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What is the Fair Market Value of a Full Service Commercial Law Firm?


What is the Fair Market Value of a Full Service Commercial Law Firm?.

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What is the Fair Market Value of a Full Service Commercial Law Firm?


The Mumbai Stock Exchange stands tall, and is ...

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Jerome Kowalski

Kowalski & Associates

February, 2012

 

 

A short piece in today’s the Wall Street Journal caught my eye: The Journal reported that a report was just issued that “estimates that top U.K. law firms are worth between $711 million to $4.1 billion, with Magic Circle firm Allen & Overy leading the pack.”    The report the Journal made reference to was brief and from Europa Partners which stated that it had just completed its second annual valuation of UK based law firms and found that “Law firms are valuable businesses; six of the top ten by value are large enough to be included in the FTSE100 if they were listed.”

I wonder.

When I went to school, I learned that the definition of value was “the price a willing buyer would pay a willing seller, each negotiating n good faith and neither under duress.”  Well then, is there a willing buyer out there for any of these firms?  We don’t see any. The Alternative Business Structure, sometimes called the Tesco law, does allow for non-lawyer ownership of law firms in the United Kingdom and Wales. But, as I predicted some time ago, there aren’t any non-lawyer buyers lining up or kicking the tires for large commercial law firms. With the top ten magic circle firms valued in the eye-popping range of $711,000,000 to $4,200,000,000, I suspect that more than a few equity partners at these well heeled law firms would be seriously thinking about cashing in their chips if there were a willing buyer out there. I know you would. I certainly would.

We have all learned the hard way that lawyers, trusted business advisers to the global markets, have concocted the silliest business model for their own business.  In any other endeavor, a business owner invests capital, sweat equity and builds a viable enterprise and looks forward to an exit strategy, where he or she could sell the business or perhaps leave it to his or her children. Lawyers can do neither. If they are lucky, they get to retire voluntarily when they are ready (not when they are forced to) and then simply get their own money, namely, their capital contributions, back over a period of years. Maybe a nice dinner with a couple of partners is thrown in as well. But no premium and no premium for having built a successful business. Anti-nepotism rules typically preclude a bequest of a partner’s ownership rights to his or her offspring.

More painfully, a large commercial law firm has less than zero value on liquidation or winding down.  In fact, such scenarios have been enormously costly for partners in such law firms.

Well, then, what is a commercial law firm worth? Nothing, really. I have no idea what Europa Partners’ valuation methodology was, but whatever methodology was deployed, it certainly couldn’t result in a fair market value with the standard textbook definition of value.

The Achilles’ heel in valuing a law firm is that its most valuable assets, its working partners, ride that old elevator down every night and in this age of partner free agency, there is only a hope and a prayer that these assets will return the next day to contribute to the production line. Our colleagues across the pond do have an advantage in maintaining some value for these assets in some respects in that the rules in the UK do allow for “garden leaves,” under which a withdrawing partner can be compelled to spend many months after he or she withdraws from a law sitting at home enjoying the garden or just sucking wind. But, in most of the United States, Rule 5.6 of the Model Code of Professional Conduct bars a lawyer from entering into any agreement which restricts him or her from practicing law. No restrictive covenants here.

But, I digress.

The point is as we go through the wrenching changes wrought by The Great Recession, clever lawyers, with a bit of self interest should be thinking about re-designing the entire business model of law firms and the delivery of legal services. While the American Bar Association dithers with little bits of the non-lawyer ownership of law firms issue for no good or productive reason, the market – and clever lawyers – will develop a new structure which create a new structure for the delivery of legal services, which will have real value, be saleable and scalable. Our LPO competitors have already figured out how to do so and may be soon eating our lunch. And their enterprises have real value.

© Jerome Kowalski, February, 2012. All Rights reserved.

Jerry Kowalski is the founder of Kowalski & Associates, a consulting firm serving the legal profession exclusively. Jerry is a regular contributor to a variety of publications and is a frequent (always engaging and often humorous) speaker to a variety of forums. Jerry can be reached at jkowalski@kowalskiassociates.com or at 212 832 9070, Extension 310.

 

Private Equity Investments in Law Firms Have Arrived in the UK and Have Largely Ignored BigLaw; What Will Happen as This Phenomenon Arrives in the United States?


Private Equity Investments in Law Firms Have arrived in the UK and Have Largely Ignored BigLaw; What Will Happen as This Phenomenon Arrives in the United States?.

