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

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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 or at 212 832 9070, Extension 310.



I am Shocked, Shocked to Learn that Some Law Firms Puff their Own Financial Reports

Cover of "Casablanca [Blu-ray]"

Cover of Casablanca [Blu-ray

Citibank recently let the cat out of the bag, leaking a “secret” actually rather notoriously well known to the legal profession for decades: In an article appearing in the August 22, 2011 edition of The Wall Street Journal, Citibank revealed that a significant number of law firms materially misstate their profits when reporting to AmLaw. In particular, it appears that almost one-half of the top 50 law firms in the AmLaw 200 gamed their numbers when reporting to AmLaw.  While the fact is that this piece was hardly news (we addressed the issue in May of 2010), and later addressed the fact that some law firms unfortunately game the financial statementsthey distribute to their own partners.

While this “disclosure” by Citibank and The Journal ought to yield either a yawn or a response akin to that of Rick Blaine (played by Humphrey Bogart) to Captain Louis Renault in the 1942 classic, Casablanca: “I’m shocked, shocked to find out that there’s gambling going on here!”  But, remarkably the Journal piece had legs. The Journal’s own legal blogger, Vanessa O’Connell,  commented on the piece. Bruce MaCewan, writing as Adam Smith Esq., commented on the piece. Law 360 had some interesting observations. The ever eloquent and astute Steve Harper chimed in with important observations.   Jordan Furlong joined the discussion, noting that the “system inherently prone to inflationary bias.”  He further noted “We use rankings of the previous year’s self-reported partner  profitability as a surrogate for the prestige and desirability of a law firm, and what that says about our profession isn’t good.” There was enough chatter on the issue that it might have even been a “trending” note on Twitter on the issue. Based on telephone calls I’ve been receiving, the issue will continue to trend for the foreseeable future.

The question of who shoved whom first in the current round of this bout between AmLaw and Citibank, is beyond enigmatic, as Aric Press, publisher of American Lawyer magazine, impetuously, apparently, elected to re-publish a column originally written by him in 2006 in which he first took issue with the accuracy of law firm financial reporting by law firms to both AmLaw and Citibank, and dated the re-release, some might say disingenuously, August 15, 2011, prior to the Wall Street Journal piece.  I suppose only Mr. Press knows why he felt a sudden need to re-publish five year old work.

Rather than personally commenting on the entire issue of law firm financial reporting, Ed Reeser, a noted California bar leader, wrote a piece on the subject, which Ed was kind enough to allow me to reprint here.

If every law firm is misrepresenting their financial performance, and everybody knows it, does it matter?

 By Edwin B. Reeser

August, 2011

The law industry is a huge one (as we would expect), with an estimated $100 billion in annual gross revenue. Firms like Baker & Mackenzie, Skadden, Arps, Slate, Meagher & Flom LLP, and DLA Piper each hover around $2 billion in annual revenue, and virtually every firm in the AmLaw 50 is more than $500 million in revenues annually (actually the top 57 firms are over that mark).  So when the Wall Street Journal reports that a majority of the firms in the AmLaw 50 are misrepresenting their financial performance, according to sources referring to a Citibank report, it is big numbers, and big news, that more than 22% are overstating net income by 20% or more.

The article also reveals a “spat” between Citibank and The American Lawyer (AmLaw) that reflects a complicated issue over financial performance reporting with some seriously competing interests, and more than a few skeletons in the closet for both the lender and the magazine. Of course, we cannot forget the law firms that fundamentally are called out for lying about their financial performance.

We must take note that [neither] of the players here are disputing or denying that the numbers supplied by a majority of law firms are wildly out of the realm of truth.  Citibank is allegedly saying more than half of the top 50 law firms in America are materially misstating their financial performance, and that AmLaw numbers are misleading.  AmLaw is claiming it’s not their fault, they just report the numbers firms have told them.  What they have not said is “and we have known for a long time they were misleading.”

Indeed, Am Law has replied they really don’t think their numbers are that different from Citibank’s.  They both do know and have known for a long time that there are problems with the numbers reported by law firms. Doesn’t everybody?  But admitting it could prove to be uncomfortable for Am Law as the follow up question become: So why did you folks at Am Law not do anything to correct it, why did you persist in using survey results you knew or had strong reason to believe were bogus?  And of course, the lens spins back to Citibank with the same inquiries, which leads to a panoply of concerns over lending practices and decisions.

