Technology, Capital, and the Future of Law Firms

It's great to be here. Thank you. And, like, I was just... Like, we were having so much fun, and then you went into, like, your serious, like, hosting voice. You transformed before my eyes. It was amazing.

Or David Copperfield, you fill in the blanks. It's fine. Yes. That's right. Once the recording hits, it all changes.

Yeah. I'd be happy to. Thank you for the opportunity to help educate, which is a big part of what we do. I mean, I started my career as a basketball coach and then went into business and ran a lot of businesses.

And when I founded Samson, it was to kinda bring all of that knowledge that we had gained and bring it to founders. And so a lot of this is returning to teaching. So speaking of teaching, we wrote a book that we published in November called The Owner's Manual, Why, How, and When to Sell Your Business to Private Equity. And if you read that book, and if you don't, it's okay.

I'm sure you did.

Yeah. So it's really kind of our fundamental doctrine, which is... And I've operated across a number of industries. I myself, as an operator, acquired over 80 founder led businesses in my career.

And so as part of that process, I probably looked at 3,000 potential acquisitions. And I and I came across a number of businesses, especially the small business markets across many industries, HVAC, refrigeration, accounting, engineering services, architectural services, etcetera, where founders never really get an understanding of how is an investor going to look at my business versus how I look at my business. And so we basically have created a framework, and what we compare it to is think about real estate. And we now have this thing called Zillow or Redfin.

You can go on. I'm sitting here in my home in Chicago. I know the per square foot trade range for any home in my ZIP code. Every business is the same way.

And if we think about then the values, the potential levers of value creation within a home, I got a choice to make. Right? Do I wanna upgrade my appliances before I sail? Do I wanna put a new roof on?

Do I wanna slap a new coat of paint on? What I can't change is really location. Right? But there are things that could potentially move the value of that.

Now in a business, it's a little bit different. The levers are different, and we're not just talking about value, but we're also talking about deal structure, right, depending on these variables. So we try to get founders to think about is enterprise value versus current income. We need them to live within the realm of reality.

Because sitting here today, it would be great if on a per square footage basis, my house were the same valuation as one that's in Aspen. But if I think that, then I am simply delusional.

Right? And so sometimes, you know, we have this emotional attachment to these things. So you have to live within the realm of reality. And then number two, as we think about a business, all the outside investors are thinking about is the predictability of future cash flow.

And so, for example, if you have client concentration and one client makes up 30% of your revenue, all in it, that might have been great for you as a founder from a current income perspective, but an investor looks at that and says, gee whiz, if you lose that one customer, there goes 30% of your revenue. So you might want to then think about remodeling the business the same way that you might think about remodeling a house before a transaction. You might wanna spend a year or two hire a sales force, diversify your client base. You think about key man risk. You think about operational leakage.

So we help founders think through and put on the eyes of an investor when looking at a business and understand what are the things that they might wanna do to get the type of exit valuation deal structure that they envision when they're thinking about maybe one day selling their business, not to their employees or not to their family, but to a third party? That's what we teach. And it is that perspective that we also bring into the legal industry.

And this is the thing. When we talk about exit prep, what that term means in the world of m and a, it means, hey. Before you sell your business, exit prep means, have you spoken to your tax guy? Have you spoken to your wealth manager?

Right? These types of things versus what we call exit engineering, which is understanding what is the market paying for. How does an investor view a business? And so if I take...

You know, like, we could take the personal injury legal space. What are the trade ranges today within the PI space? What are the valuations of EBITDA? It goes from four times at the low end to eight times at the high end.

And then there are certain dependencies, right, that make that up. It could be size. It could be...

Are you getting...

Are your leads branded or unbranded? Right? Are you...

How much of your revenue or profit is dependent on one or two cases versus spread across hundreds of cases, what's your speed to lead, all these operational factors in terms of, right, the quality and durability of the predictability of future cash flows under how much of the business runs through you versus have you hired a team to, let's say, do marketing, intake, someone else that's, let's say, running the lawyers. How have you split up pre lit versus lit? These types of things are all factors in this valuation range. And so as you think about, hey.

