The Firm of Wal and Mart: When you're not betting the company

Change has been continuous for AmLaw 200 firms for many years now, driven by a number of factors, including:

 

·      High merger activity;

·      Litigation finance, which has helped level the playing field between deep-pocketed defendants and plaintiffs; and,

·       Big Four accounting firms eroding billable hours from the bottom up.

 

This will only accelerate as nonlawyers will increasingly be allowed to own law firms.

 

Indeed, EY wants to double its legal managed services revenues over the next 12 months.  However, predator may become prey as Ropes & Gray and Paul Hastings have both formed consulting groups to go after the work the Big Four accounting firms have offered their corporate clients.[1]

 

Furthermore, private equity firms have gotten in on the game.  Earlier this year Lightyear Capital acquired Rocket Matter, a cloud-based legal software business.[2]

 

Nonlawyer ownership of law firms is here and I believe will accelerate quickly as the obvious benefits are realized.

 

However, the biggest shift from nonlawyer ownership of law firms will likely be for small and mid-sized firms, which heretofore have been immune to these larger trends.

 

Nonlawyer Ownership of Law Firms

 

Arizona has become the first state to allow nonlawyers to own law firms and other legal service businesses.[3]  The judicial intent behind this is to make legal services more affordable and to address what’s referred to as “the crisis of access-to-justice”.

 

Essentially, Arizona is establishing a two-year regulatory sandbox for firms to play in where new ownership structures and business models can be tried.  If everything goes as planned, firms can then apply to continue thereafter.  These firms will be known as"Alternative Business Structures" (“ABS”).

 

Utah is also enabling nonlawyer investment in law firms, Chicago and the District of Columbia will likely be next.  Like Arizona, Utah will have a two-year period to try new business models.  (Some of the first proposals in Utah were from firms offering low- and no-cost legal services for those affected by COVID-19.)

 

Arizona has also implemented a new licensure process that will create nonlawyer "legal paraprofessionals" that can provide limited legal services, including being able to go into court with clients.

 

Minnesota is following suit with a legal paraprofessional pilot program of its own.

‍

The idea of nonlawyer ownership of law firms is not a radical idea. The UK and Australia have ABS and there are even publicly traded firms, such as Knightsplc which trades on the AIM in London.

 

‍Nota Bene: If you are interested in what’s going on in your state in regards to nonlawyer ownership of law firms (and other issues), there is probably no better resource than the Institute for the Advancement of the American Legal System (“IAALS”).

 

The hope of the IAALS is to have a multi-state regulatory body to oversee the nonlawyer ownership of law firms. That is obviously better than a Balkanized regulatory regime on a state-by-state basis.

 

Risks of Nonlawyer Ownership

 

In thinking through the implications of nonlawyer ownership of law firms, the obvious dread is of "Legal Walmart" coming to your town.  This is not irrational, Walmart destroyed Main Street U.S. retailers with a relentless focus on everyday low prices and huge selection, why wouldn’t someone do the same thing to legal services?

 

Someone will.

 

The received view is that Walmart was the big bad firm that destroyed good-paying jobs at local firms all across the country.  Much of that is true.

 

However, there was contributory negligence on the part of the small-town firms.  They operated their businesses to maximize the distributions to owners and failed to reinvest in their store fronts, display cases, technology, employees, and everything else.

 

By the time Walmart got there, the fight was already lost and their customers had no reason to stay with them and not defect.

 

Does "maximize distributions to owners" sound like your law firm?  If it does, you should revisit your strategy.  When nonlawyer ownership is nation-wide, there will be huge rollups providing basic legal services at scale and at low cost. My guess is that a client will be able to get competent legal advice for basic legal services at a very reasonable price.

 

If you run a commodity business and don't differentiate yourself, you could be in trouble.  If you have reinvested in your business, have strong relationships with your clients, and don't gouge them on prices, you should be fine.

 

Importantly, the firms that succeeded in competition with Walmart did not on price.  They competed on everything but price.  Most people understand the pricing dynamics of big versus small firms and are willing to pay more to the smaller, local firm.  However, they don’t want that privilege abused.  (I gladly pay a premium at my local farmer’s market, but I don’t want to buy an $8 apple.)

 

This will require a shift in thinking for the local firms, which have competed on price versus the big AmLaw 200 firms.  They will have to think very strategically about how they position themselves between competition from above and below.

 

For Big Law, there could be some powerhouse mergers between one or more of the Big Four accounting firms and AmLaw 200 sized law firms.

 

Benefits of Nonlawyer Ownership

 

While there are plenty of risks from nonlawyer ownership of law firms, there are probably more benefits, at least for entrepreneurial firms.

 

The most obvious is that by taking in outside capital, a firm’s partners reduce their risk.  The second is that raising capital can accelerate reinvestment in technology, people, and back-office functions that help keep a firm competitive and efficient.

 

Just as significantly, having firm equity as a currency opens up a host of potential benefits, including:

 

·      Aligning the interests of past and current partners;

·      Facilitating a means for founders and long-term partners to cash out;

·      Shifting the focus from maximizing cash distributions in a partnership to building firm equity; and,

·      If your firm is on the larger side of local firms, you could be a buy-out candidate.

 

All of these benefits are available to firms that embrace the change and use the power of traditional corporate structures and capital raising to their advantage.

 

Investment Implications

 

As I’ve written about in my Financial Planning for Attorneys series, lawyers need to invest their personal financial assets differently than a typical investor due to the unique set of risks they face, including Company Town Risks™.

 

In future posts I will continue to unpack the ramifications of nonlawyer ownership of law firms as well as the investment implications for attorneys.

‍

NOTE: Nothing in this blog post should be considered individual investment advice. If you need investment advice, please email Jack Duval at jack@bant.am or call 845.605.1007.