Law Labs

Private Equity Is Coming for Law Firms: What Every Owner Needs to Know

• Billie Tarascio • Season 1 • Episode 14

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Private equity and venture capital are moving into the legal industry fast, and law firm owners face real decisions about MSOs, ABS structures, and what it means to take outside capital. This Law Labs roundtable breaks down how private equity actually works when it buys a law firm, why the headline price often hides debt and leverage, and what separates a good partner from a deal that destroys value.

Host Billie Tarascio sits down with three attorneys who each live this issue from a different angle. Fred Litwiniuk is a Canadian law firm owner who took private equity to grow his firm and now partners with other firm owners through an MSO and ABS model. Taylor Bell works in ABS and MSO setup and sits on Arizona's ABS regulatory board, with a focus on legal ethics where these structures overlap. TJ Henry runs a vendor-backed MSO that operates as the back office for law firms and previously ran one of the first PE-backed law firms in recent history.

What you will learn in this episode:

  • Understand the real difference between an MSO and an ABS, and when a firm needs neither
  • Learn why Arizona's relaxed fee-sharing rules change the calculus for firm owners
  • See how private equity uses debt and leverage to fund most of a purchase price
  • Find out why a deal that looks like a 6x multiple to you can look like a 4x to the buyer
  • Discover what earnouts and rolled equity actually mean for your payout
  • Grasp why your firm is worth more to buyers the less it depends on you personally
  • Hear why most PE firms calling on lawyers have never operated a law firm
  • Learn the multiple ranges firms are actually seeing today, and which deals tend to fail
  • Understand why clean financials before the LOI stage protect your valuation
  • Explore lessons from non-lawyer ownership in Australia and the UK
  • Find out why a captive MSO can create value even without selling to outside capital
  • Get a framework for vetting a PE partner before you ever sign

Meet the Guests:

Fred Litwiniuk

Chief Growth Officer, Litco Law Fred is a Civil Litigation attorney and member of the Law Society of Alberta who, alongside his brother Todd, grew Litco Law into a model for contemporary legal operations. With a dual MBA from Cornell and Queen's, he speaks from experience on taking private capital into his own firm.

LinkedIn: https://www.linkedin.com/in/fredric-litwiniuk/


Taylor Bell

Founding Partner, Arizona ABS Law Taylor is a compliance attorney and appointed member of the Arizona Supreme Court's ABS Committee. He guides firms, legal tech companies, and investors through ABS formation, governance, and regulatory strategy, with inside insight into the Committee's standards.

LinkedIn: https://www.linkedin.com/in/taylor-bell/ 


TJ Henry Jr.

Co-Founder & Managing Partner, Federate Legal TJ is a legal operations executive who runs a vendor-backed MSO serving as the back office for law firms. He previously ran one of the first PE-backed law firms in recent history and knows firsthand what can go wrong inside these deals. 

LinkedIn: linkedin.com/company/federatelegal

SPEAKER_02

Welcome everyone. My name is Billy Tarasio. I'm an Arizona family law attorney and uh I also host the Modern Arizona podcast. We have a Law Labs edition and this is one of our Law Labs Editions podcasts that we're also doing live and we've got a roundtable discussion today on private equity and venture capital coming into law. And I'm so excited to introduce to you our guests, three attorneys who all have specific relationships with this issue. So they are most of the people here guests today are attorneys. And the guests that we have, the speakers are in the best possible position to educate us. And so we've got three Fred Litwiniac from Canada, and he owns a law firm and a LSO slash MSO and an ABS. Welcome, Fred.

SPEAKER_00

Thank you, Billy. It's a pleasure to be here.

SPEAKER_02

We've also got Taylor Bell from ABS Law Arizona lawyer on the ABS regulatory board. And your entire practice now, Taylor, is setting up ABS. Is that right?

SPEAKER_03

Yeah. A mix of ABS and MSO work. Um, and then uh legal ethics when those all overlap.

SPEAKER_02

Wonderful. Welcome. And finally, we've got TJ Henry. Uh TJ also owns an MSO, but it is not the MSO that buys law firms. It's the MSO that operates as the back end of law firms. So we've got a MSO buyer, an ABS MSO setter upper, and a true MSO backend, but also TJ has run a large um venture-backed or PE backed?

SPEAKER_04

It was it was one of the first PE backed uh law firms in recent history, and probably most like the the the best or call it the most known use case in the past couple years.

SPEAKER_02

And the and the great thing about that is this experiment has already played out a bit and it failed. So the the lessons and the discussions that we're gonna be able to have today, I I am very, very excited for. Thank you to our panelists. And let's start off with the question of MSO or ABS. Battle it out.

SPEAKER_00

Uh I can start if you like. I mean, um, you know, our answer to that was both. Um, and and the reason our answer to that was both is because, you know, and I'll and I'll tell you where we've we've landed on that. We we are much more, we we use our MSO far more than we use our our ABS at this moment in time. And I think a big part of that is really um, you know, some of the regulatory action that's been taken against ABSs. Um, because I think people are afraid of, you know, not all people and not everywhere, but I think some people are afraid of ABS's and what does it mean when, you know, when non-lawyers own law firms? Um, you know, and Billy, you and I have talked about this a little bit, just about looking at, okay, what did it mean in Australia and in the United Kingdom where non-lawyers can own, can own law firms in different ways? Uh, what does it mean to have publicly traded law firms? Um, so we can learn some of those lessons from other places. But I think, yeah, the first, the first part of it is fear because um, you know, lawyers have a pretty great thing going. Um, and I think we're all very um, you know, I I've never met a lawyer who was, you know, anxious for anyone to come up, come and, you know, ruin our thing, right? To destroy this, this, uh, the legal profession, to hurt the the clients in any way, to, to hurt the lawyers in any way. Um, but I I think the ABS versus MSO thing is um, you know, I I think I wish it wasn't a debate because I think that people who believe in ABSs and people who believe in MSOs, uh, a lot of us, I include myself in this, really just believe in some alternatives for the future of the legal profession that include, you know, and I know we're speaking to um attorneys here today, that really include greater optionality for attorneys, and frankly, an opportunity for attorneys to realize the value of the businesses they build, not just the practices that they build. Um, so that's my my big take on it is I don't know that it's one or the other. I think if you know from a per purely operational standpoint right now, MSOs look more attractive to me because of the adverse um, you know, I guess regulatory action taken by certain states.

SPEAKER_01

Taylor, do you agree?

SPEAKER_03

Yeah, I mean, I I think that they get framed against each other a lot. Um, and I don't know if that's necessarily um beneficial or helpful. I think there's room for both, and it really depends on what your goals are and um and who who the makeup is of of what you're trying to build. Um, you know, ABS can be a really great option for certain types of law firms and certain types of ownership groups. You have control over the whole thing. That's the big um, you know, selling point is that your non-lawyers can own the law firm. They can't direct the legal work, but they can own the law firm. And so if you're a venture-backed legal tech company that has a really cool tool that could also add legal services as part of what you're doing, it might make a lot of sense to go the ABS route. Um, whereas if you're working in a contingency field, um, you know, co-counseling outside of Arizona with multiple states, you've got a big PI practice. MSO is probably the better route for you, um, or potentially a mix of both. Um, lots of people are going the ABS route and also setting up um their MSO uh at the same time. And so I would say it doesn't have to be either or. Sometimes it's both. It really just depends on what's going to be best to accomplish your goals. And it may not even be either of those things. I mean, oftentimes, uh especially with some of the way the rules changed in Arizona with fee sharing, you might not necessarily need an MSO or an ABS if you're a lawyer trying to start a practice. You can maybe accomplish your goals with just a traditional firm.

