In the last fifteen months, private equity investment in law firms has gone from theoretical to reality. Tom Lenfestey of the Law Practice Exchange is back with the podcast to talk about new legal and regulatory developments, what drives multiples in law firm valuations, the cultural elements dealmakers should consider, and more.

Preorder The Exit Blueprint: The Law Firm Owner’s Playbook for Selling, Succession, and Life After Law on Amazon.

This episode is brought to you by Hilco Global. Learn more at hilcoglobal.com. Read a transcript of the podcast below.

Middle Market Growth: Welcome to Middle Market Growth, an ACG production, I’m Carolyn Vallejo. Last time we spoke with Tom Lenfestey of the Law Practice Exchange in January 2025, we were discussing the nascent trend of PE investment in law firms. This year has brought some new developments for legal services M&A and Tom is back with us to discuss them. Tom, thanks for joining us again.

Tom Lenfestey: Yeah, absolutely. Thanks for having me back.

MMG: For those of you who might have missed the last time that you joined I’d love to give a refresher. So could you tell us a little bit about the Law Practice Exchange and your role there?

TL: Sure, absolutely. I’m Tom Lenfestey, I’m an attorney and CPA by degree, so glutton for punishment. But overall, I founded the Law Practice Exchange about 13 years ago. Really focused on growing the marketplace for law firms to provide similar exit options that other professional industries or verticals had. And so it’s been a little bit of a longer road, but it’s exciting to see where the marketplace is finally going. The Law Practice Exchange itself really is kind of divided as a platform in two areas. We have the marketplace law, which I call our Zillow for law firms. It’s our direct-to-market for a lot of our law firm owners as sellers for buyers to really, you know, deal search and kind of match, hopefully connect and make deals happen. And then we have our private market advisory, which really sits there for the larger scale firms dealing with a lot of the topics we’ll talk about today about private equity and matching in those through investments and otherwise.

MMG: And just for a bit of fun, if you could learn any new skill in 2026, what would that be?

TL: I mean, anything AI, but probably, you know, go deep on agentic workflows. You know, I have those on my team that are working on it, but I would love to know more myself. I think there’s so many things in my day I’m like, I bet you I could build something that would solve this for me going forward. So anything on AI.

MMG: Alright. Well, today we’re going to be taking a deeper look at the buying and selling of law firms, how PE involvement has developed in the past year and a half or so since we last spoke. But let’s start by talking about the law firm landscape today and why so many law firms might be seeking a buyer now or in the near future.

TL: Absolutely. I think, you know, there’s a, a few factors of course, that we talked about last time that, you know, are probably still the same. There is a significant percentage of law firm owners right now that really do sit in the ownership seat without any natural succession plan. So there’s a succession crisis, kind of a grain of law firm ownership, I would say that’s, you know, coming to a head. Lawyers like to practice a little bit longer, they’re slow to retire. So it’s hanging on a little bit longer than maybe the baby boomers going before them. But really since law hasn’t been as focused on succession or there hasn’t been a marketplace, there is that overall general landscape. Then we have some regulatory changes. We have, you know, a BS, which is non-attorney ownership in Arizona, Puerto Rico. We also have the influence of ai. So how that’s changed in the overall, you know, kind of impact on law firm ownership and just overall consumer shifts and just different competitiveness. I think it’s really in a fragmented industry like law is, it opens up a lot of discussions and potentially motivation for what does either exit look like or what does partnership look like to go through these different challenges like succession, you know, tech and otherwise.

MMG: Well, we’ll be going deeper into some of the topics you just mentioned. First though, I know that last time we spoke we talked about what made law firms attractive investment targets for private equity and other investors. You mentioned things like durable demand, solid profit margins, and you know, many of the factors that have made other professional services like accounting hotspots for investment in recent years. Has that investment thesis shifted at all since we last spoke?