There's this new thing called an MSO. By the way, it's not a new thing. It's just that private equity in the last few years discovered something that has existed in The US legal market structurally since 2003, the same way that in accounting, the alternative structure was created in 2012, but the first investor did not come into it, New Mountain Capital, was Citrin Cooperman until 2021.

Now that more people are aware of this, we want founders to think about what do they wanna do. And as private capital comes in, how might that might affect competition? What we say to founders, whether or not you ever choose to do a transaction or not, by fortifying the business, by taking this view, you're going to identify risk points in the business. And by mitigating these things, by strengthening the business, by making the business more antifragile to losing one person, to losing one customer, these types of things, no matter what the business is stronger, whether or not you ever decide to exit or not. And when private capital comes into a market, it fundamentally starts to change the dynamics of competition.

So whether or not selling to a third party is right for you, you also have to adapt to the new world order and be prepared to compete now against those resources. So what we do is we help founders understand this.

We help them plan for this if it is something that they are thinking about. We don't advocate for anything, but at some point in time, typically in all private businesses, there's a decision to make. Let's say the founder or the owner reaches a certain age, right, is what am I gonna do with my legacy? Right?

And they're now in the legal industry, there are simply more options than there were before. But now as we have this new wave of potential owners or investors in these assets, how you're thinking about it, which was before it was just, I might sell this to my partners for one time earnings over an earn out over five years. I might just need to merge with another law firm. Right?

These types of things. The dynamics in certain sectors of legal are changing rapidly. And so founders have these options that they never had before, but they need to understand how the investor's gonna view the business. So what we do is we help founders understand this.

We help them prepare for it, do this type of business engineering, sometimes one to two years ahead of a transaction.

And then founders asked us to start our own investment bank because they said, hey. You've done all the prep for us, helped us prepare for this, as opposed to handing us over to an investment banker. Can you do that? So that's why we started our investment bank. And today, we're probably the leading investment bank, certainly within the personal injury space in The United States. And... But we've worked on deals across eight sectors of law in the last four years.

In some cases, Eric...

And listen. And by the way, you know, I've also run finance and accounting firms, and I've also run architecture and engineering firms. I ran a $2,000,000,000 professional services business as well. Right?

So I've worked across multiple industries. And just to put a pin in that, some of the things you're saying, I think, are more true in what I call traditional billable hour law firms. And some of the things you're saying are untrue when we start to take a look at scaled consumer or B2B driven law firms. Like, for example, some of the things that you're saying, if they were a founder of a scaled personal injury law firm, right, on this call right now, they would disagree completely with you because those businesses run...

They're all contingency based, marketing driven, have two years of backlog depending on their time on desk. Fantastic technology, and that's very different than a white shoe billable hour law firm. It's also very different than, let's say, an insurance defense firm or a creditor's rights firm or a property tax protestation firm. I think when I hear you talk, what I'm hearing you I'm hearing you speak from the experience of looking specifically at billable hour law firms that have not invested in a lot of technology to a certain extent, etcetera, that are taking all the distributions out every year that really have no backlog.

It's eat what you kill.

That is a type of firm. But if you take a look, for example, the legal industry is a $400,000,000,000 industry, 55,000,000,000 of that is contingency personal injury.

So we can't make these generalizations across the entire legal industry.

I don't disagree with you in certain sectors of law, but I'm always very careful to be... As we take a look at an entire industry...

And part of the reason that that private equity and outside investors are so interested in personal injury, why do we see so much activity? Now we're starting to see activity on the billable hour side. There was just... We know that there was just a large deal that was announced with Thrive, right, in Misumi, different type of business. But why do we see so much activity? Now we've seen Morgan and Morgan announce that they're gonna be doing something.

And so when we think about... And you can't get noncompetes on lawyers. So why is private equity so fixated specifically right now, let's say, on contingency fee marketing driven scaled law firms? Because 97% of all cases are negotiated settlements with insurance companies that do not require lawyer time. Number two, if you're a marketing driven firm, like, let's say, even say Morgan and Morgan.

