Monday, June 25, 2007

Who Actually Sells the Law Firm?

Mid-market law firms in response to questions from The Lawyer are saying they would like to consider seriously an IPO or taking in external investment. This is all part of the post-Clementi maneuvering that is taking place as the Legal Services Bill travels its slow journey through parliament. I've indicated some of the potential pitfalls before.

While I believe the legal profession should be relieved of many restrictive practices and be given the freedom to organize itself how it likes, I do not believe lawyers are a knowledgeable group when it comes to making these kinds of decisions. Fundamentally, they are naive: they are not great business people, not when it comes to themselves.

If the Legal Services Act is like a Big Bang, lawyers will not have the technical savvy to compete with the private equity funds and banks. All the stockbrockers and jobbers in the City of London were eaten up after Big Bang.

Although lawyers engage in business and play an enormously constructive role, this does not mean they are perceptive analysts of their own situations. Lawyers are essentially technical underlabourers for financial institutions. Undoubtedly good, but they are not the leaders in transactions.

Here then is a possible scenario for the post-Clementi age. Everyone is excited about investors. Law firms are being courted assiduously. Within these firms--and this is mostly the mid-market ones--the senior partner (often a founder) will be sitting with his chief financial officer (probably an accountant), and one or two other senior lawyers. They will be planning their exit strategy, just like good private equity funds. They will have worked for a goodly number of years and comes the payoff. The crucial question is: how much of the equity can they sell off without causing a revolution in the partner-ranks?

Let us assume they work a wonder of spin and convince their partners that this is the yellow brick road for the firm. And let us assume that they decide to sell off 25% of the equity. Once the deal is clinched and the shares of the sale have been distributed, why would those senior guys stay around?

They won't. They will leave because there is nothing in it for them any more. It will be up to the remainder to knuckle under a different, and potentially harsher regime (remember how the unions have been complaining about private equity) with less of the pie than they used to have.

That's because they won't have thought of exit strategies like the others. I would suggest any partner should now plan a possible exit strategy and be prepared to execute it as soon as the chief financial officer and senior partner start walking around with slightly manic looks in their eyes.


All Blog Spots said...

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ilanit said...

Los Angeles private equity firms borrow new money into existence in order to take these companies private. They inflate the money supply and syphon off huge sums as personal compensation. All the while, the cost of everything goes up as the value of a dollar goes down.