Law firm founders considering a private equity backed Legal MSO transaction spend an extraordinary amount of time thinking about what happens at closing. How much cash will they receive? What happens to their compensation? These are obviously important questions, particularly when the answers involve several million dollars, but there is another question that receives considerably less attention: What exactly happens after the deal closes?
Understanding what Tuesday looks like can be every bit as important as understanding how many millions appeared in your bank account Monday afternoon.
The First Week: Probably Fewer Changes Than You Expect
Assuming the transaction was structured properly, lawyers continue practicing law, clients remain clients, and most attorneys and staff continue doing essentially what they were doing before the transaction.
What does change is the business relationship. The new governance structure becomes effective, employees may receive additional communications about the transaction, new management contacts are introduced, and the integration process begins.
Depending upon the transaction, there are often changes involving payroll, e.g., all non-attorney staff might be transferred to employment by the MSO. There can also be changes in accounting, tech, etc., but sophisticated MSOs understand that making massive, disruptive changes immediately after investing millions of dollars in a law firm would be roughly equivalent to buying a profitable casino and immediately closing half of the gaming tables to redecorate the interior. While there are MSOs that seem unconcerned with disruption, the better private equity operators know not to do so.
Jesse Hamilton, the head of M&A at legal MSO Lawhive, put it this way: “When we close, our first priority is stability, with very little changing day to day for anyone. Good integration happens over quarters, not days, and the operators who rush it usually end up paying for it.”
The First Month: You’re Going to Be Reporting More
Most reasonably well-managed law firms already track revenue, collections and receivables, but private equity investors will probably want more management meetings, monthly financial reviews, quarterly board meetings and considerably more discussion about forecasts.
Founders will also become intimately familiar with EBITDA (earnings before interest, taxes, depreciation and amortization – think net profit after normalizing partner compensation) which is one of private equity’s favorite three syllable words.
More detailed reporting does not necessarily mean less autonomy, but it absolutely means greater focus toward clearly defined goals. This is when a founder will discover that there are 17 different ways to create a spreadsheet showing that March was 9% better than everybody predicted in January.
The First 90 Days: Establishing KPIs and Finding the Levers
Once the MSO develops a better understanding of the business, it will begin looking for opportunities to improve it through Key Performance Indicators aka KPIs. That may mean better billing and collection procedures, better technology and AI implementation, lateral recruiting and geographic expansion or acquisitions. These are the “levers” private equity people constantly talk about, meaning the things that can be changed to make the business grow and become more profitable.
This is also where the quality of the MSO becomes apparent. The worst operators assume that an MBA, a Patagonia vest and an impressive spreadsheet will have somehow bestowed upon them superior knowledge over the people who spent 25 years building the firm. The best learn from the founders and seek ways to help improve the existing success combined with new tech and systems that can be acquired with capital.
By Year One: The Growth Plan Becomes Real
Before closing, everyone talks enthusiastically about growth. After closing, somebody starts measuring it. If the investment thesis or plan for growth contemplated growing from five offices to 10 or acquiring three smaller firms, those assumptions will increasingly become part of management discussions.
Hiring, marketing expenditures, technology investments and expansion decisions will probably become more structured as well. A founder who previously decided over lunch to hire three new administrative assistants, may now need to explain why that makes business sense. And that’s actually a good thing.
Josh Porte, a partner at Holland & Knight who has deep experience with legal MSO transactions, has seen these transformations first hand: “We have observed that MSO partnerships between private equity sponsors and law firm founders have resulted in increased budgeting discipline, more concerted strategic planning and overall professionalization of the business. The practice of law has long been somewhat insulated from these types of fundamental principles of effective business stewardship, but that dam is now breaking.”
While nobody should be telling attorneys how to cross-examine a witness, having trained professionals in charge of marketing and technology is the norm in every other industry and profession.
Most Post-Closing Surprises Shouldn’t Be Surprises
The best time to determine what life after closing will look like is obviously before closing. Founders should understand who receives financial reports, who approves budgets, what resources the MSO is actually obligated to provide and more.
“We’ll figure it out later” may sound wonderfully collaborative during courtship, but it becomes considerably less charming when $50 million has changed hands and everybody suddenly discovers they had a different definition of what “Figure it out” means.
The headline valuation understandably receives enormous attention because there are millions of dollars attached to it, and lawyers possess the same mysterious ability as everyone else to become extremely attentive when someone puts eight figures on a term sheet.
But a Legal MSO transaction is not simply a liquidity event. It is the beginning of a long-term business relationship in which governance, expectations, personalities and operating philosophy can matter as much as the multiple paid
at closing.
Smart founders will work with advisors, attorneys and consultants who help them understand and pre-determine what happens after the check has been cashed.