If a lawyer were to leave Morgan and Morgan that's handling your case, are you... Did you sign up because it's Morgan and Morgan, or did you sign up because of that lawyer? If you go to do your taxes at H and R Block and your tax preparer leaves.

So, again, I just... I don't disagree with you with regard to traditional law firms where the relationship is with the practitioner. And we had the same thing in accounting, architecture, and engineering, RIAs, wealth management, estate planning. I'm doing business with you. I don't necessarily care about the firm that you're working for, but in certain sectors of legal, the relationship is much more with the firm than with the person, and that is where we see the majority today of outside capital flowing. Although it is starting slowly to move into what I hear you talking about is more traditional billable hour work.

That's our general framework for all business owners to think through. That's right.

So from a law firm standpoint, and, like, this goes to what Eric was saying before, is that the traditional law firm model is that whether it's B2B or b to c is that... And we should say this as, you know, plaintiffs or defendants in most cases or person or company is what you are talking about is there is a client, there is a other contingency, or there is an hourly billing.

And Contingency flat fee hourly billing. And now we're starting to see more subscription based like an outsourced general counsel, and we're not supposed to say those two letters. I'm gonna try not to the AI native law for it. Right. And things in the future. But let's just stick with contingency flat fee billable hour.

It varies.

Let's go through the three worlds if we can.

Okay?

So let's start in contingency personal injury as an example. Let's start there. I have a client. They are 35,000,000 of net income owned by one founder.

The founder has hired a president who runs the business. He's got a head of litigation. He's got a head of pre litigation. He's got a head of marketing, a head of operations.

The founder is 52 years old.

His NIL is on... His name, image, and likeness is used in their marketing. They are a high volume shop that does, you know, kind of slips, strips, and falls, MVAs, all the stuff.

Do they cast a wide net in a particular market?

Their average case or client acquisition cost is $2,500. Their average settlement fee, fee to the firm, is $2,200. So they're averaging about a 10 x return on marketing spend. Their average time on desk is eleven months when they factor in pre lit and lit.

And every year they spend more on marketing, the firm goes up in value. And the founder, because of the team that he has built, spends actually just about four hours a month at the business. They call him when it's time to shoot some commercials. That story I gave you is a true story.

I just gave you a true story. Now clients come in through digital marketing. They come in through a billboard. They come in through word-of-mouth.

So multichannel. And let's just say all of their leads are branded leads, not off brand. We don't... Too much... We don't have time to get into all that. Right? And so when they pick up the phone, maybe they just got into a car wreck.

And it's interesting. So Rafi in Phoenix, I have a home in Phoenix, just did a minority deal with Fortress. It's been in the news. And I can tell you, having spent a few seasons in Arizona, and I know a number of personal injury lawyers out there and founders out there, but I know the jingle. Call Rafi Rafi. Call Rafi Rafi.

Thank you. So, like, I know that.

I've spent two seasons out there. I know call Rafi Rafi. So that's probably gonna be the first person I call. Now when I call, do you think I'm expecting to get Rafi on the phone?

Nope. I am not. Am I ever gonna speak to Rafi? Ever.

Nope. I am not.

Nor is it my expectation. Who am I getting? I'm getting a person in a department called intake. And you don't have this at a Bill Waller. We're gonna go through the models. Yeah. Yeah.

We're gonna go through the models. Right? So it's an intake person. Speed to lead. They called me.

They knew my brand, so they probably want me. I gotta get them to sign. I got...

Now I gotta understand what happened in the accident. Was it your fault? Was it their fault? Do you have insurance?

Do they have insure...

Like, is this a case that I want? Blah blah blah.

Might need to bring in... You know, do you wanna talk to an attorney? Well, the attorney you're gonna talk to might be what we call a sign up attorney.

This is a sales process.

Intake is the sales process in PI, then it goes to conversion. By the way, now you're in the case management system, and they have very good case management systems. Okay? Now you're in the case management system.

