With private equity (PE) rushing into the legal industry to snatch up hot properties such as legal technology and talent services, it is only a matter of time before PE firms set their sights on full or partial ownership of law firms, big and small. For law firm owners who are anxious about losing control to deep-pocketed private equity juggernauts in the name of growth, the odds may seem insurmountable. PE firms have numerous advantages over the traditional self-financed or partner-financed law firm model, including:
- Limitless Funding: PE firms typically have hundreds of millions, if not billions, of funding at the tip of their fingers. Although many mega-firms in the legal industry can rival this level of spending, the typical law firm owner who wants to retain full ownership of their practice cannot hope to compete at this scale alone.
- Business Acumen & Experience: Many PE firms are familiar with how to quickly scale operations for greater efficiency while economizing costs in a systematic and strategic way because they have decades of experience doing this over a variety of business models.
- Access to Innovative Tech: PE firms usually have wide-ranging networks that give them access to experts across many disciplines and industries, including tech. This helps them bring in outside teams to quickly implement technologies into the legal sector, which has traditionally been slow to adapt tech innovations for better business operations.
Staving Off Private Equity Law Firms
To stave off an aggressive private equity takeover, law firm owners with attractive practices will need the funding to invest in tech implementations and business operations upgrades to drive sustainable growth. Traditionally, self-financed law firms have depended on their partners to raise funding for costly long-term growth projects, but because this money often comes from partners’ personal wealth, it can prove to be quite limiting. In addition, this can be a point of contention among partners, leading to long negotiations about strategy and goal alignment depending on each partner’s risk appetite.
One way law firms can avert a hostile takeover from an overzealous private equity firm without creating contention among its partners is to seek financing. The advantages of financing are manifold, including:
- Retaining Full Ownership: When law firms take on investment from private equity firms, they almost always give up a portion of their ownership, allowing the PE to have a say in how the business is run. However, when firms take on financing from a bank or litigation financing company, law firm owners retain full ownership of their practice.
- Lower Expected Returns: Banks and litigation financing companies typically expect a lower return on their investment and allow a longer period for that return to come to fruition. This allows the firm to test and learn as it devises new strategies for growth while protecting its day-to-day operations from the drastic upheavals private equity ownership often brings with it, such as mass staff reductions.
The Search to Acquire Smart Financing to Fuel Law Firm Growth
When deciding to take on financing from a financial institution such as a bank, law firm owners have two main choices: traditional commercial banks that offer financing to all variety of businesses or specialized banks that offer specific products for law firms such as Esquire Bank. The advantages of choosing a bank that specializes in the legal vertical far outweigh traditional banks:
- Legal Expertise: A specialized bank, such as Esquire Bank, is staffed by lawyers who understand the value of a contingency fee law firm’s case inventory. The staff attorneys can quickly evaluate a firm’s case inventory, projecting case outcomes and using these projections to build the case for a law firm’s creditworthiness.
- Financial Authority: Although traditional commercial banks can provide financing, the firm’s partners will usually be asked to use their personal assets as collateral. However, a specialized bank, such as Esquire Bank, has the authority to use a firm’s case inventory as collateral, leaving the firm’s partners to invest their personal assets as they see fit.
- Specialized Products: Banks that service the legal industry have specialized financing products such as a Case Cost Line of Credit and a Working Capital Line of Credit. These products are often structured with the contingency fee business model in mind and are most advantageous for growing law firms.
In addition to these advantages, financing with a specialized bank offers law firm owners invaluable consultations on business growth as well as a network of other law firm owners who have leveraged financing to grow their practices into industry leaders. Financing growth through banks gives law firm owners access to the huge sums of investments that private equity firms can offer without having to give up control and ownership of their practices.
Valuating Your Firm’s Contingent Case Inventory
To set their firms up for success in obtaining financing, law firm owners should ensure that the value of their case inventory is clearly presented. When seeking financing, there are four key considerations for presenting a healthy case pipeline and business profile:
- Place an Estimated Value and Timing on All Cases. All cases in your case inventory should be assigned an estimated dollar value and time frame to resolution.
- Extrapolate This Over the Next Three Years. For example, take the average number of cases resolved in a year multiplied by the average settlement amount. Then, project this over the next three years to give your potential lender an idea of anticipated future revenues.
- Calculate the Success Rate of Your Firm. The success rate of most reputable firms is at least between 90% to 95%. This will give your potential lender an idea of how likely it is your firm will achieve the projected revenues presented.
- Separate Case Costs from Case Fees. Case costs typically come out of your client’s share of the settlement, not out of your firm’s revenue. Separating case costs from case fees shows the true value each case brings to your firm.
Growing a law firm in today’s highly competitive climate can be an arduous task; financing that growth doesn’t have to be. Law firm owners shouldn’t have to sacrifice control of their firm to achieve someone else’s vision of growth for their firm because they lack the funds to drive their own strategic vision to success.
Interested in learning more about law firm growth strategies? Visit LawyerIQ
Learn more about how specialized banks, such as Esquire Bank, can help you retain ownership, fund growth, and achieve your vision by visiting lawyeriq.esquirebank.com.
The information provided in this blog is provided for general informational purposes only. Some of the information may not be applicable or appropriate for all law firms.