SPEAKER_02

That's a good point. I know an Arizona lawyer who set up his firm as an ABS and then let it go because he could accomplish everything he wanted to because of our relaxed rules on fee splitting without the regulatory burden and the fees associated with being an ABS.

unknown

Yep.

SPEAKER_02

Fred, you're in an interesting position because you're sitting in as a lawyer, as a law firm owner. You were a law firm owner before you got into the business you're in now. You took private equity in to help grow your law firm, and now you're in the business of accumulating law firms.

SPEAKER_00

Yeah. Um, I would say, and the way we think about it is not necessarily accumulating law firms, as much as it is giving law firm owners who see what's happening in legal, right? I mean, I I think I think a lot of us can see um, you know, a different future coming. And, you know, for the firms that want to get maybe some of the benefits of private capital without maybe some of the detriments, that's what we're, that's what we're attempting to offer, right? That that's the way we think about it is can you be part of something larger without losing your soul? Um, because, you know, I I think that, you know, it it doesn't have to be private equity that's coming to, you know, offer to buy your firm, right? It can be, it can be Morgan and Morgan, it can be Sweet James, it can be, you know, there's a number of these sort of firms out there that are um and have been for quite some time actively acquiring practices. Um our model is more about a partnership model where it's like, okay, well, what if you, you know, what if you could get access to um some money? So you don't have to keep pushing your own money in all the time to grow the firm. You could get access to some other money. And what if you could get some access to some back office services that take care of all the stuff that you don't like and didn't go to law school for? Right. Like I've never met a lawyer who is like super excited about doing HR or doing accounting. I mean, maybe there is one out there. I haven't, I haven't met them yet. But yeah, that that's that's how we think about it is really like for the lawyers who love what they do and just want to do more of what they love and less of what they don't, how can we help them do that? So we don't, you know, we're unlike unlike some of the other people out there, we're not in the business of changing the brand names or, you know, trying to like enforce uh a certain way of practice on anybody. In fact, we're entirely hands-off on that, right? We just focus on the back office stuff, the non-lawyer stuff. And the reason that we're created that way is because as a lawyer who did this myself, I that was the solution that I wanted, right? I mean, there's a lot of stuff to do when you're running a firm that isn't legal work. Um, and that stuff can be tedious and difficult. And in particular, my brother and I, in scaling our firm, um, you know, before we, before any of this was, you know, on the radar, it was really we had to push our own chips in over and over and over again, right? And and that's fine to a degree, but we also have families and we, you know, at some point I'm gonna send my kids to college, et cetera. So we all have these personal expenses and things that we want to take care of. What if we could unlock that? So I'm of the view that private equity is neither good nor bad. It's a tool like anything else, and it could be applied to do great things and it can be applied to do horrible things. I think to the degree that we as lawyers can get involved early and steer the way that private capital enters our thing into our industry, I think the better, the better off we'll be, and I think the better off the clients will be. I think if we let the finance aspect of it drive it too much, then you know, there's a, I think, a greater likelihood of you know some of the negative aspects of of um you know private capital, of some of the things that can go on, like optimization or forcing outcomes or things like that.

SPEAKER_02

PJ, I would love to hear from you about what you have seen go wrong.

SPEAKER_04

I don't know that we have enough time on this round table for me to go through everything that I have seen go wrong. Um, but I'll I'll speak to a couple general items. Um so as mentioned that one of the previous previous firms that I ran was PE backed, and it was one of the first in the more recent history, call it 2021, 2022 transaction. And there's good, there's bad, and there's ugly involved. And I'm not going to speak on that specific, but I'll talk in general what what could go wrong. Um, first, when you deal with a PE backed law firm, you're really talking about PE owning the MSO that has a contractual agreement under a master services agreement or MSA with the law firm. And that MSA is what how the MSO provides services. It's the controlling document and agreement between the two entities. But what you put in that MSA matters very much. And the control mechanisms that you put that are put in that MSA matter very much. And they come in all shapes and flavors. I've heard often that PE wants to PE will say often, we don't want to control the law firm. We don't want to tell the attorneys how to do the work. But then you push the button and they go, but really, we just want to tell them who they can hire and who they can fire and how and you know what we pay them and what clients they can take on. And obviously that is problematic in some ways. So some things that I've seen that could go wrong are over control in that MSA. So saying having control over equity partners, either getting equity or not at the law firm. Um setting up, call it a group board or round table that leans too heavily into controlling not necessarily the attorneys, but maybe the paralegals in that instance. So for instance, most most PE-backed firms are going to have all your non-attorneys, which includes your paralegals sitting at the back office. Well, attorneys are very used to controlling the legal work, and that includes paralegal time. So how that time from an optimization for each paralegal gets controlled is now a it's not an ethical problem under state RPCs, but it does become a practical problem that can create friction if you are not careful and the back office has too much say over when an attorney can write off time, who they can write off time against. Um, I'll note a couple other things too. Purchase price matters. Um as much as people want to get, as much as attorneys who are interested in this and selling want to get as much money as they possibly can, that can that can cut both ways. They can obviously get paid, but that money often, depending on the private equity firm, is levered. So when that money comes, let's say that it's a $100 million check and I'm using nice round numbers, 80% of it might be on a debt line, variable or otherwise. And that means that back office MSO needs continued revenue, otherwise, it risks failing on its debt service. And if it fails on its debt service, now that has a massive problem for the law firm. So understanding not only the capital that you're getting paid, but how that capital is structured, if it's too much, it actually could cause a really big downstream ripple effect for the firm itself. So I'll stop there.

SPEAKER_02

There are plenty of others, but well, my my follow-up question to that is okay, why does that matter? Let's say the funder loses the law firm separate should still be intact with its reputation and its clients, right?

SPEAKER_04

You would think so. The law firm is intact, but how does the law firm operate when all of the technology and the back office service people and all of your finance and accounting and billing and HR and marketing and everything else is funded by one entity? If that entity goes becomes problematic or goes up or under, the law firm now has no support. The law firm now has to go secure all of those either through separate MSPs or managed service providers or to a fully separate MSO, but that is not an overnight thing. So imagine your systems being shut off or your access to people and staffing being shut off in a week's time. I don't know that many decent-sized firms could survive that. So being able to understand what the contingencies are in place. You might write into the contract that even if the the MSA is broken, that the MSO would still have to provide services to the law firm until the law firm finds a suitable alternative. But in reality, that may not actually be possible. Or they the MSO may just refuse to service what happens to the law firm if you have no access to your accounting or billing or invoicing or anything else. So understanding who you're partnering with is massively important from.

SPEAKER_02

Okay, I really want to move from what you talked about to multiples, what's dangerous, what's right, what people can expect. But before we do that, you're an MSO that does not buy, does not take an ownership interest in in law firms. Can you talk about why you set it up that way and why why people might want to choose that method?