We're building the case, building the file, communicating with the insurance company. Let's just say it's a soft tissue accent, blah blah blah. The insurance company, the panel, and you know and the adjuster knows, on average, depending on what we're seeing. And then there's what are your insurance limits, all these things, who's at fault, etcetera.

Algorithmically, we know on average this is a $20,000, and we gotta go through the process. This might not require any attorney time throughout the entire process, possibly. This might just, right, be a negotiated process settlement, etcetera. Now I just described the process to you.

And in that process, there might never have been an attorney involved, and we satisfied the client's need. That's an example of a process. Let's go to flat fee, and let's go to a sector of the industry called creditors' rights. Within creditors' rights, let's go to mortgage defaults.

Now let's talk about who is the actual client here.

Wells Fargo, Rocket Mortgage, JPMorgan... Like, take every single mortgage company that you can think of.

If someone defaults on their mortgage, does Wells Fargo have the attorneys on staff to go process this? No. They don't. So what do they do? They outsource this, right, to outsourced creditors' rights, mortgage default firms, and they pay them a flat fee based off of specific milestones. So now if I'm operating on a flat fee, is the time that I'm putting into this the important thing?

No. It's actually...

What's the least amount of time that I need to achieve the things, right, to...

I gotta file the matter. I gotta show up and go...

These types of things. Sure. What we're optimizing for is to fulfill the request within a specific, right, as optimally as possible. So I'm gonna use a lot of technology.

Right? I'm gonna use a lot of document management technologies because the most I'm ever gonna get are these flat fee increments. And so me, the service provider, I need to be as efficient as possible and only have the attorney do what the attorney must absolutely do because that's my most expensive asset. And I'm gonna break down the workflow using people, process, and technology to optimize this.

By the way, creditors' rights firms typically average anywhere between operating on a flat fee basis between the really good ones, between 2835% net income post compensation, retained earnings in the firm.

And by the way, these are B2B driven relationships, typically a multiyear contracts.

So who's the relationship with? Well, it's with a scaled firm that's invested a lot in technology.

And by the way, the rates are capped. Right? And so, like, as you think about this, like, if an... If a lawyer leaves, are they taking a three state region of Wells Fargo with them?

No. They're not.

I wanna come back to leadership, though. Right? Yeah. Yeah. Yeah. Go ahead.

I wanna come back to...

So listen. The CEO of that firm, I happen to know one who's the CEO of a firm that does this in six states, they do 45,000,000 of net income a year.

He's got an incredible... Now he shows up. He operates the firm. He's the CEO of the former lawyer turned business. He's a business per... He has a law degree. He went to law school. It's a law firm.

He's a business person.

By the way, he's got... He has separated himself from the day to day of the business. He's got a head of institutional sales. He's got a whole sales force.

Right? He's got a president. He's got a CEO. He's got a head of technology. He has chief information officer.

They actually just hired a head of AI. They have an onshore call center. They have an offshore call center. Right?

These types of things. So from a leadership perspective, this founder has built a cascade in an entire team like you would see in another scaled professional services business.

And let's say this founder want...

Right now, he still might need to stay on, roll over, but, you know, we've got leadership depth and depth spread across, and this is run like a business. Now let's go over to a traditional law firm. Pick...

You guys...

I can describe one too. You can describe one. So let's talk about leadership there. What might we have?

Mostly tribes. We have partnership structure. It's really a collection of people sharing infrastructure. We can't get noncompetes on these folks, by the way.

They can just lateral hire and get offered $40,000,000 to come over here, and there go all the clients with them. We probably haven't been investing a lot in technology and these other things because we're really not incentivized to. Right? Because it's like, I make money by charging you money.

I make, like, hour, hour, hour, hour, hour. Right? And so then I look at that as an outside investor, and I'm like, well, gee whiz.

How do I do this?

Outside investors, this is the tricky thing. These are a lot of the conversations that are happening. Right? It's like, first of all, like, I need to invest in retained earnings.