Citibank has the lion’s share of the Am Law 50, and even Am Law 100, law firm market for lending.  It has been a lucrative and relatively secure lending field, at least until the last three years.  While the banks have not typically lost serious money in lending to this sector as of yet (the Bank of America loss of $25 million due to the erroneous handling of a UCC-2 filing being an exception in the Heller Ehrman LLP bankruptcy), this is now the season for working line of capital renewal discussions, and there is growing anxiety about the dependence of law firms on their use of debt.

Underwriting will probably be tougher, covenants will almost certainly be more numerous, interest rates may be higher, maximum loan amounts may be lower than prior years, and demands for increased partner capital could be higher.  And tolerance for baloney in the numbers from “creative” modified cash basis accounting practices could be headed towards zero.  The Howrey LLP  bankruptcy is probably the wake up call.  Why?  Because the typical approach of lending, say 60 percent of the receivables base, and expecting to be able to comfortably collect all of the outstanding working line didn’t work (there is still more than $25 million outstanding). The “no brainer” credit became a “brain damager” problem with full recovery dependent on future contingent fee collections; and as previously reported the law firm turned on its lender and blamed it for its inability to make pension and employee severance payments by holding back on the extension of more credit.  Remember the parable of the frog and the scorpion?)

The “crack pipe of debt” is now more widespread in the industry than ever, in some cases out of control, and thus threatens the viability of a greater number of law firms.  The use of debt is corrupted to arguably inappropriate uses beyond the working needs of the business (distributions to partners of uncollected income is only one of them).

What is not addressed, but lurking under the surface, is the way some law firms have made use of personal lines of credit to partners from the same banks that finance their working capital
lines, to finance capital contributions, all of which capital will be lost in most law firm failures and for which the individual partners will still have liability for unpaid balances due to the lender.  Then, of course, there are the personal lines of credit to lawyers to pay for their annual living expenses as they wait for yearend draws and distributions, which in a failing firm do not arrive or are subject to clawback to pay creditors in a bankruptcy. And the car and home mortgage loans to the lawyers.  And we cannot forget the handling of the law firm pension plan accounts, which are a terrific fee
generator for the banks. There is a lot more money in play than just the aggregate of the working lines of capital, or secured term loans to the law firms.

Am Law is struggling in the new age of information to maintain its profitability, and this survey of comparative law firm financial performance is a franchise, it defines it.  If the survey is discredited, and Am Law with it, what will the damage be financially to AmLaw?  It is too soon to tell, but the risk is that it could be significant.

Citibank is struggling with – well the list is so long we can just leave it with Citibank has more than a few challenges of its own in the current business environment.

But what is really powerful is that both sides will, in the defense of themselves, be incented to spill the beans about how misleading the majority of the most prestigious law firms in the nation are
with their financial performance reporting.  That is not very promising for impressing clients, or recruiting talent, or for the prospect of future stories about large law firms.  This could be the opening
chapter in a revealing series from many sources on what leadership, governance and decision making law firms have adopted.

I  was asked “If every law firm is misrepresenting their financial performance, and everybody knows it, does it matter?”  My opinion is that not every law firm is misrepresenting their financial
performance, and that yes it does matter.  If it didn’t matter, there would be no need to do it.  I think that is a fair message for Citibank to convey to their law firm clients.  Citibank may not have relied on the creatively presented numbers given to AmLaw when making their business decision to lend.  I don’t believe that top law firms would provide anything other than the “real” financial performance numbers to their bankers.  But I do believe that deliberately releasing false results for publication is corrosively damaging on a wide range of issues beyond reputational, and can incent law firms to undertake imprudent business decisions that destabilize their business, increasing risk and jeopardizing the credit extended to them. That is a fair and relevant concern for a bank.  You are free to differ.

But there is another troubling question that this now public tiff has released.  When the question of absence of veracity legitimately surfaces as characterizing law firm financial reporting, it quickly spreads to, “And what else have you been saying, and to whom, that you knew was untrue?”

Edwin B. Reeser is a business lawyer in Pasadena specializing in structuring, negotiating and documenting complex real estate and business transactions for international and domestic corporations and individuals. He has served on the executive committees and as an office managing partner of firms ranging from 25 to over 800 lawyers in size.  Ed can be reached at

The views expressed herein are solely those of the author.

Tip Toe Through the Tulips: The “New” New (Old) Way to Market Legal Services

English: Cultivations of Tulips in South Holla...

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                                                                             Jerome Kowalski

                                                                             Kowalski & Associates

                                                                             June, 2011


 Open market auction exchanges for legal service?