Private Equity Investments in Law Firms Have Arrived in the UK and Have Largely Ignored BigLaw; What Will Happen as This Phenomenon Arrives in the United States?


Tesco in St Peters Street, St Albans. Historic...

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                                                                                      Jerome Kowalski

                                                                                      Kowalski & Associates

                                                                                      February, 2012

After so much anticipation, the law permitting nonlawyer equity investment in law firms (“Alternative Business Structures” or “Tesco” laws) took effect in England in November and for BigLaw, it is much more of a yawn than a yowl. I can’t say I am very much surprised. I previously predicted this result.

As some have noted, the proceeds of capital infusions by outside investors in large law firms will likely be applied to technology and most particularly knowledge management systems, all with a view of lowering costs to consumers of legal services. The result would be increased commoditization and reduced revenues per lawyer. Thus, the consequence of such investments may well be that unless one creates a Goldman Sachs-type leverage ratio (10,000 to 1?), an extremely unlikely result for any law firm; the investor will simply not get the anticipated return. Moreover, as clients become increasingly reluctant to pay for associates’ time, particularly first and second year associates and the profession continues to move to an inverted pyramid model, that kind of leverage just won’t happen.

The practice areas which yield the highest return still remain in the plaintiffs’ class action bar and in big stakes high end plaintiffs’ contingency cases. The recent acquisition by Australian based, publicly held Slater & Gordon of Liverpool personal injury firm Russell, Jones & Walker for £58 Million serves to prove that point. Similarly, just yesterday, private equity firm Duke Street announced an LBO for insurance litigation firms Cogent Law and Plexus Law.  Massive class actions and other high end cases chew up enormous amounts of capital. Law firms which have been active in this world have already amassed substantial capital and have the internal resources to fund these cases. Some still utilize traditional institutional lending from banks at favorable rates. Others utilize litigation funding companies which do tend to charge exorbitant interest rates; but, then again, these funding companies accept all of the risk in making non-recourse loans and at the end of the day, they do not remain partners of the law firm.

Others have noted that outside investors in a firms would exert some degree of control within a law firm and the danger they highlights is that such investors will impair the independence of the lawyers’ judgments in directing that efficiency, rather than the clients’ best interests will be a driver in handling a client engagement, all in violation of Rule 1.1 of the Model Rules of Professional Conduct.

An added impediment is the preservation of client secrets and confidences. Non lawyer investor participation in law firm management necessarily makes non-lawyers privy to such secrets and confidences, with no mechanism to police the maintenance of such confidentiality by these non-lawyers.

Ultimately, the killer ethical rule in the United States that dooms private equity investment is not the confidentiality provisions or the requirement that lawyers act with independence. Rather, it’s one never mentioned in the discourse on this subject: The prohibition that bars lawyers from entering into agreements that limit their ability to practice law. Thus, equity investors in law firms could never have any assurance that a law firm’s most valuable assets — its partners– would exercise their free agency rights and ride down the elevator one day, never to return.

As the ABA agonizes over whether US law firms should permit nonlawyer employees of a law firm to hold an equity investment in law firms, the real question concerns the underlying issue of adoption of Tesco laws in the United States. The New York State Bar Association announced just a few days ago that it would create a committee, under the capable leadership of immediate past NYSBA president Stephen Younger to study the issue. But, even as he seated this committee, current NYSBA President Vincent Doyle proclaimed that the Association “remains opposed to nonlawyer ownership of law firms.” Sounds like a fair unbiased hearing on the subject won’t be very likely here.

The reality is that bar associations and government regulators were and continue to be asleep at the switch as nonlawyer owned and unlicensed LPO’s moved and continue to move to openly practice law in the United States and nonlawyer owned and unlicensed Internet providers of legal services do the same, These phenomena were the result of market forces and a bit of ingenuity and brazenness by these entities and the sloth of the regulators. The fact is that we do have a model under which non lawyers can effectively invest in law firms (yes, even commercial law firms), earn a solid return and even exercise some degree of control in what we believe to be an ethically compliant fashion. Interested, call me and ask about it.

© Jerome Kowalski, February, 2012. All Rights reserved.

Jerry Kowalski is the founder of Kowalski & Associates, a consulting firm serving the legal profession exclusively. Jerry is a regular contributor to a variety of publications and is a frequent (always engaging and often humorous) speaker to a variety of forums. Jerry can be reached at jkowalski@kowalskiassociates.com or at 212 832 9070, Extension 310.

