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Is Private Equity Coming for Small Law Firms?

By Joseph Fawbush, Esq. | Reviewed by Laura Temme, Esq. | Last updated on

Lawyers provide vital services that can affect their clients' finances, family, and freedom. It isn't terribly surprising, therefore, that states have stringent requirements on the ability to practice law.

However, there is an attorney shortage in many rural locations throughout America. Even when attorneys have a thriving practice in rural areas, it can be very difficult to sell the firm. When they retire, attorneys in small towns often take with them the firm's reputation, and there aren't many lawyers ready and willing to take over the practice.

There have been some proposed solutions to improve representation in sparsely populated areas, including lowering bar exam requirements and offering incentives to relocate. Lately, states have begun looking at ways to increase access to justice by involving non-lawyers in law firm operations and ownership — even allowing limited legal work to be done by non-lawyers.

Could allowing non-lawyers to invest and own a law practice help get some law firms off the ground or ease selling when an established lawyer retires? Could it help lower costs?

If there's interest from private equity to invest in law firms (and there is), what's the hold up?

Rule 5.4

The American Bar Association's Rules of Professional Conduct prohibit lawyers from sharing fees with non-lawyers. Only two states (Arizona and Utah) and Washington, D.C. allow non-lawyers to own a stake in law firms.

The legal industry has lagged behind other professions in terms of how many non-professionals have an ownership stake in businesses. In many states, for example, non-physicians can own medical clinics — as long as their medical director is a physician.

That's not to say there aren't legitimate reasons for concern. Some fear that a private equity takeover would turn law into something like a commodity. Others point to increased conflicts of interest. It doesn't take much imagination to picture a scenario where a client's best interests and those of a private equity firm are at odds.

Finally, there is hesitancy from lawyers themselves. Many partners are reluctant to give up any control of the firm. A focus on long-term growth, as may come from a private equity perspective, doesn't always necessarily match what current partners aim for, which is maximizing profits in a given year.

Reasons Why Private Equity May Come for Law Firms

Despite challenges, there's a growing global trend for private equity firms to buy up a stake — even a majority stake — in large law firms. Some private equity firms see the legal field as the "last untapped gold mine."

Of course, large equity firms buying up established law firms with existing revenue north of $100 million is one thing. But what about smaller firms?

Certainly, it is not just rural law firms that could occasionally use an injection of cash. Presumably some attorneys wouldn't mind focusing on the legal practice while a non-lawyer partner focuses on the business side. And third-party litigation funding is skyrocketing. Current estimates put over 100 approved alternative business structures (ABSs) in Arizona. Some of these law firms even have majority non-lawyer ownership.

The legal industry is notoriously resistant to change, but with private equity firms and investors interested and ready with cash, is it only a matter of time before things change? Time will tell, but it isn't likely to happen quickly.

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