SPEAKER_04

Yeah, absolutely. So when we were running a PE back firm, um, at the time, thesis wasn't really broken, but the execution of that was problematic in our view. And we really wanted the ability to deliver a shared services model that delivered value to the end users, to the to the which who our clients are partners at law firms and the law firms themselves, in addition to the clients being clients, right? So we wanted the freedom to build that how we wanted without a lot of structure around the who, the why, and the what. And that meant that we chose to build a vendor-backed MSO. So what I what I mean by vendor-backed is we don't write checks into MSOs or law firms. While we are an MSO, we are a pure vendor just like your outsourced IT provider is or your outsourced HR provider is. In this instance, we're only an MSO because we are a collection of MSPs under one roof, right? Because an MSO at its core is simply a collection of MSDs, even if it is part and parcel to how PE is coming into the industry. Um, and really it starts with delivering value to the law firms and the clients. Um, that is our sole focus at all times. If we can't deliver value, we don't get hired. And so it makes sure that our alignment moving forward is together with the firms themselves. Honestly, one of our bread and butters is actually just building, launching, and then operating brand new firm spin-outs, which is not attractive to private equity because there is maybe a track record for those individual partners, but they don't want to be in the business of launching brand new ventures. They want established law firms where there's predictable revenue and scalability and and they can, you know, have a real clear sense of what that eBIT is. Brand new firms don't have that, but there hasn't really been an option for groups of five or 10 attorneys to start their own without doing it themselves. And that's where somebody like Federate comes in because we can do that in two months, and on day 61, somebody can go, oh crap, I now have my own firm. That's the point. So it's a little bit of a differentiator on in that way. Um I still don't think that the PE model is broken by any stretch of the imagination, but I do think that again, who you partner with matters, and there is every flavor under the sun of PE operators who are, you know, both on the good side and the not so good side.

SPEAKER_02

There is a lot of debate over how many actual buyers there are in the market right now. What are the three of you seeing in terms of are there a lot of buyers and what who what does that look like?

SPEAKER_00

I I mean, I would say that it's it's impossible to know the true number from from in my view, um, because there are and and not everybody's a buyer in the same way, right? So there are a lot of people who would like to buy and who will buy um at attractive multiples. I mean attractive to the person who wants to sell, right? They'll they'll put a big price on the table, right? Um, and I think that I want to get back to what TJ said because I think it's one of the most dangerous things about this particular point in time is there are a lot of people out there who have the money to acquire who, you know, if it were me, I wouldn't, I wouldn't partner with or sell to. And because they don't have a track record or they don't understand how law firms work, right? And at the same time, um, it's important that we as lawyers know how private equity works so we don't get ourselves into trouble. So I know there are a handful of acquirers out there for sure that are acquiring firms. There seems to be more competition um for contingent fee single event um personal injury firms right now, so not the mass torts ones, but that's my world. So I see a lot of that. And I see, you know, firms that are competing. I see that uh rather private equity is competing for firms that sort of have 10 million in EBITDA and 10 million of EBITDA and above, right? And so there are a lot of just practitioners out there that don't have, there are a lot of firms out there that don't have $10 million of clean EBITDA. Um EBITDA, you know, for the people on this call who don't understand what that is, that's just that's basically your profit, right? Um and so um I think that the danger that I want to point out is exactly what TJ said about, you know, everybody hears the word private equity, they think equity, but they should really think of the word debt, because there's never a private equity deal where they don't, as TJ said, lever it up with massive amounts of debt. Why should you care? If your headline price looks great to you, right? Like if somebody comes to you and just offers you a boatload of money for your firm, what is a boatload of money? And we can talk about what the multiples or what the ranges are. Um, that can be extremely attractive, especially if you're a person who wants to just sell the firm and like and go away with a big bag of money. If you don't care what happens to the firm or what happens to the clients or what happens to, you know, your team or the partners you're leaving behind, um, I guess that, you know, maybe that's all you're thinking about. But I think most attorneys I talk to don't think like that and really do think about, you know, what's going to happen to this firm, um, whether I'm here or not. And so, you know, TJ's point is really important, I think, for anybody on this call who wants to understand private equity, you need to understand debt. Right. So, what basically private equity does, as TJ said, is they basically take out a sort of mortgage of sorts on your firm, and most of your purchase price is paid with borrowed money. Why do you care? Because the cash flows of your firm are what support that debt payment. And just like any debt payment, if the cash flows can't support the debt payment, in other words, if you paid too much, right? If the if the headline price is too high and the business, the fundamental business itself can't support that debt payment, then the business is going to struggle, right? And it might go out of business. There's going to be some irresponsible buyers who over lever and who kill some law firms. It's coming. Something that is shocking that will be shocking to people when you start to see single event personal injury law firms go out of business because they can't afford to service their debt. It's kind of unit's kind of unfathomable to us who've been in this industry for any length of time. But it's going to happen, unfortunately. Um, I don't know how and when, but at some point in the future I predict that it's going to happen. I hope I'm wrong. Um, and when it does, that's gonna call into question this whole thing, right? And so this what but the thing you need to know about private equity is they don't need every investment to win. And there's many of them who have big bags of money that they have to put to work until they get paid. So the way that private equity funds work is until they send the cap, until they deploy the capital and buy something, the people managing the fund aren't getting paid. So they're actually incentivized to pay more and to pay quickly and get money out the door, right? I'm generalizing, obviously, but but this is basically how they work, right? They get paid for deploying capital. So they're incentivized to overpay. And if they go and buy three, four, five firms and two of them fail, I mean, that could just be some of the carnage, right? I mean, that could be the tuition that they might be willing to pay. It's not quite. like venture capital, right? Venture capital, you know, for people who are familiar with it, they need what, one in 10 to pay? You know, they're looking for one in 10 blockbusters. In PE, it can be more like 50-50, right? Do you want to be with a do you want to be with an organization that, you know, only cares if half of its half of its portfolio companies do well? So there's all kinds of things that you can look at in private equity, like where their performance is, you know, how they've done over the past amount of time. There's all kinds of this information that is available, but not easily accessible to people who aren't in that world. You probably don't even know that you can find out are they performing in the top decile or the top quartile or all these sorts of things. And I think a lot of the people who are doing this, while they have in legal, while they have track records with private equity, they do not have track records with legal. I say all this that I I believe prudence and caution is warranted at this time. Not that it's a bad thing, but just that there are are bad things that can happen. I'll get off my soapbox now.

SPEAKER_04

I've gone on on one quick note, uh and just really to your original question on like how how often this is happening and how many people are approaching it. In the past year or so I've I and my co-founder at Federate have probably been approached by 60 plus private equity firms looking to get in. And that is people kicking tires that's hey I've got a solid thesis of what they think is a solid thesis. It's both on the uh PI and contingency side it could also be on the corporate side everybody's trying to approach and get different has a different buy box so to speak. But I'll note that out of those you know call it 60 58 of them have never run a law firm don't have anybody on their team that's up that has operated a law firm. Half the reason they're calling me is because as a vendor MSO, because I'm not writing a check, I have a healthy overlap that I may be able to help them run their thesis. And up until now we haven't actually done that. So it's that's not really a thing. But one of the things it's gonna come like with time in the next two years, that's going to change. But as of right now, most people stroking checks um have never don't even have operators on our team, let alone have operated a law firm. And so we are still in really early innings of people trying to get in. But as you know attorneys are risk averse and one of the reasons a lot more deals haven't gotten over the line is because and I've sat in these meetings with managing partners who called me afterwards and go, this all sounds nice but they've never actually done this before. And as attorneys, attorneys don't want to be the fifth person over the wall, let alone the first, right? So as with anything time will change that. But right now there's only a handful of people that have actually run law firms before.

SPEAKER_03

I think you'd see the same trend on the venture capital side um you know with the legal tech firms coming into the ABS framework as well or building AI native law firms. You know, it's it's all the rage uh with venture but the number of venture firms that have actual legal operators as part of their teams or with any experience is really slim. And so uh you know these venture firms and legal tech companies that are are looking to create ABS law firms, once they're licensed, the reality is they're a law firm now they're not a legal tech company. And um it's a it's a huge shift that I don't think um everyone's always prepared for it so kind of tangential to to the PE coming into a law firm and what that really the reality of it is can be slightly overwhelming.