TL: I think the core of it is the same. I think if anything, especially, you know, private capital and whatnot has done the research and really pulled out where that focus is. I mean, there’s an aspect of, it’s a very large market that has been untouched. So when you’re talking about, you know 400 billion, you know and above for certain practice areas and firms, that could just be personal injury. You know, there’s a wide open landscape that’s very fragmented. You know, the acyclical nature of a lot of legal services. They are fragmented, they’re historically under invested in technology operations. Really from that standpoint. There’s just a big opportunity I think for advancement of what I’ll call just those business op side of things, which I think is what a lot of has happened in other professional verticals like accounting, right? As you saw it, it’s the, the human capital is there, the client relationships are there, the revenues and the EBITDA may be there, but there’s a lot of room for business improvement. And I think overall it’s probably broken up into two frameworks. Just to go a little bit deeper of where things are now. There’s probably private capital that we’ve talked to that’s looking for corporate or transactional. Those may be a little bit larger. You may be talking about the AmLaw, you know, 100, 200 firms. Some of those have hit the headlines. But overall, that’s really kind of similar to some of the accounting plays, which has been how do we grow and scale through adding, you know, human talent but business, you know, scale and efficiencies. The other as part of the thesis really comes down to more of the consumer legal practice areas like personal injury, you know, trust and estates, family law. Those areas that typically would probably be the most focused would be how do we advance marketing? How do we advance operational and still technology efficiency, but it’s less about the human talent and growth of, you know, picking up partner groups from other firms and growing through scale that way. It’s more about how can we really grow these brands, make them more efficient, deliver, you know, better and cleaner client services throughout. So I would say the corporate and the consumer are kind of taking two different paths depending on what private capital is looking for.

MMG: Talking about, you know, growing value and scaling, I want to learn more about what is driving multiples in law firm valuations. How do you add value here?

TL: Yeah, I think forever, I’ve always said law firm valuations made up of three components, and that’s really financials, brand and systems. But really when you get beyond that or kind of look at what really is driving multiples in, you know, mid-market, especially for private capital, I think it probably comes down to five things and those fall into those buckets. But the first is revenue predictability is really looking at, you know, I mean reoccurring revenue models for firms great, but it’s really how much you know of those, those marketing machines for consumer practice areas like personal injury, you know, how much data is there to really get comfortable with yes, that many, you know, new calls or new leads are coming in that are converting to actual clients and cases. So I think revenue predictability of course is a huge multiple, you know, increase or decrease factor depending on the firm. The other is margins, law firms that are notoriously inefficient operators, you know, law firm owners are overall, but you know, really those with documented efficiency and room to grow are kind of that, you know, they can really demand a higher potential multiple. The third one I’d say is just demonstrated organic growth for a lot of law firm owners. And where we’ve seen some early pairings is, you know, they’ve had success. It’s not for a lack of success and they’re really floundering for private capital at this place to bail them out. They really showing the success and they’ve done it on their own. And so really it’s what then would the plan be with private capital? So organic growth, having that history and then having that plan, you know, to accelerate that through other efforts. And I think the fourth piece would really be, are they a platform which is really happening, especially in the personal injury space right now, the size and the scale of the firm or the brand and the systems and the team. Are they a platform that private capital’s really going to invest in and then build around through other brand acquisitions, but they’ve just acquired, you know, the best in class, you know, marketing knowledge intake operational knowledge, otherwise versus an add-on. And I think the last piece is really one that’s, you know, we may have talked about on our last one, but is that key man risk? Law firms and probably any professional service that are really dependent or the risk is around the law firm owner or otherwise, those of course are going to receive lower multiples or different terms. Those that have been built into, you know, more institutional, you know, businesses and brands are going to receive higher multiples.

MMG: Now, of course, this is a complex market. There are regulatory factors that must be considered. And you, you touched on this a little bit earlier, but as I understand it, there have been some pretty key developments that would further open the door for private equity involvement in this space. Could you tell me about those?

