The nature of law firms is changing rapidly, especially as firms strive to stabilize in a new post-pandemic reality. One of those realities is that law firms today are increasingly less local. Many traditional firms are struggling to redraw boundaries around the once indispensable requirement for its lawyers and staff to do their work primarily from a common office. Technology and the pandemic have helped the practice of law shift to less localized but equally connected modes. Remote firms like Scale LLP, which uses technology and a distributed platform to deliver services to its clients from primarily virtual spaces, are on the rise and growing and have even begun to snap up high-quality boutiques that fit their brand and profile.
The nature of law firms is changing rapidly, especially as firms strive to stabilize in a new post-pandemic reality. One of those realities is that law firms today are increasingly less local. Many traditional firms are struggling to redraw boundaries around the once indispensable requirement for its lawyers and staff to do their work primarily from a common office. Technology and the pandemic have helped the practice of law shift to less localized but equally connected modes. Remote firms like Scale LLP, which uses technology and a distributed platform to deliver services to its clients from primarily virtual spaces, are on the rise and growing and have even begun to snap up high-quality boutiques that fit their brand and profile.
Law firm founders of valuable small to mid-sized firms have historically had little choice but to continue spinning the “hamster wheel” of professional service. Even where they’ve built something of value, that value is often not transferable due to ethical prohibitions on non-lawyer law firm ownership, the founders’ personal relationships with their client base, and the highly local, highly constrained nature of the law firm market.
When they do manage to exit with some financial reward, founders earn far less than the owners of professional businesses in adjacent industries. But with the rise of remote work and remote law firms, could that equation finally be changing?
The legal industry is highly fragmented. Aside from a relatively small number of very large firms, the vast majority of law firms are small businesses. According to the ABA, solo and small firms (2-9 attorneys) comprise the majority of the legal profession, with 63% of respondents to an ABA survey in 2019 identifying as a solo or small firm. While being associated with a solo or small firm can be a great way for lawyers to serve clients and be recognized as professionals in their community, it can also bring challenges when a principal of the firm wants to move on. Professional responsibility rules in most states prohibit firm founders from selling their business to non-lawyers. This makes the universe of potential suitors small: usually other firms in their geographic area, or even more locally, the other lawyers at their firm. This model is in stark contrast to the high-growth tech world backed by heavyweight VC investors.
Coupled with the fact that law firm mergers have historically been highly localized, this reality has made exit options few and far between for solo and boutique lawyers. It is true that larger boutiques sometimes have success selling to a national platform that has a geographic motive in the acquisition — for example, opening a new office in a particular location. However, by and large, the most common market for a partner who retires or exits from his or her firm are the other remaining partners at that firm. The terms of that exit typically are dictated by the partnership or shareholder agreement that each partner is required to sign upon entry into the partnership, which specifies what happens to a partner’s equity interest when he or she leaves the firm or retires. There is no one form to such agreements and terms, and the outcome for partners leaving and resulting valuation of their equity interest can range considerably. Ultimately, the point is that historically, there has been a very small and pre-defined market for a departing lawyer’s equity interest in a law firm, even for successful law firm founders.
But the nature of law firms is changing rapidly, especially as firms strive to stabilize in a new post-pandemic reality. One of those realities is that law firms today are increasingly less local. Many traditional firms are struggling to redraw boundaries around the once indispensable requirement for its lawyers and staff to do their work primarily from a common office. Technology and the pandemic have helped the practice of law shift to less localized but equally connected modes. Remote firms like Scale LLP, which uses technology and a distributed platform to deliver services to its clients from primarily virtual spaces, are on the rise and growing and have even begun to snap up high-quality boutiques that fit their brand and profile.
Do these seismic shifts in the way in which legal services are delivered to clients signal a new era of opportunity for boutique mergers? We think so. The geographically constrained nature of exit options is one reason why law firm owners have typically garnered only 1-2x net profit for the business they worked hard to build, multiples that pale in comparison to similarly profitable businesses in other professional industries like medicine and accounting. As geography becomes less relevant to the practice of law, the market for law firm mergers expands meaningfully. In a world where there are, say, 20 remote law firms with over 200 lawyers each, geography becomes less relevant as a driver for law firm mergers and expansions of remote “offices” becomes more and more appealing. In the present environment, law firm founders often can’t find anyone (internally or externally) who is interested in absorbing their practice. In the future, demand and exit opportunities may increase as the importance of geography wanes.
That’s good news for your average law firm founder, who has worked hard to build something he or she can be proud of.