SPEAKER_02

If there are law firm owners listening who are PE curious they have built a business they um are interested in maximizing the value of that business maybe with PE, maybe not.

SPEAKER_04

Maybe they just know that they're going to be competing with PE where do they start in terms of readying their firms for what's coming okay I'll take a I'll take a stab at it and then you guys can add um so Fred kind of mentioned this earlier but law firms don't really operate on an EBITA basis, right? Law firms are cash businesses. PE, on the other hand, cares about EBITDA very much. And so we first we have to understand what EBITA is earnings before interest taxes depreciation and amortization, right? And PE cares less about top line revenue that matters but they care less about top line revenue and more about consistency, margins, predictability, scalability, right? And then adjusted EBITDA becomes a really big conversation. And adjusted EBITDA is all the either one time, irregular non-recurring items that we either remove from an EBITDA calculation or add back. And one of the major ones we add back is attorney compensation. So most law firms operate on a profits per partner. Your equity partners aren't getting paid uh salaries they're just taking the profits of the business there might be a draw but it's ultimately profits. Well under a an MSO structure where PE would come in, there has to be some compensation for that or at least those attorneys likely have to get paid that's going to be an adjustment to that EBITDA PE really cares about client concentration. They care about key person risk uh they care about referral dependency. And so one of the things I think that if law firms are interested and they want to drive multiples up or they want to be a really attractive target, you know, I think one, you need a strong layer of leadership. I think most firms that I know that are trying to get in the space are more interested in in the leaders on at the firm level and they're not really interested in equity partners law firms that have 30 equity partners that's a much harder sell for them. They want repeatable operating systems, repeatable intake conversion, they want clean financials they want a reliable marketing engine, they want practice areas, even if it's corporate or teeny or immigration or PI with predictable economics and they want growth trajectories more than just flat static size. So on the flip side what harms a firm in some of those conversations is founder dependency. It's not having documented processes it's weak reporting and KPI no KPI culture. If your margins are inconsistent and they're you know they're yo-yoing back and forth from year to year. So I I guess I'll say if your business only works because you personally know where all the the the bodies are buried and where the fires are, like that's not going to be really attractive to institutional capital.

SPEAKER_00

Yeah if I could add to that TJ I couldn't agree more. I would say the mantra for anybody on this um you know one of the mantras for anybody on this call would be your business to private equity is more valuable to the degree it does not depend on you. Yep. Right? The more it depends on you, the less valuable it is to any buyer right if somebody just think about a business that you want to you would want to buy right if you went to buy somebody's business, just any kind of business, right? And you found out that you know the person running it was the bottleneck for everything and knew everything and there was nothing written down and there was no way for you to take it over. Think of that versus turnkey. I think that's really what TJ's saying I I recommend just for a general private equity overview. I always like the book as an intro um the private equity playbook by Adam Coffey look there are a lot of books out there that you can read and and one of the things that I'll just say generally is like I would just encourage everybody on on the call to um what is the what Reagan said trust but verify right like this is a this is a time of great opportunism right it's a time of great opportunity but it's also a time of great opportunism everywhere you turn everywhere you look all of a sudden everyone's a legal MSO expert or a legal private equity expert. Take it from me there are almost none right there are almost there are almost none and I'm not I'm not knocking the people that want to help or the people who are getting involved with this but I'm just saying you need to understand the people that you're talking to another mantra that I'll give um to anybody on and this I think is applicable private equity or not is there's no good deal with a bad partner. You need to date right you you've got to you've got to figure these things out and and the private equity folks they know stuff that you don't know. We're all very intelligent we're attorneys we went to law school we figured this stuff out but we're not accountants we're not quants we're not financial wizards at least I'm not um and and I would say that they know stuff about financial engineering that you don't know they know stuff about the paper the the legal paperwork of MA the agreements and things that you just don't know and so you know the night is dangerous and full of terrors. I'm not I'm not really trying to like scare everybody in that way, but having great advisors around you is also really important. But understanding this fundamentally about private equity I think is really important. They are inter they are an investment vehicle right private equity. They are taking money from other people and they are promising a return to those people and they get paid to the degree that they can deliver the return right they get paid to manage the funds they get paid to put funds out of the market but ultimately they're an investment vehicle that has a time horizon preferably most of the time and TJ you can speak better than this but my understanding is preferably no longer than seven years.

SPEAKER_04

Yeah normally it's normally it's going to be five, five to seven their preference is right around five anything longer than seven, we start talking about continuation vehicles sending selling to themselves or them just taking a discount just because they have to do some level of transaction on that time horizon.

SPEAKER_00

Yeah which means you're you're you are sort of a flip project as it they have to believe that they can buy you today at a certain price and that within the next five years they're going to be able to turn you and sell you again for a higher price. That's the private equity game. And so take a look at you know Citron Cooperman, which is an accounting firm, not a law firm but Citrin Cooperman, right? Bought at a 10 multiple and I believe sold a few years later for a 14 multiple while they grew the underlying EBITDA. So what they want to do is they want to buy you with your 5 million EBITDA or your 10 million whatever it is and they want to grow that 10 times and then they want to turn around and sell you for a much higher price to somebody else so they can get very wealthy, right? If you understand that, then you can understand how that might work in your firm. Like in other words if you already knew that if you just had access to $50 million, you would go do X, Y, and Z, right? You would go do these things and it would send the firm on this crazy trajectory. If you can show that to them, then they will do that, right? Because that's the kind of thing they want to do. They want to know that they can just pour gas on your wonderful fire and make it 10 times the size it is and then sell it to the next private equity fund.

SPEAKER_02

Taylor, anything we missed that law firm owners need to do to prepare?

SPEAKER_03

I mean just to piggyback, it it law firm owners well lawyers run law firms. They are not great at running businesses. And so if you're looking to get involved in this you need to take your lawyer hat off and put the businessman hat on, business person hat on. Like it's it's pretty simple like you you can't just think about the legal work and it probably means that you need to get yourself out of the legal work the day-to-day legal work that you might be focusing on and really be running your business. Because like what Fred and and TJ said, if you are that key person, you're their the main lawyer in your law firm, that that's not super attractive. But if you are looked at more as like the CEO who has put in fantastic systems that are easily repeatable and you just need more more bodies to do more cases and you need more money to have more bodies like that's that's what's going to work. And so that's my main suggestion is that like you can't think of yourself as an attorney first necessarily you're CEO of this brand and you're growing that so that you can take on investment and and do awesome things with it.

SPEAKER_02

Let's talk about multiples. What range of multiples can people expect if they set themselves up and they're interested in finding a PE partner.

SPEAKER_03

I mean I I would say a lot of it has to do with where you are on your EBITDA if you're spent if you're spending 10 million to make two million versus spending 10 million to make eight million or make eight million, like it really changes the number. I know um Fred and TJ can probably speak more specifically to what they're seeing or what they're actually implementing. But um again it goes back to what are you putting your money into and are you actually making any money just because you're spending a lot or you're bringing in you know $10 a year but you're only taking home three of that it's a huge difference between the firms that are making 15 and taking 10.