TL: Sure, absolutely. Well, I think, you know, going back where we may have touched on it, on the first one, the movement happened here in the us The UK’s had an alternative business structure or non-attorney ownership for about 20 years. But Arizona kind of opened the door for us here in the us. So Arizona was the first state to have a true alternative business structure, which means, you know, non-attorneys can be part of ownership. So it’s an application, a review process, that’s what KPMG legal as far as their law firm entity went through to receive approval to be a law firm, although not owned by lawyers owned by, you know, accounts and CPAs. So I think that’s, you know, one of the movements significantly that’s happened is you have Arizona, Puerto Rico has followed suit. So it’s another jurisdiction where we’ve seen a BS pop up. And then we have MSOs, and we may have touched on those before, but MSOs probably most of the listeners are pretty familiar with managed service organizations have as they’ve been deployed in other professional verticals like healthcare. But that’s really where, you know, the law firm, you know, through private capital investment is really separated into two vehicles. And, you know, the, the assets are moved from the law firm and acquired by the MSO, which is where that private capital dollars go. The law firm stays owned by lawyers, and the lawyers stay over there and that delivers the legal services. And then the MSO is really what’s tied to private capital provides those services that the law firm pays for. So we’ve seen those different changes and I think the exciting part is probably when we talked about this a year plus ago, is there wasn’t, it was thesis only. There had always been deals happening, but I think since then there’s been some real public deals and other movements that’s come from that, and that’s really exciting to see.

MMG: So you have advanced the MSO as a way for PE to enter the field. Tell me a little bit more about how MSOs would translate to the legal services space.

TL: Yeah, absolutely. So as mentioned, the MSO is really about creating those two entities and for private capital where, you know, for law firms and where it works well, you’re really talking about what’s your why or what is that purpose? What, what would you do as a law firm owner operator that you can’t do because of potentially not having the private capital to do it, or you don’t want to deploy your own private capital to do so. And so the MSO is the vehicle that private equity can, you know, own and invest in and essentially provide the accounting, the marketing, the technology, all the best in class services to that law firm. And that’s really truly Carolyn, where we’re seeing the, the deals happen is under MSO structure. There’s been some, you know, public of course deals in Arizona under a BS, but MSO has really been the chosen vehicle, I’d say over the last year or so. It’s a private structure and it’s largely being used because there’s not enough guidance state by state to allow private, you know, capital to have what Arizona or Puerto Rico kind of guides them the ability to do and what allows law firm owners to do it. But it’s a great vehicle as it’s been used in other professions to really, you know, probably get to the same place of having private capital invest in the growth and the success. The overall aspect is, you know, the regulatory compliance has to be that the MSO cannot influence the lawyers delivering their legal services. So there has to be that wall where the professional has to, you know, deliver the professional services in their independence and judgment. And so that’s always where the regulatory risk goes and what’s being talked about a lot right now.

MMG: Now there’s a term here that our listeners may not be familiar with, but they should know it’s the regulatory put clause. Can you define that for us and tell us what it means for regulatory risk?

TL: Yeah, I think it’s something that, you know, whether it’s used a lot or not, I think for investors, it, it’s something to have in the toolbox as regulatory put clause, if it’s in the legal agreements, essentially says if a regulatory, a state bar or otherwise would take adverse action against a say an MSO structure it’s an unwind clause and it can take to a, you know, varying degrees of full unwind, modify the structure, right? You know, financials going back and forth, you know, they were paid to seller. Now maybe they go back from seller back to private capital. But the overall, it’s a hedge. It’s, you know, hedging the risk of regulatory bodies taking an adverse opinion to some of these structures. Candidly we’ve seen none of them used or deployed, but I do think it’s one of those things that we get asked a lot by private equity is, you know, there seems to be some uncertainty based on regulations. Most of the, those private capital that have gone and done deals have met with the good ethics attorneys out there and become very comfortable that there may be some ripples, but at the end of the day, you know, it will settle very much like accounting and veterinary and dental and otherwise to allow these MSO structures as a vehicle to do so. But overall, it’s a good clause to know about to maybe, you know, calm some of that early concern private capital may have about moving into the space.

MMG: I want to talk more about what you have seen kind of on the ground, so to say, because you’ve just laid all of this out conceptually and you are working with law firm owners every day to explore their options on the market. So tell me more about what you’re seeing in terms of how they’re feeling about this opportunity, their appetite for potentially exiting to a private equity firm.