           On a recent breathtaking spring evening, I sat on the rocker on my front porch sipping my iced tea and just took in the beauty of the setting sun. I looked across the small dazzling colorful expanse of lawn and took pleasure in the blooming of the various perennials. I took special delight in the array of tall tulips that marked the boundary between lawn and shrubs.  My thoughts turned to the tulip auctions of Holland.

Holland, the world’s largest producer of tulip bulbs long ago established a unique auction method to sell millions of tulip bulbs each year.  Hundreds of commercial buyers sit in an auditorium with large pallets of different types of tulips passing on a ramp at the front of the auditorium a series of large electronic circular dials are displayed above the passing pallets. As the pallets pass each circular dial the dial announces a high offering price and the dial then begins to rotate with lowering offering rates for the bulbs, until one of the buyers presses a button and the bulbs are then automatically sold to that buyer.  It’s a rather phenomenal display (which you can see here) and a clever centuries old practice which obviously yields maximum pricing, as opposed to typical auctions, in which prices are bid up from a low base, instead of being bid down, from an artificially high price.

Naturally the thought occurred to me why can’t there be an open market auction exchange for legal services. Perhaps an Ebay for lawyers and consumers of legal service.

In fact, there are such auction exchanges, hosted right here on the Internet: ,  and arguably, The UK has its own version at  .

As the Wall Street Journal noted, Shpoonkle attracted a great deal of buzz and debate.  Shpoonkle, whose motto is “Justice You Can Afford,” also attracted the attention of the ABA Journal. Shpoonkle is very simple, lawyers register for free membership, the site verifies the lawyer’s bar admission; clients register for equally free membership. Shpoonkle monetizes its site through advertising.  Clients are then entitled to describe their need for legal services – the facts and circumstances of their particular case or matter – which is then posted on line and Shpoonkle registered lawyers then quite literally bid on the case. Bidding is open and transparent.  The client reviews the bids, reviews the lawyer’s qualifications and then selects a lawyer.  The lowest bidder does not automatically win the engagement.  At the conclusion of the engagement, the client is asked to rate the lower’s performance on a scale of 1 – 10 and is also asked to post comments about the lawyer. These ratings and comments are then available for review by any prospective client. does not differ in any material way from Shpoonkle. Membership and registration are free. Ratings are based on a five star system and client comments about particular lawyers are also posted.  Bidyourcase does seem to reserve the right to charge registration fees in the future.

Both services are consumer oriented and the focus at both sites is currently on lower end price sensitive work.  But there is no reason why these auction exchanges, still in their infancy, cannot ratchet up with time and be an open market auction exchange for serious corporate commercial work. Both sites have no constraints with respect to the type of bid offered by lawyers: hourly billing, fixed fee or any value or alternative fee arrangement.

Quora differs in that it is a question and answer forum.  Frequent questions asked on Quora are for recommendations of lawyers for particular types of legal work and requests for lawyers to offer their services on particular services. Questions are also posed about particular legal questions and lawyers have the opportunity to “strut their stuff” by posting erudite thoughtful responses on complex legal issues, including links to their own blogs.  Quora has attracted a fair degree of higher end consumers of legal services and large law firms and law firm partners.  But, Quora does not host an open market auction exchange per se.

Are open market auction exchanges for legal services going to be the wave of the future?  There is every reason to believe that it may very well will be.  In fact, currently, corporate clients are routinely conducting private auctions through Requests for Proposals processes.

Public open market auction exchanges for serious corporate legal work may be quite inevitable.  After all we’ve gotten accustomed to large corporate clients announce that it will engage in convergence programs or that they will.  Certainly, issues of confidentiality and the preservation of client confidences and secrets must be safeguarded.  But, we would not find it unusual for a bank to announce that it is accepting RFP’s for mortgage foreclosure work or that a major consumer products company announce that it is seeking bids from law firms to handle its trademark compliance and registration work.

We are seeing more legal work commoditized and more corporate consumers engaging counsel through corporate purchasing departments.  Purchasing agents would surely welcome the idea of a public open market auction exchange.

Until then, I’ll just continue to admire the tulips.

[Update: On August 2, 2011 The Wall Street Journal reported that some large corporations, such as GlaxoSmithKline PLC, eBay Inc. and Toyota Motor Corp. are actively engaged in reverse auction
programs to procure legal services.  The Journal reports: “The ways it works is that potential law firms vying for business participate, at once, in an online chat room where they can anonymously submit their lowest bid for a contract with a client. As lower bids from competing lawyers come in, firms can choose to submit an even more discounted bid or drop out of the running completely.”  The Journal goes on to report that corporations are realizing savings of 15% to 40% when using this process.]

© Jerome Kowalski, June, 2011.  All rights reserved.

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