SPEAKER_00

TJ I just want to point out um you know Billy I think that this is just another one of those areas of private equity that's very opaque, right? It's very hard to see through the multiples because there's headline multiple like there's the multiple that you might hear. First of all, there's a lot of deals going on where the multiple is not disclosed, right? So you kind of have to like dig in the background and try and figure out the multiple and somebody shares what it is and they don't. It's a bit of a game. But you know we don't the the truth is is for some of the largest deals that are the most public deals that we're seeing right now, I actually don't know what the multiples are, right? I hear rumors and conjecture um you know maybe somebody will tell me over a drink in a uh in a bar and maybe they'll be telling me the truth or maybe they won't. I know that I'm seeing consistently for single event um private you know for single event personal injury law firms, contingent fee personal injury law firms in the United States, I'm seeing between two and six times. And that, you know, that is again it's a sliding scale based not only on your EBITDA. Taylor's right EBITDA massively important but there's a number of factors which can also help drive that multiple up um but the headline multiple here's the here's the trick about it, right? Is that what you think you're getting from a multiple and what the private equity fund thinks they're paying you from a multiple can be two very different things based on the spreadsheets that they're using in the background. So you know TJ might have more to say about that but let's just say that what looks like a six to you might look like a four to them. How do they do that? Right? Like that's just a question of how they're sort of engineering the financials and how they're thinking about the deal. That doesn't mean necessarily that you're getting a bad deal if you think you're getting a six. The question is it's like any other market, right? What will you, as a law firm owner, what will you take for it, right? It's a free market. And so if if you say, well I'm not accepting that and and you can just kind of do the math on this because what what does private equity do when they pull a multiple all they're really doing is they're saying here's what we think the profit's going to be for the next let's say you're getting a four multiple right you know say here's what we think the profits are going to be for the next four years based on the profits that you've had the previous three, for example, right? Let's pull those all forward to today and pay it to you all at once as if you've got all those earnings at once. And then when you get those earnings, you'll get capital gains tax treatment on it instead of you know regular tax treatment on it. Right. And that can be pretty attractive to you to an owner. Again, I'm over I'm vastly oversimplifying it but I'm trying to make it as simple as possible. You're really pulling forward tomorrow's earnings to today all at once boom here they are capital gains tax treatment. And you have to decide as an owner whether or not that's worth it to you. Transactions that we're seeing in the market seems like for most owners and I would say two to five two to six, it's probably more like you know four to five is what I'm seeing most often right now, right? If I'm really zoning zoning in on the multiple is that people are getting four to five times their earnings for like you know a decent a decently run firm that has greater than probably two million dollars of EBITDA right and most of the deals we're seeing are well above that right they're in that sort of like 14 to 25 million dollars of EBITDA. Are they getting much more in multiple I could only tell you rumors I I I can't tell you what those multiples are.

SPEAKER_04

Yeah I I can I can I can expand on that a little bit um I think Fred is right I think the best deals that we're seeing end up in the four to five range um maybe four to six but I think a lot of that is a lot of that is because the the owner on the or the private equity backer or the acquirer probably knows what they're doing a bit more, which means they're sitting at a multiple and doing deals that fit a structure the ones that are paying higher often tend to be the folks that have less experience in running firms um or overpaying to get a platform deal across the line. We've seen a couple in in recent history and I'm not going to name names um that are in the seven and a half, eight, eight and a half range. That starts to feel from my perspective and my experience a little bit dicey. It's doable but it's a little dicey. I can tell you a number of years ago um and again not mentioning firm names a handful were done in the mid teens right 12 to 16. And that sounds awesome if you're a managing partner, but none of those have been successful. Right like any of the firms that I know that have been in the mid-teams on a multiple, I won't think any anybody running those firms at those firms, PE backer of those firms would consider any of those transactions a success for a lot of the reasons we already talked through in debt and and structure and needing to pull cash out or otherwise. And so the good deals I'm seeing tend to be in the four, five, six range there is a a level of mid-market, upper mid-market or upper lower to mid-market PE guys who have a mandate to only write checks of a certain size. So there's a little bit of incentive to overpay as a result um which Fred talked about. And so they they're perfectly fine writing a larger check and doing an 8x multiple can I tell you that that's uh going to be successful in the end. No, I can't. I think it's dependent on a lot of other factors. Some of that may be on the corporate side too, right? It may not be on PI. It may be midmarket P PE guys who have an aversion to PI who are like, you know what, screw that I want $20 million EBITDA shops and I'm willing to pay much larger for it. So every flavor and shape and size, but I do think that the more successful ones are probably going to all be in the four to six range because when we pull that EBITA multiple and we balance it with growth of the firm and with operational efficiency, the transactions that are going to end up being really well done pull all three levers simultaneously, right? Uh we have a multiple arbitrage I bought it for five I sold it for eight or nine X. I was able to help grow the firm and I was able to save the firm 10 to 20% in operational savings through economies of scale and purchasing power. So the best deals are going to be sh by shops that can pull all three of those at the same time and aren't just I'll pay you a number go do your thing but you have a mandate to grow. How do I do that as a law firm owner if if you're not helping me as the a PE backed MSO, it's still on me anyway to grow it. So yeah you might have written me a check but I still got to go figure it out.

SPEAKER_02

So um I I know that's slightly off topic on partnership on the PE side but I do want to talk about that like post PE, how do you grow? But before we do that, um can you explain a little bit more about okay you've got this multiple but then there's an earnout period and you're not getting it all at once and then you're rolling some equity in how does that all work?

SPEAKER_00

Yeah I can I can kick that off if you like Billy I think I think um you know when you think about the type of business that a law firm is it's broadly lumped into what what PE calls professional services, right? And when you think of professional services, like what do we have as a law firm as in terms of assets, really what we have is you know we have our people, right? You might have, you know, you might have a book of business, right? And depending on the type of practice you are, right, you've got a you've got a book of business, you might have some WIP, et cetera. But the deals that I mostly see are in contingent fee, you know, single single event personal injury firms where um yes you have a docket, right? You have a number of cases depending on how long it takes you to settle cases that will come due in the future and provide revenue to the firm. So there's some predictability of revenue there. But if you are an investor and you're looking to buy a law firm, what do you want to make sure happens? I think you would, I think we'd all agree that it's pretty important that a law firm has attorneys. And so you know oftentimes the founder who is selling is a key, is a key attorney in the firm. Not always, right? But oftentimes they're a key attorney in the firm. So you're looking for ways to have them stay around and make sure that there's continuity to the next ownership group. Right. And so in some structures um you know and I will say that we're we're one of these our preferred time for the founder to stay around is forever, right? And we know that that's not going to happen, but we we love it when founders stay along forever. In other structures people you know want to send a founder out the door on on day one. I think in a law firm situation that can be extremely risky. So some of the ways that you know we'd look to and not just you know not just groups like ours but private equity looks to drive alignment, right? To make sure that the purchase was a good one and that it continues to operate is by using things like earnouts and rolled equity. And so just very simply what those are, let's say you have a purchase price of um just make it like six million dollars, right? Call it the purchase price is six million dollars, just an easy round number. They might say, well we'll give you um 50% of that in cash today, right? So here's three million dollars and they might say for a period of time we're gonna give you 25% of that. So $1.5 million and let's say it's over three years, right? So we're gonna give you $5 million a year over the next three years. So you get three up front or sorry not five million, you get $5000 a year over the next three years. And then the last 50 or the last 25% of that we want you to take back in rolled equity or rollover equity. And it's one of the reasons why I recommend the private equity playbook by Is because I think it does a really good job of explaining the economics of the role of equity. Now, why would you take back shares in an organization, right, as opposed to cash? You would only take shares in an organization if you believe that in the future, in a relevant time frame future for you, right, where you could benefit from it, that those shares would be worth more to tomorrow than they are today. And they would also be worth more than you could get from just taking the money, the equivalent money in that shares, and putting it into the SP 500 or whatever other investments, alternatives that you have, you have to believe that the rate of return or the the multiple on that capital, however you want to say it, right? One of the terms that private equity loves to use is MOIC, OIC, multiple on invested capital. They want to provide a multiple on that capital to their investors, right? And if you're and you roll equity as part of the deal into this private equity fund, you're basically becoming an investor. And so you have to believe that in the future that's going to be valuable. So it's as simple as I usually see those three buckets. Now, some deals have no earnouts whatsoever, right? You can negotiate, these are these buckets are negotiable. Um I haven't I've yet to see a deal that does not contain at least 20% rolled equity. TJ might be in this in in my world. Um, TJ might might see something else. Um I know he does things differently as well, but um, you know, in in most of these transactions, the bigger ones that I'm seeing, I've heard anyway, that the minimum equity being rolled is 20%. So the minimum of purchase price that people are taking back is 20% in shares in the larger MSO or ABS as the case may be, but it's typically MSOs that I'm seeing. Um and so that those are the three buckets. Why would you why would you agree to an earnout? You might have to, right? Your buyer might insist upon it to drive alignment for a period of time after the deal closes to make sure that the value of the business that you promise it will be there as a seller continues to be there, right? And just the market, the more bidders there are for your asset, your company, the more negotiating power you have. If there's one buyer who wants it, you have less negotiating power than if there's 10 buyers who want it. So then those buckets become more shiftable.