TL: Yeah, I think overall, you know, most sellers probably come to us truly on that, you know, considering sale. And so when you’re talking about private equity, private capital, at least where the market is right now, you know, they would ask these law firm owners to stay on for three to five years, and so it’s not a true sell and exit. And, and so initially that’s a little bit of a change, right? They have to be presented with, oh, well, you know, this, can this be done? You know, should it be done in my situation or otherwise? I think most get excited, especially for the brand, the, the platforms that Private Capital is looking at right now, meaning significant EBITDA size, significant brand and operations, because they have, they see the entrepreneurial opportunity to partner with good private capital right investors and continue to grow what they were already doing for maybe the last 20, 30 years, but to really accelerate. And so I think at first, you know, of course there’s a little bit of change, you know, need some knowledge on how this would work, how this would structure, but then it goes to entrepreneurial excitement, and that’s truly where we’ve seen deals get done. They’re not doing it necessarily for just the, the check. I tell everybody that lawyers really deal in terms of risk, like they evaluate, you know, we’re trained in law school to evaluate everything in terms of risk. Value comes second in our mind, right? And especially for a lot of these law firm owners that have done early deals. They’re making good money. They have true good, you know, distributable cash flow and EBITDA, so it’s not the capital necessarily that really excites them. It is the opportunity and you know, potentially some of the solutions that would be there as well to have a true partner in the growth that would come from it. So lots of, you know, some, you know, excitement early, some hesitation, some evaluation of those risks, and then truly going forward and say, no, this could be great to take a legacy that, you know, they’ve built for 20 and 30 years or longer sometimes, and really take it to the next level, especially as this market changes.

MMG: All right. Well let’s close on an actionable note as we always like to do. Are there any final pieces of advice for PE firms who maybe are interested in exploring this space? They want to invest in a law firm within maybe the next year, let’s say? I understand there also may be some required reading that you can suggest.

TL: Oh, absolutely. I have some required reading. Well, I’ll start with the reading and then I’ll give more actionable and everything else. But you know, we’re excited or I’m excited to release. I released a succession planning book for lawyers some years ago and the market was very different. We have a new book coming out that really has a different, you know, a different message and brings us really up to speed for law firm owners and for, you know, buyers and investors. It’s called the Exit Blueprint, a law firm owner’s guide to planning, preparing and executing a successful transition. And I think really the overall goal from a law firm owner standpoint is getting to the point of it’s not about having a transaction in front of you, it’s what you need to do to prepare whether your potential buyer is going to be another attorney law firm, or it’s going to be private capital to really try to move the law firm ownership in the market overall to start doing the things that private capital are going to look for. So to get the data, get financials to prepare for that to be a potential exit because that’ll definitely help deals move better. And otherwise from the private capital side, I would say in the book there’s a, a few different things. It’s one, as I already kind of mentioned, to understand the mindset of the lawyer. As I mentioned, they, they really think risk first and then value second. So it’s how to approach that from, you know, a standpoint. The other is really the overall law is still very much a human capital business and culture of the firm. And if you lose the culture of the firm in a transaction, that’s probably the biggest, you know, loss that you can have, even if you get some of the cases and the marketing right, everything else. And so it’s really a structure to give solid guidance to both parties, but on what should that transition plan look like? And you know, really what I try to tell, you know, both sides in the book, but you know, with buyers, it’s don’t rush that post-close integration. Really focus on some practical aspects to be strategic, not fast prep during due diligence or otherwise, but that is something that’s different about law, even dealing with the law firm owner themselves. There’s a little bit different approach that I think private capital or any buyers should really know that would probably help them ease that transition post-close. And for the sellers, it’s really, you know, to start that prep now on, you know, culture transition otherwise, so that it’s not a huge shock, you know, post-close or post-transaction or otherwise.

MMG: All right. For our listeners, again, that book is titled The Exit Blueprint, the Law Firm Own Owners Playbook for Selling Succession and Life After Law. Tom Lenfestey of the Law Practice Exchange, it’s always a pleasure to speak with you.

TL: Absolutely. Thanks so much, Carolyn.

This transcript was prepared by a transcription service. This version may not be in its final form and may be updated.

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