounting, IT). Lawyers still retain ownership of the firm itself and control the actual legal work. PE earns revenue from the services it provides to the law firm.

The new phenomenon of private equity investors provides a whole new pool of third-party buyers that has the potential of turning the marketplace for law firms upside down all in a good way for sellers. That’s the good news. However, this new landscape is a bit more complicated and challenging than selling to a traditional third-party law firm.

Why Private Equity Loves Law Firms

Why all the excitement? The legal industry has characteristics that private equity finds extraordinarily attractive, including a highly fragmented marketplace, underinvestment in technology and processes, and rising operational complexity. Not to mention, they just love the high margins that law firms already have. It would not be hyperbole to state that private equity investors are champing at the bit to disrupt the legal profession.

Law firms, in general, also see an opportunity. Many firms often lack the resources or interest to effectively address the growing complexity of managing a law firm, including cybersecurity, data management, marketing automation, and AI. PE ownership also reduces, and at times even eliminates, the day-to-day operational burdens of managing the firm's business functions. It allows the owner to do what they most like: practice law or manage how other attorneys at the firm practice law.

Law firms, specifically those with aging owners and no succession plan in place, are thrilled with this new way to cash out. This is especially so because, unlike selling to another law firm, the brand and legacy can be preserved.

How Does Selling to Private Equity Work?

In a nutshell, here's how it works.

• The MSO signs a long-term Managed Services Agreement with the law firm
• The MSO acquires and manages the firm's technology platforms, real estate, staff, and other infrastructure
• The MSO sets pricing for its services at market rates to be paid by the law firm

If properly structured and executed, the MSO never directs legal strategy, selects cases, or shares legal fees. It also protects clients' confidentiality and data, just as any other properly vetted vendor would. In short, the two entities strike a balance in the documents and in practice.

Of paramount importance is the fact that the MSO cannot interfere with the professional judgment or decision-making of the law firm or its attorneys. Further, the fees paid to the MSO cannot be based on a percentage of the firm's revenue or tied to the firm's profits. Doing so would be improper fee-sharing. Flat fees or cost-plus fees are used instead.

Private equity companies are typically most interested in consumer-driven practices. Think personal injury, workers' compensation, immigration, bankruptcy, estate planning, and family law. These practices have developed their own brand, not tied to the individual owner. They are also not the relationship-based practices one frequently sees in the corporate world.

Put another way, the practice areas can operate on autopilot even when the owner is absent. There is also little risk that the business will walk out the door if an attorney leaves because it is the brand that attracts business, not any individual lawyer. Finally, the success of these practices depends heavily on operational efficiency. Investors realize that you don't necessarily need a law degree to determine how to get the work out the door systematically and cost-effectively.

Because of this new development, it would not be an exaggeration to say that there are now more buyers than ever for law firms. The challenge for law firm sellers is how to reach this entire new pool of possibilities.

Options for Selling Your Law Firm to Private Equity

There are basically two choices for selling your law firm to private equity:

The “DIY” Method

.The DIY method is to market your firm on an online directory and hope a PE investor visits the site at the right time. Do you have the time and the patience to do that? You could also reach out directly to PE investors looking to disrupt our profession, but do you even know how to find them? How can you do that confidentially?

Work with an Experienced Law Firm Broker

The second is to work with a law firm broker, such as Roy Ginsburg, who already has established relationships with multiple PE folks whom he has carefully vetted. These investors and potential buyers wait for Roy to call them with the newest opportunities, which could be your law firm. Working with a law firm broker like Roy removes the burden of finding a suitable PE buyer from your already overloaded plate, and allows you to connect with the right buyer in a confidential way.

Brokers with the access Roy has are few and far between. Contact Roy to learn more if you're thinking of selling your law firm to private equity or another third-party buyer.