SPEAKER_02

The issue that I have personally had and seen with friends who are getting offers are when you look at the offer, okay, the big number, the initial number might sound fine, but when you're getting it over a three-year period and you're giving up your ownership and your profits during that time, you would have made as much if you hadn't sold.

SPEAKER_00

The the capital gains treatment is one answer to that, right? The tax treatment that you get is is one answer to that. But I think you you've hit upon what I think is a key, a key point, Billy. There has to be a reason beyond the money to do a deal like this. Now, for some people, it's retirement, right? That's a compelling reason. I don't want to practice anymore. Um, I would like to get out of this. For other people, it's I just want to practice and I don't want to deal with all the other stuff. Uh just let me practice. Leave me alone. I started a business, I've grown it to a certain size, and I hate running it. I would like to just go back to being a lawyer. And then I think for some people, they really do believe in that rolled equity piece where they're like, ah, I see what's happening here. I have a chance to take shares in an organization that, you know, is already larger than I am and it's the future. I believe the thesis. I believe that that those shares that I take are going to earn me way more money than I than I could, you know, doing this on my own. So I think there's a number of compelling reasons beyond the headline price. If headline price is all you care about, um, then, you know, that's one thing. But I think there's a lot of lawyers and you know out there who really care about a lot more than that. And so they're being very thoughtful about who they partner with.

SPEAKER_03

I I think that's where Fred's dating analogy comes back into play pretty strongly on all of this. I mean, if you're gonna be uh continuing to work for the next three to five years on an earnout for this new new entity that also you have equity in, and um, you know, hopefully you're aligned on your goals and what they're bringing to the table and that long-term vision. I mean, if you're just caring about that top line number and finding whichever PE is going to give me the most, I mean, there are plenty of people who have significant regrets after selling their firm or you know, their doctor's office or their dental practice because the partner that they chose ended up being the absolute wrong one for them because it didn't align with their goals. If their goal is, like Fred said, I I want to keep practicing, I love practicing, I hate running the business, I don't want to wear that CEO hat. Find find that right uh MSO that is going to take those things off your plate, allow you to continue to practice. And it might mean that you're not getting the strongest multiple necessarily because they're bringing more to the table. I don't know. But um uh it it really is important to take your time to really think ahead of time, like what are my goals here? What am I hoping to accomplish um over the next five to 10 years? And how is my partner in this, because it is a partner, how is that going to align and help me accomplish those goals?

SPEAKER_02

All right, we've got about 10 minutes left, and I have a million questions. I'm sure our listeners do too. Um, let's talk about lessons learned from Australia, from the UK. What have we learned through deregulation and maybe through other industries that we need to keep in mind?

SPEAKER_03

I could talk about this for a long time. Um I'm I'm uh a champion of loosening the monopoly that lawyers have on all of this, um, because I don't think that at the end of the day, it has led to a benefit to society as a whole. Um, it has led to some really rich lawyers. Um but uh so I I think what we've learned in allowing like in Arizona as a model here in the United States and in foreign models where there's non-lawyer ownership of law firms or mechanisms for non-lawyers to be involved in the practice of law, like through an MSO, is that if done correctly and thoughtfully, it does not lead to an increase in harm to the general public, the consumer. That um, whether it's through compliance frameworks or just thoughtfully putting things together, um, because on the MSO side, there there is not a whole lot of compliance framework um other than you know, ensuring that there's you're following the ethical rules and and not sharing fees uh directly. But I would argue any money that comes into a law firm is a fee. So you probably are sharing fees, it's just not like directly. But anyway. Um as long as you're doing it carefully and thoughtfully, uh it's adding to the framework, it's adding more lawyers to the practice, it's adding access to justice across the country. I mean, there are so many areas that need more lawyers. We need more law firms, we don't need less. Uh, and there's room for everyone. Um, it's just that making sure that you know you the lawyers are still taking care of the ethical requirements that lawyers have and that we're protecting our clients and not letting, whether it's the PE in the MSO or it's a ventor firm in an ABS, not letting those non-lawyer finance types um tell you what you can and can't do when you have a client sitting in front of you across the desk. Um, but as long as you're doing that, um there hasn't been this crazy um, you know, death of the practice anywhere. Um, if anything, it's made things better and more innovative.

SPEAKER_02

Sarah reminded me we have until 1115, which is fabulous. But but Taylor, follow-up question. Is there an increase of access to justice? Are more people represented in Australia and in the UK than there are here?

SPEAKER_03

It's a difficult number to come uh to come up with because uh outside of like the ABS framework in Arizona, we're actually asking law firms, you know, how many lawyers do you have? How many clients have you served in Arizona, that sort of thing. Outside of that, nobody has to, and nobody does report those numbers. What we do see is how many cases go like in in the US, it's it's above 70% of civil cases have one side, one party that's unrepresented. Um, those numbers are smaller in the UK and Australia. I don't know them off the top of my head, but I know that they've been impacted. Um, and those numbers are being impacted in Arizona. Uh, and so I would argue that yes, it is increasing, it's one piece of increasing access to justice. I don't think it's the solution. It, you know, this is a huge issue that we're not talking about today. Um, but uh it is a piece of it for sure.