You guys are distributing out all the earnings every year. So, like, what are the retained earnings of the firm? So, by the way, if we're gonna do this, hey. Guess what, everyone?

Everyone's gotta take a compensation cut.

And then I need I need I need, you know, retainer. By the way, I can't get noncompetes on lawyers. So what am I buying?

Yeah. There are few deals that are just starting to happen. Right. These questions are being asked.

And at the same point in time, and I'm gonna say the AI word, I'm sorry, but because here's what's going on in this world and what people are starting to wonder about and think about, and they're starting to understand, gosh, this is different also because of the rules of the profession. Sorry, Eric. You're gonna ask me something. But this is also, like, the only profession where you...

I cannot get a noncompete on you.

I can do that in any other business.

Right? Even where there are alternative structures, right, in accounting. You guys know this is going off. I can get noncompetes on you.

In dentistry and medical, I can get non...

Here, I can't. It's a quandary right now. It's being looked at. It's being examined. But then we see these things like AI native law firms popping up, which are technology driven, typically subscription based, with the AI doing the majority of the work and then kinda lawyers at the bottom.

Well, that kinda starts to flip the model. Then you see K&E invest 500,000,000 in...

Now, however, read very carefully.

What did all the partners have to do to make room for that investment? Take less compensation.

And the same thing just happened at McKinsey. And the same thing is happening at PricewaterhouseCoopers and E and Y as we... So we make this business model shift because it's being demanded now by corporate clients.

And the other thing that's happening is corporate clients are now ingesting AI themselves and taking work back from you. I spoke at a WSG conference recently. There were a few members there where the GCs at their clients were now using ingesting AI to shift the model, hiring then some of their own associates. Some of the practice areas were down 35% this year because the clients are saying, sorry. I don't need you anymore. And guess what? I'm not so happy with all your lateral hiring that you have been charging me more and more and more every year.

I would like to stick it to you.

What they're gonna do in a small, midsize firm, whatever. Right? Because we're talking about a founder led firm as opposed to, like, a top 200 management committee and all that stuff. Their options today are the same as they were yesterday before all this MSO private equity talk. No one's coming to save you.

Private equity is not coming to save you. You are uninvestable. You are just as uninvestable as a friend of mine who runs a restoration business here in Chicago, who the high school friend, the... His high school buddy that he went to work with. This restoration company does 10,000,000 a year in profit. And his buddy that he went to high school with that gives him ton of work, he does 8,000,000 of that profit a year with his one buddy.

Guess what? That's an unsellable business because it's based off of one relationship. Private equity is gonna look at that and say, sorry. So I'm talking about things that are pervasive, pervasive.

So that type of firm, private equity is not coming to save you. Your options are the same as they were before. Pass it down. Right?

Have your partners buy you out. Merge with another law firm if you can. Transfer it to the family.

Now, if the question is how do I get off of my tools if I'm just looking at pure succession over time, it's the same way as any other partnership. And so you can either structure it so that your partners buy you out of time, but this is also how MSOs were created in the first place in The United States. I will remind everyone. And this is also why from a regulatory framework perspective, why they're not going away. MSOs were used to pass law firms down to the family of founders so that they did not have to liquidate the firm and the family could continue to take cash flow distributions through an MSO structure. So the founder might sell, let's say, 80% or 60% of the distributions of the firm to some of the partners and then through an MSO retain some of those distributions into perpetuity for the family.

I mean I'm sorry.

I felt like I spoke way too much, guys.

And I'd love to have my cofounder on, Jordan.

She's been with me for sixteen years, and so we started to do this together. By the way, this is not different than other professional services. We did it... When I started in architecture and engineering, you know, it was the same thing. It's, again, it's another professional technical service. Right? And so we've been driving this type of thought process and transformation into professional services businesses now for sixteen, seventeen years globally at scale across industries. And so what's really changed here, it's an awakening in essence because the market... Because of technology, a industry that felt that it was insulated from transformation, its clients are now forcing it to change.

Yeah. Right? Has nothing to do with outside capital.

My pleasure.