Lawyers aren’t just advising private equity (PE) firms anymore, they’re becoming investors themselves, taking a page straight from the PE playbook. While the legal profession debates whether PE should own law firms, some lawyers have already made their move, quietly stepping into the role of investors themselves.
Lawyer Investors: A Growing Trend?
I first learned about lawyer investors in 2020, when someone contacted me about a law firm listed for sale on my website. I chatted with the prospect and discovered he was a Big Law refugee who was now a private investor focused on "alternative investments.” He was toying with the idea of buying a law firm.
The listed firm ultimately did not interest him, but we promised to stay in touch should other opportunities become available. I’ll be honest, I never gave a second thought about the uniqueness of this particular buyer. He was not a typical law firm buyer seeking to expand its market share or enter a new practice area. I just assumed he was an outlier. It turns out he was a trendsetter.
Fast-forward to today. I get contacted by lawyer-investors almost monthly. They either want a quick lesson about the marketplace for law firms, more specific information about a law firm listing on my website, or both.
What’s driving this shift, and where is it headed? Let’s unpack this trend and what it means for the legal industry’s future.
Why Private Equity Lags in the Legal Profession (Rule 5.4)
First, let’s explore why private equity has yet to disrupt the legal profession as it has in accounting, medicine, and dentistry. The answer is Rule 5.4. This rule of professional conduct, which prohibits nonlawyers from owning a law firm, is well-entrenched in the minds of lawyers and investors. The rule’s rationale is to prevent nonlawyers who might prioritize profits over ethical obligations from interfering with a lawyer’s independent and professional judgment.
However, some states have taken a different stance. In a profession loath to change, change is happening. In the last few years, Arizona, Utah, and the District of Columbia have revised their state’s Rule 5.4 to permit nonlawyer ownership of law firms.
Why States Allow Nonlawyer Ownership
The state getting the most attention around this change is Arizona. It has created a regulatory framework of licensed entities known as Alternative Business Structures (ABSs), which allow nonlawyers to have ownership stakes in law firms. The goal is to encourage innovation, improve access to legal services, and introduce new business models that enhance efficiency.
According to the Arizona Judicial Branch’s website, the purpose is “rooted in the idea that entrepreneurial lawyers and nonlawyers would pilot a range of different business forms that will ultimately improve access to justice and the delivery of legal services.”
In other words, lawyers and nonlawyers can experiment with different business models to make legal services more efficient and easier to access. With their increased access to capital, Arizona hopes that ABSs can implement technological innovations to achieve this.
However, there has not been a tsunami of change because of ethical concerns. Most states have ignored the issue, while others—notably California and Florida—have strongly rejected it. Even the American Bar Association (ABA) opposed the idea when it was under consideration.
How Private Equity is Transforming Arizona’s Legal Market
So, what has happened in Arizona? Last year, a Wall Street Journal headline described the state of affairs in Arizona best when they wrote, “Why Arizona Law Firms Are a Hot Investment for Private Equity.” Over 100 ABS law firms operate in Arizona, and it’s estimated that nearly half are funded by private equity—far more than those established to expand access to legal services.
Not surprisingly, most private equity ABSs focus on personal injury and mass torts: high-volume, highly profitable practice areas with large settlements and contingency fees. Private equity firms have long financed these cases through lending, but now, instead of just collecting interest, they aim to maximize returns by taking an equity stake in the firms themselves.
Beyond Litigation: The Business Potential of Consumer-Driven Law
Other practice areas provide opportunities for PE, particularly those that prize operational efficiency, such as bankruptcy, collections, immigration, and estate planning. These consumer-driven practice areas have the following characteristics in common.
These practices:
- Use a disproportionately high percentage of paralegals and legal assistants relative to lawyers
- Push lots of paper
- Are ripe for technological innovation to handle paperwork more efficiently
- Don’t rely on a lawyer’s reputation to get clients. Instead, they attract people through advertising and marketing, bringing in a steady flow of business.
In short, they operate more like traditional businesses where entrepreneurial and management expertise is valued as much, if not more, than legal expertise.
How Wealthy Lawyers Are Entering Private Equity
Now, let’s look closer at the PE industry itself. Take a peek at some of the pedigrees and resumés of those who work at private equity firms. Finding those with a J.D. or Esq. after their names is not unusual. Look further, and you will see that some are highly credentialed, having attended a prestigious law school, worked in Big Law, or both. Although you can’t determine it from a LinkedIn profile, one can further assume that some are presumably very successful and savvy investors.
Why Lawyers Have a Unique Edge as Investors
Big Law does not dominate the legal field. At most, those lawyers represent 20% of the profession. Most attorneys are sole practitioners or work in small firms, many of which have only one owner. And a large share of those owners are Boomers with no succession plan.
In other words, a wave of law firms will soon need buyers—yet few traditional investors can enter the market because they aren’t lawyers. That means less competition and more opportunity for those who can, especially in acquiring well-established firms with loyal client bases and steady revenue streams.
Unique Challenges In Legal PE
The legal marketplace is very immature and fragmented. Finding a business match is easier said than done because buyers and sellers must pair practice area and location. Further, there is no comprehensive platform on which buyers and sellers to connect.
My few competitors and I have website listings, but successful pairings are very hit or miss. There’s also bizbuysell.com, which seems to have the most “for sale” listings.
The problem is that most listings are way overpriced because they are placed there by traditional business brokers who have no clue about the law firm marketplace or how to appraise a law firm. For a variety of reasons, traditional valuation formulas don’t work for law firms. Brokers think all law firms are identical and randomly assign multiples to calculate values. They wrongly believe that selling a law firm is no different than selling a CPA or dental practice. It is different. Those other professional service marketplaces are far more mature.
What Can Private Equity Do for the Legal Profession?
In my twenty-something years of consulting (forty as a licensed lawyer), I have encountered very few law firms that operate with the sophistication and acumen one typically finds in the business world. However, the high margins of most practice areas leave plenty of room for error. I’ve always believed that many law firms make money in spite of themselves.
You don’t need an MBA to recognize that PE capital and expertise can enhance law firm bottom lines. Further, lawyer investors don’t necessarily even have to be active owners. Savvy investors know how to unplug from the day-to-day business operations. They hire good people, both lawyers and non-legal staff, and they let them do the heavy lifting. Once the right team is in place, the lawyer-investor’s role can be just that—ownership.
The Future of PE and Lawyers
The legal profession is undoubtedly ripe, probably overripe, for disruption by PE. That said, Rule 5.4 isn’t going anywhere soon and will sharply limit the number of available PE players. I remember that according to conventional wisdom, one of the reasons to go to law school was, "Even if you don't practice law, you can always put a law degree to good use." Private equity presents a new and unexpected reason to become a lawyer, which no one envisioned when I heard that remark many years ago. For those who enter this space, the rewards could be substantial.
Whether you're considering selling your firm, or looking to invest in one, let's talk. Schedule a consultation to ensure your transition is smooth, profitable, and on your terms—or to find new ways to invest your money.