SPEAKER_00

Fred? Yeah, Taylor, you and I have talked about this a little bit, and I know you've done some writing on this as well. About, you know, there with non-lawyer ownership in Australia coupled with um increased regulation, um, there was a notable decline in client complaints about loss. Sure. So, you know, at the at the various, I think it was New South Wales, um, did a did a study on this. Um, correct me if I'm wrong, but um, you know, like we have some we have some evidence that, you know, potentially under a system like this, it could serve clients better, right? Um, you know, and we can think about why that might be the case, why, you know, private capital might demand greater professionalization of law firms, right? It might um engender systems and processes and things like that that that make client um service more doable, if that makes sense, or make it easier. Um but I think it's it can be really unevenly applied. And so I think that, you know, as with any anything like this, you know, there would be benefits and detriments. They might not be evenly applied. But for the audience that we have here, which is which is attorneys, one of the things that, you know, you can achieve in the United Kingdom and Australia because of this is an ability to actually, you know, sell a practice properly for a real value and exit, right? I mean, I think, you know, like I was telling you earlier, Billy, my brother and I, we were the succession plan for our parents. So, so we bought their law firm um from them. And, you know, lucky for them, right? Like that was great. Right. But not everybody has that. And not every, not everybody's kids want to take over the law firm, et cetera. So um, you know, and they were lucky they had such nice sons to pay them a fair value for it as well, right? Um, it is it's just, you know, the options are no longer for lawyers. Um, you know, I have to either die at my desk or I have to give this thing away for pennies and basically get paid out of my own, my own docket, you know, by partners who don't really want to pay me. Um, you know, this is a common issue, right? If you have, you know, partners in a law firm, when a partner wants to leave, um, especially in smaller law firms where they don't have a real mechanism to deal with this, it can be very painful, um, you know, a process to deal with that. I think that this can be a good solution for that. Now, will it lead to better outcomes for clients? I mean, I think we we hope so. Could it lead to worse outcomes for clients? Yeah, it could if we don't do it right. And I think that, you know, I I I know that Taylor and I are aligned on this. I imagine that TJ is as well. None of us want to see a future where things get worse for the people in the legal profession, the people who do the work, the teams, the lawyers, you know, and the clients, right? That would be a terrible, that would be a terrible future for all of us. So I think it's really important that as this happens, we really just pay close attention to some of those mistakes, like we saw in Australia and the UK. The biggest mistake I saw in the UK was just, um, frankly, was people who had money but not sense about how to run law firms overpaying for things they didn't understand. And I suppose if you're not the bag holder, if you're the person who gets the money and you get to sell your thing and it and you know it turns out badly, you might think, oh, well, that's great for me, but it's not when you get sued, right? It's, I mean, we're lawyers, right? We understand if the transaction goes really poorly and something doesn't, you know, come out right in the wash, you you could still be at risk, you know, and somebody might still try and sue you. Um, so it's it's just again, for the audience that we have here, I think that too much money too soon buying things that they don't understand and paying too much for them and not understanding how they couldn't service the debt led to destruction of value. On the other hand, the legal industry in both of those countries is flourishing. And there are, you know, there are high street lawyers in the United Kingdom now, right? You can now walk down any high street in the UK. And there's been some success stories and some not so great ones. But I think that there is more accessibility to solicitors generally in, you know, for the general public in the UK. And lawyers haven't, they're not gone. They haven't, you know, the legal profession hasn't, you know, um ceased to exist uh because of this. So that I think the doomsday scenarios just don't usually come to pass. I think it's much more mild than that. It can, capital can amplify terrible things or it can amplify wonderful things. And I think it'd be up to us, I still think, as attorneys, to decide what this does to the profession. And this is a really key moment. But I think it would be irresponsible to bury our heads in the sand about it and say that it wasn't coming, um, or to, you know, try and fight uh fight against it, because I think it's a a tide that, you know, if we harness it right um and we guide it, I think that it can be really beneficial.

SPEAKER_04

By the way, if and if for the record, you and I are on the same, or the three of us are on the same page, even if you didn't know it, we're we're we're on the same page. Yeah, and and one of the important things that is it's you made a comment about uh consultants and some knowing what they knowing knowing really what they're doing and some not. That's really even important now too, because you've got consultants all over the spectrum and you've got some folks that are pushing structures on a if on a one to ten scale, if one was most conservative and ten was most extreme, let's push everything. I've got some consultants that I've talked to that are at 11s or 12s, right? That like every everything is permissible, do anything you want. And I think that's extremely harmful for what this could be and should be and the transformational effect it should have on law firms. And I agree about removing the call it monopoly that Taylor mentioned earlier. I think that's it's really important for the industry to continue to evolve and innovate. But if we start pushing the boundary too far, then it only harms all of us across the board. So it's part the right partner matters, the right consultant matters, who you talk to matters. There are folks simply trying to make a quick buck. There's also folks that will large PE shops that'll just write large checks effect on that law firm or the industry be damned. I would hate to see that, but it's gonna happen.

SPEAKER_02

Fred, your model seems quite responsible to me. You as a law firm owner took a minority investment, and then you took your knowledge as a law firm, lawyer, owner, operator, and started expanding and consolidating. One of the thoughts I've often had is why don't law firms and lawyers just start doing this themselves?

SPEAKER_00

I think it's a good question. I mean, I think there has to be a compelling reason to be part of a larger group. And and one compelling reason is, and we see this in in law firms generally, we've seen this at in the AMO group for a long time, where like, you know, smaller practices get swallowed up by larger ones because, you know, the partner, um, they become partner in an AM-aw firm and they figure that they can make more money or do better, right? And this happens in all kinds of professional services, happens in, you know, accounting and and medicine and all kinds of things where you join a partnership group because you think you can do better. I think that um, you know, the the big thing for the people that we partner with is really um this feeling that they can decouple the growth of their firm from using their own money. So in a contingent fee legal practice, you actually have to be very careful about how you grow, depending on how long it takes you to recoup the money that you put out, right? Or your time on desk is what we commonly call it in the industry, right? So if you get a file today, because it's a contingent fee and you don't get paid for a certain amount of time, you might say, well, wouldn't it be wonderful if I had, you know, I've got a hundred files right now. Wouldn't it be wonderful if I had 200? But if your time on desk is two and a half years and you've got to pay team members to work on those files in the meantime, you've got to pay case costs or disbursements, you've got to um hire experts, um, you've got to uh get a larger lease space to house the new people that you hired and you're waiting for those contingent fees to come through, it makes growth really challenging. And you have to be very careful because growth can kill you because of the cash effects on you, right? So it's like there's a cash component of this that's really important. On the other hand, once you get it rolling in the contingent fee practice, then the revenues that come in, the cash can be really attractive. But the thing is, if you're continuing to grow, if you're always continuing to grow and you have growth aspirations, um, you know, that means you're always pushing your own money back in. And for, you know, and for anyone in personal injury, you realize how hard it is to get a regular bank to lend you money, right? So you're left with alternative lenders and the rates can be really high and the and the fees can be onerous and things like that. Wonderful uh to have that option, but it can be really tough. So I think um this is an option for certain types of practices to get access to capital to grow that doesn't have to come out of their own pocket, right? They can, you know, um, they're not starving. Personal injury lawyers for the most part are doing doing quite well. But there's a there's an aspect of that where, you know, I would like to put some money away from my family. I would like to, you know, make sure my kids can go to the college they want to go to. Um, I would like to invest in something else for a while. You know, I would also like to do a real estate investment or whatever else you want to do, equities or whatever it is you want to do. So I think that there's a big part of that that that, you know, the reason we do it that way is because that was my thinking, right? Like when I bought, when I bought the firm with my brother from our parents, I thought, well, that's great for them. Now what am I gonna do? That that and that's a real, you know, that's a real um uh you know, consideration. And for many years, you know, we had we experienced that same phenomenon of just pushing our chips back in and back in and back in and back in. Um and it's a it's it's great and it's nice to have an alternative.

