Understanding law firm growth strategies has never been more critical. I just got back from the Business of Law conference in Scottsdale with Jeff Kerlin.
We were one of two family law firms there among 100-plus personal injury firms.
That was intentional.
PI firms sit on the cutting edge. The money flows there first. Vendors start there before moving to other practice areas.
If you want to see what’s coming to family law, watch what’s happening in personal injury.
What we discovered should concern every family law firm owner. Three major forces are converging on our practice area, and most attorneys have no idea it’s coming.
1. Alternative Business Structures Are Flourishing
Arizona is currently the only U.S. state allowing non-lawyer ownership of law firms through Alternative Business Structures.
The Arizona Supreme Court Chief Justice spoke at the conference about their ABS program. What she shared surprised me.
I always assumed Arizona did this to increase access to justice for people who couldn’t afford legal counsel. That wasn’t the primary reason.
They really did it to help solo and small firms compete by allowing them to take on capital and compete with bigger firms. Access to justice was secondary.
Arizona studied this extensively before implementation. They require an ethical lawyer for each ABS. Firms jump through multiple hoops. The program has been wildly successful according to the Chief Justice.
Currently, 152 ABS firms exist in Arizona, with 40-50 more pending approval.
Other states are paying attention.
Utah is testing this in a confined environment they call a sandbox. Washington state announced something similar. Tennessee just announced two weeks ago that they’re exploring it. Puerto Rico allows non-lawyer ownership. Washington D.C. permits partial ownership, intended for lobbyists.
I wouldn’t be surprised if we see multiple states adopt similar programs in the next two to three years. This expansion will create unprecedented law firm growth opportunities for firms ready to access capital markets.
The big concern has always been ethics. The worry is that non-lawyer capital will take over firms and force unethical decisions. That’s a fair concern, and it may happen somewhere eventually.
But the Chief Justice said ethics hasn’t been an issue whatsoever. It’s been no different than what’s existed for 100-plus years, with lawyers following ethical guidelines.
That cuts directly against all the protectionist arguments about why we can’t have non-lawyer ownership.
One interesting note. California explored this four or five years ago, then completely reversed course and became outright hostile to non-lawyer ownership. A close friend who’s a partner at a large firm in San Diego has told me hair-raising stories about the corruption within California’s legal bar. Maybe that explains their resistance.
2. Managed Service Organizations Coming to Law
MSO stands for Managed Service Organization. You might hear it called LSO.
An MSO is a separate entity from a law firm that takes all the assets out except client information, retainer agreements, and the lawyers themselves. All other expenses move into this managed service organization that can be owned by non-lawyers.
MSOs cannot advise clients on legal matters. Only lawyers can do that. There’s a pretty bright line there.
We’ve seen MSOs in other professional services for years. Dental has Aspen Dental, Forward Dental, and Heartland Dental. Medical has them in plastic surgery, dermatology, and other specialties. The vet space has them. Even engineering has them.
Law is really the last profession seeing this happen.
In dental, only 13% of practices are owned by an MSO currently. It’s still wide open and growing, with lots of money still flowing in.
The first MSO in law happened in 2006 in North Carolina, at least the first recorded one people know about.
At the conference, we were told billions of dollars are stacked on the sidelines ready to come into law. Transactions are already happening, starting at the B2B business level and personal injury.
I don’t know of any MSO transactions in family law yet. Family sits a little further down the pecking order. But I’ve been told about one home office investment group closing a deal in Virginia with a family law and estate planning firm.
MSOs handle fees on a monthly retainer basis or cost-plus basis, not percentage. They can’t take 50% of all revenue. It might be cost plus 30%, but it can’t be percentage-based. That’s how they get around Rule 5.4 prohibiting sharing attorney fees with non-lawyers.
Anyone looking to create their own MSO needs legal help. We’re looking at it right now and will retain a firm to help us structure ours properly to support sustainable law firm growth.
3. Amplified Competitive Pressure
All this consolidation pours gas on competitive pressures we already see around marketing and client acquisition costs.
Private equity money changes everything.
At the conference, almost every vendor at the trade show was owned by private equity. Private equity has acquired AI companies. They’re already in the tent, in our space. Now they can see our data and understand transactions. They have significant intelligence on acquiring firms and amping up competitive pressure.
We’re going to see more consolidation, which forces even more competitive pressure.
Private equity firms love law. It’s recession-resistant. Not as cyclical as other economic sectors. Law firms are scalable.
I’ve talked to two private equity companies. Both said they really like family law firms. They like the model. It’s predictable revenue without the volatile spikes that happen in personal injury, where you might have 10 months of normal settlements then one mega settlement that creates a 10x event.
Across the board at the conference, we heard the same timeline. Twelve to 36 months, you’re going to see a lot of law firms transact.
What Could Go Wrong
Competitive pressures will become much more acute than today.
Firms that aren’t ready, that don’t have solid control of their numbers and cost per acquisition, will be in real trouble.
We’ve got a couple of years to prepare for these opportunities and threats. There’s still time on the clock.
How We’re Preparing for Law Firm Growth
We’re taking several steps to prepare our firm for law firm growth in this changing landscape.
First, we’re creating an MSO that meets all compliance standards. We’ve already talked with an ethicist and will put her under retainer to ensure everything we do is completely up to code.
Second, we’re getting very direct and thoughtful about margins. We need to get north of 25% to give us healthy standing to withstand marketplace volatility. That requires significant work and time to get our cost structure right.
Third, we’re starting to focus on acquiring other firms we could bring into our family of law firms. Together, I think we can create defense and opportunity against what’s happening with MSOs, private equity, and competitive pressures.
I don’t want to be in a situation where we’re forced to sell because there’s too much pressure. We want to be one of the bigger players who can withstand that pressure and provide insulation to smaller law firms.
Done right, the right structure actually allows attorneys to live their best lives. They won’t have to worry about billing, HR, or cash flow. They can focus on being excellent attorneys and know they’re part of an organization that’s growing and thriving.
Most lawyers I interface with just want to be excellent lawyers. They want to take care of clients, be proud of what they do, offer good service, and go to bed knowing they gave their all. That’s how most attorneys look at their craft.
Learning From Other Industries
I’m currently studying what’s happened in dental, medical, vet, and other professional service companies where MSOs have entered their space.
There are really good models out there for understanding the timing and structure of MSO deals, how it will change our marketplace. My research assistant is pulling together everything she can find so we can get a solid feel for how quickly it will happen, what the multiples will be like, and how long it will take.
I think we can get real insight and anticipate what’s around the corner.These three forces are coming whether we’re ready or not. The question is whether you’ll prepare now for sustainable law firm growth or get caught flat-footed when they arrive.