Trending for Law Firms in 2012: What to Expect This Year


Trending for Law Firms in 2012: What to Expect This Year.

Trending for Law Firms in 2012: What to Expect This Year


United (States) Parcel Service.

Image by matt.hintsa via Flickr

                                                                                      Jerome Kowalski

                                                                                      Kowalski & Associates

                                                                                      January, 2012

 

Thirty items affecting the legal profession that are guaranteed to dominate the headlines in 2012

It is that time of year when you are entitled to know what to expect for this new year.  Accordingly, here is what the hot trends for 2012 will be:

  •  Continuing decline in legal spend on outside counsel.
  • As law firms continue to more efficiently and timely bill for matters and, the trend of law firms whittling away at their inventories (WIP), while not being able to replace that inventory because of the lethal combination of  reduced headcounts and  reduction in the legal spend, lenders to law firms will require more stringent reporting and will in some instances, reduce available credit lines.
  • Deleveraging of work with partners and other senior lawyers billing increased hours and the trend towards the inverted pyramid model continuing.
  • Law firms establishing subsidiaries to engage in services complementary to their services, including e-discovery, document review, legal staffing services, investment advisory services for high net worth clients and the like.
  • Congress, the courts and the judicial conference will make serious progress about modifying e-discovery rules, bringing down their current gravity defying costs as well as dampening down the torrent of spoliation claims and the attendant Herculean tasks companies need to take to avoid these claims.
  • Given weakening retail sales and decreased demand for most commercial real estate, buyers will emerge to take advantage of attractive pricing on some properties, perceiving real value opportunities.  Private equity funds will move in to this arena in a big way.
  • Increased  focus on collaboration, within the law firm, vertically with clients and horizontally with vendors of support services and co-counsel. Extranets will be enhanced and new technologies will emerge to provide greater transparency and real time feedback and collaboration.
  • More paperless offices.  With the bulk of communications now being electronic and the expected decline in timely services from the United States Postal Service likely to increase the trend of communicating electronically, law firms will be incentivized to go completely paperless. Incoming snail mail will be scanned and digitized. The huge cost of storing paper documents will evaporate.
  • Increased use of outside facilities management companies for mail, fax, reproduction, IT, bookkeeping and legal records departments.
  • Law firms will make more investments in technology than in people. The IT hotspots are knowledge management, software to farm information for the purpose of responding to RFP’s, making an AFA proposal, based on prior similar work handled by the firm and for project management purposes.
  • Every lawyer will tuck an IPad under his or her arm and no lawyer will attend a meeting without opening one. Continued development of apps for lawyers will simply make this tool not only essential, but a lawyer not having an IPad at the ready, risks a serious loss of credibility.
  • Tough times often brings out the worst in some folks.  Last year’s small spike in BigLaw partners and even other law firm personnel who engaged in defalcations of client funds will sadly probably continue.  Look for more headlines of such tales.  Law firms will be well served to now tighten controls and checks and balances regarding client finds.
  • There will be periodic announcements by a partner at a BigLaw firm stating “after 25 rewarding and wonderful years with my former firm, I have decided to open a solo practice so that I can work more closely with my clients.”  Sometimes these announcements will be sincere and genuine.  Sometimes these announcements really mean “I’ve been on the job market for almost a year since I was asked to leave my former firm.  I haven’t been able to find a new slot and my firm wants me out right now, so I may as well give this a try.”
  • Virtual law firms, such as Clearspire and Rimon will continue to grow and gain real traction and increased market credibility.

I am quite sure that we have been fairly thorough and inclusive. If you think we left anything off the list, please let us know by commenting below. Similarly, if you think we are wrong about any of the above, post a comment.

It’s going to be a challenging year.  Please fasten your seatbelts, hold on to the handrail and make sure that your arms and legs do not extend outside your car. We are in for an interesting year.

© Jerome Kowalski, January, 2012.  All Rights Reserved.

 Jerry Kowalski, who provides consulting services to law firms, is also a dynamic (and often humorous) speaker on topics of interest to the profession and can be reached at jkowalski@kowalskiassociates.com .

The Coming Invasion of the Body Snatchers: Are Offshore Law Firms Going to Invade the United States?


The Coming Invasion of the Body Snatchers: Are Offshore Law Firms Going to Invade the United States?.

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