SPEAKER_04

Billy, if I if I can, just real quick, I we've actually seen other people create captive MSOs. So um where the law firm is actually creates their own MSO, not necessarily to sell it, um, but because there are other benefits to doing so, whether that's cultural preservation or governance or control, or frankly, just separating the legal business from the enterprise value and the back office services. When you separate the entities, even if you don't sell that back office, you can start treating a law firm like a client. And there's a psychology behind that that actually does create uh value and better services for the attorneys themselves if done properly. As an example, we are currently designing and building a captive MSO for an AM law firm now. Second 100, they hired us to design and build their MSO. Now they're tightly controlled, meaning only a couple equity partners, rare for an AM law firm. They're not doing it to sell it. They're not doing it specifically so they can take extra P or PE investment. They are doing it for optionality and to get the benefits of the structure. So there are certainly we're actually advising a 75 attorney firm on whether they should do the same thing. We had another AMLAW firm approach us two weeks ago about a captive MSO. So there are firms out there that maybe they roll up, maybe they do firm acquisitions as a result of that. But there are distinct benefits to an MSO structure that do not have to be tied to PE or outside capital investment. And a number of firms are actively exploring that. And we're working on some of those now.

SPEAKER_00

And we actually just add to that. Oh, sorry, T, I was just gonna add that's what we did first for our own firm is we set up our own captive MSO first. And one of the reasons was we wanted to equitize some of our non-lawyers, right? That's what I was gonna say.

SPEAKER_03

Yeah. Go ahead, Haley. Yeah, I'm I'm working with two firms right now that are, you know, small mid-sized firms that are looking to they're creating their own captive MSO one for succession because they they don't want to go the ABS route. Um, but um they have a a spouse that works in the business, basically runs the business, but isn't a lawyer and allows that to continue. And then two, uh to give key personnel um equity in the business or potentially bring in some external support and be able to give, like on the software side or something like that, give equity, but they have no intention of expanding the MSO outside of their own uh their own framework.

SPEAKER_02

Very, very interesting. I do want to leave a little bit of time for questions. Um, if anybody has questions for our panel, Sarah, do you know if we have any existing questions?

SPEAKER_01

Um we do. I think we have a couple in the chat.

SPEAKER_02

Okay, I don't see those. Do you want to read them?

SPEAKER_01

Sure. I just completed a successful sell side due diligence for an MSO. It was quite a task because we were brought in the same day, the LOI was signed, and the quality of the financials was were a mess. We are currently managing six of these deals at various stages in the process. How important is it for law firms to have clean financials long before they get to the LOI stage?

SPEAKER_04

Um I know that's a simplistic answer, but if if the firms want to maximize value, clean financials are going to be extremely important. One, they're gonna be a drag on your due diligence and it's gonna hinder how quickly you can get to ground zero and what a price is and how this operates. And otherwise, you're looking at Adjusted EBITDA up the you know what, and there is going to be a ton of negotiation and back and forth on every single piece of the business. Clean financials will drastically simplify that. Now, making sure you have that is easier said than done. So whether that's internally, whether that's outsourcing your accounting and bookkeeping and finance to somebody who knows what they're doing who can do that up front. Um I think that PE PE is not in the game of paying more than they have to, even if we've just talked about them their willingness to write checks larger than they should, they will figure out ways to get that multiple down or have the multiple say what it is and pay you less. Non-clean financials are one of the ways they're gonna do that. So the cleaner it is, the more transparent that relationship and partnership will be. And honestly, the higher multiple you'll end up getting. But yeah, it's vital.

SPEAKER_00

Oh, sorry, TJ, I was just gonna add, think about it. If you were selling your home, right? You have to stage the house. You might call a home inspector in first to look for any deficiencies that some buyer might find, right? And you might do a bit of pre-work um before putting the house up for sale. It's no different than that, right? You want to identify the things that might cause your asset to be viewed as less valuable than it is. You're not trying to hide anything, but if there are simple fixes that you can make or things you can clean up to make it look better, um, then you know that's a good idea.

SPEAKER_02

We have another question that's really good. Um, I should have asked it. What happens the first six months after private equity quote unquote purchases a firm?

SPEAKER_00

There's just no one answer for that, unfortunately, right? It'll really depend again. That dating process will be incredibly important in understanding who you're partnering with or getting into bed with, right? It's a marriage of sorts. Um, and so you know, you really need to understand that. I can tell you what happens with us after we, you know, purchase a law firm, um, using that term loosely, but um what happens with us in the six months is we have a mantra, we say first, do no harm, right? So before we ever, before we ever even do a deal, we sit down and we talk to our founders about, okay, what's your vision for this firm? We put together a pro forma budget, right? Which is just a future-looking budget for at least three years in the future. And we really understand, so we all understand what investments we're gonna make, you know, what we're gonna do with the business there. Like, I think that this is a question best asked of the people you were thinking of partnering with and really understanding that and getting that, you know. Like we put like that budget, for example, we make that part of the deal, right? Like some of the things we do, for example, like we don't, we're not the, we're not the group, and not everybody's like this, and there are different theses and all that sort of thing, but we're not the group that comes in and like, you know, as part of the transaction, we want to fire a bunch of people, right? Like you can you can sort of just make a list of the questions that you want to ask. And these are the questions that you can put into any of your diligence, right? So when there's a due diligence process, it's not just the private equity firm looking into you, it's you looking into them. And I would recommend um, you know, hey, can I talk to your other partners? So I want to talk to the other people you purchased, and I want to know from them how they felt if they're like, well, we don't have any. Or no, you don't know. Better better hope they have.

SPEAKER_04

Yeah.

SPEAKER_00

That might be a problem, right?

SPEAKER_04

Yep. I I'll uh an additional thing I'll throw in there too. Um, in addition to the have they actually done this before, is there are a handful of shops that are law firm specific uh roll-up investment shops that are really trying to approach it in the following way. Let's go get three or four firms under LOI, let's then raise the rest of the capital on the back of those LOIs, close the transaction, and here's what they're gonna say. We're not gonna touch you. Well, we might take the staff over, but like you continue to operate just as you've done for the last three years, we won't touch it. Okay, that's great, but that that only lasts until a year and a half from now, 18 months from now, in which case that investor-backed operator is going to have to figure out how to consolidate it because the operational efficiency comes from the consolidation at the MSO level. So if they just let the law firms run as they have historically, there is no consolidation, there's no operational efficiency. So the idea that they won't do that in the future is farcible. Like it's going to happen, but it it's it's a problem of when it happens. So they're going to learn on the job, view everybody else on how they operate, then try to institute best practices and do it 18 months from now. And if we're honest about how that works, that's two separate transactions. That's the capital transaction up front, then there's the the actual conversion 18 months later, and that 18 months later will feel like a separate MA transaction. So the folks that show up up front with a timeline of how this is going to work, what gets switched off, what gets implemented at month three, six, nine, twelve, not only are going to be the ones that win, but are going to be the ones that uh show the most value and benefit to the law firms themselves. Otherwise, you end up with a whole host of problems 18 months from now, um, that none of which are beneficial to the firm or to the partners of the ultimate client.

SPEAKER_02

Taylor, Fred, TJ, this has been fantastic. Um I'm sure there will be demand for a part two. So I hope that we can have you back because this has been a fascinating and timely conversation. And regardless of whether or not you are this is even on your radar, I I think as a responsible firm owner, this is the this is what we need to be learning to understand where our industry is headed and how we want to be positioned in that industry. We didn't even talk about AI, um, but maybe in part two. So thank you so much for coming. I really appreciate your time.

SPEAKER_03

Yeah, thanks for being uh having us all here, Billy.

SPEAKER_04

Happy to do it. Thanks, thanks, Billy, Taylor, Fred. Good seeing you guys. Uh enjoy the thanks, Billy.

SPEAKER_00

Thanks, everyone.