December 2, 2025 • 22 mins
Private equity is about to change everything for family law firms.
I just got back from the Business of Law conference in Scottsdale, and what I learned there should worry you.
MSOs and ABS structures are already here. This is what's coming for family law in the next 12-36 months—and I’ll show you how to prepare.
We built Sterling to $17M. Now we're prepping for private equity pressure ourselves.
In this episode, I shared the intel directly from PE firms, the Arizona Supreme Court Chief Justice, and the biggest PI players about the three biggest forces converging in family law right now.
📲 Subscribe Now: https://www.youtube.com/@jsterlinghughes
📝 Get your FREE Law Firm Growth Guide: https://jsterlinghughes.com/
📚 Order the Waterfall Method Book Now: http://www.RocketClicks.com/pre-order
---
📄 CHAPTERS
0:00 - Private Equity Law Firms: Why We Went to the Business of Law Conference
1:13 - Three Forces Converging in Family Law Right Now
3:19 - ABS Structures Explained: 152 Firms Already in Arizona
5:36 - What the Arizona Supreme Court Chief Justice Told Us
15:23 - How PE Acquires Firms: The Platform Strategy
17:21 - Why Private Equity Actually Likes Family Law
19:29 - Our MSO Prep and the 25% Margin Benchmark
----------------------
Ready to find the accountability partner you need to build your dream family law firm the same way we grew Sterling Lawyers?
Follow these steps:
1. SUBSCRIBE TO JEFF'S NEWSLETTER: https://jsterlinghughes.com/
2. BOOK A FREE 30-MINUTE AUDIT WITH US: https://rocketclicks.com/schedule-a-family-law-quick-audit/
3. CONNECT WITH US:
LinkedIn: Jeff Hughes, Tyler Dolph, & Anthony Karls,
Facebook: Jeff Hughes, Tyler Dolph, & Anthony Karls,
Instagram: Jeff Hughes, Tyler Dolph, & Anthony Karls
4. TELL US WHAT YOU WANT:
Tell us in the comments if you liked this episode and what other kinds of episodes you would like to see.
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
SPEAKER_00 (00:00):
In my opinion, creating the right LSO will
actually allow attorneys to livetheir best life because they
won't have to worry aboutbilling.
They won't have to worry aboutHR or cash flow.
They'll be able to be a greatattorney and know that they're
part of an organization that'sgrowing and thriving.
(00:20):
Welcome back to the SterlingFamily Law Show.
You know, this podcast isdesigned for family attorneys to
build and live out the uh thelaw firm of their dreams.
And uh Jeff Hughes, who is myco-host as well as the
co-founder of Sterling Law, wasjust at the Business of Law
conference.
And I said, Jeff, you got totell us everything that's
(00:41):
happening here.
I know our listeners will wantto find out how that went.
So give us the breakdown.
You know, what was the agenda?
What did you learn?
What were your biggesttakeaways?
SPEAKER_01 (00:51):
Yeah, I'm really excited to share with everyone
what we discovered at theBusiness of Law conference down
in Scottsdale.
So Jeff Curlin and I went a fewweeks ago.
And what I'm gonna share withyou is our three forces that are
converging in family law.
And if you stay to the end, I'mgonna talk about what we as a
firm are doing to prepare and tocounter those forces that are
(01:13):
coming.
So let me jump into it.
So the reason why we wanted togo to this conference is because
it's mainly geared towardpersonal injury attorneys.
And PI attorneys is where, youknow, personal injury is where
all the money's at, the bigmoney.
And so they tend to be on thecutting edge of developments.
The vendors that are there startfirst in personal injury before
(01:35):
they move into other areas ofthe law.
And I wanted to hear what washappening with the structure of
these PI firms under the new ABSrules coming out of Arizona.
I wanted to figure out what'sgoing on with MSOs.
And I wanted to kind of peekunder the tent and see what's
going on with all of thesevendors that are coming up with
these cutting-edge products, AIproducts, and so forth that
(01:57):
first start servicing PI firmsand maybe we could steal an idea
or two.
So that's the context for goingto this particular conference.
And I believe we're one of twofamily law attorneys at the
conference when there were 100plus PI firms that were there.
So um, so that that's thecontext for for going there and
(02:17):
and and visiting that particularconference.
So let me start first with uhthat makes sense so far, Tyler.
I know I'm like droning on here.
SPEAKER_00 (02:24):
No, it's great.
I think the one the only thing Iwould add is as we think about
marketing for family law firms,we know that PI firms have
always led the charge as itrelates to spending lots of
advertising dollars uh buildingbrands.
You know, family attorneyshaven't had to build brands yet
because uh of where the marketis, but PI has had to crack that
code.
So I totally agree that they'reon the cutting edge as it
(02:46):
relates to doing whatever ittakes in new uh interesting
endeavors to help their firmsgrow.
SPEAKER_01 (02:52):
Yeah, on the marketing point, what's
interesting, there were aboutseven of the top 10 size-wise PI
firms represented at theconference.
So we had the big dogs that werethere that many of them actually
spoke and had little segmentsthat they gave a talk on,
whether that be on marketing oror on MSOs or whatever.
So, okay, so first off, forcenumber one, this is the big
(03:15):
takeaway, is that ABSs areflourishing.
And now let me just break downwhat that is.
ABS is an alternative businessstructure.
And currently, Arizona is theonly U.S.
state that allows non-lawyerownership of law firms.
So let me just kind of put somecaveat around that.
Utah is exploring this rightnow.
(03:36):
They have what they're calling asandbox.
We're testing it in a combined,a con a confined environment.
Washington state um is hasannounced that they're going to
be doing something similar toUtah.
Um, I just two weeks ago,Tennessee announced that they're
looking at this.
There is non-lawyer ownershipcoming out of Puerto Rico.
And in Washington, D.C., you canown part of a law firm, and
(04:00):
that's mainly set up for all thelobbyists that are out there.
So um it's it's the first,Arizona's the first state to
completely deregulate um theownership of law firms under
Rule 5.4 of the of the ABA modelcode.
SPEAKER_00 (04:14):
So And Jeff, when did that happen?
SPEAKER_01 (04:16):
That happened in 20, I believe.
Yeah.
So at the conference, we had theArizona Supreme Court Chief
Justice that was there.
She came and talked about thehistory of it within Arizona,
why they did it.
It was super enlightening.
So what she shared was there arecurrently 152 ABS firms that are
in existence, with about 40 to50 that are in some stage of
(04:41):
pending or review or whateverthe case is.
And I had always assumed thatthese AB, Arizona did this
because they wanted to increasethe access to justice for those
who are unrepresented, whocouldn't find or couldn't
afford, rather, legal counsel.
That was always my assumption.
But she actually said, no, thatwas not why they came up with
(05:02):
this structure.
They really did it to help soloand small firms compete, um,
allowing those firms to take oncapital and compete better with
the big, bigger firms that wereout there.
Access to justice was a subpartof that, and they believe that
that was part of theconsideration, but it certainly
wasn't the major one, which wasa pretty, pretty big surprise to
(05:23):
me.
And she also explained in detailwhat Arizona has done to really
get this right.
They studied it for a longperiod of time, and they were
very thoughtful with how theywent into non-lawyer ownership.
They require an ethical lawyerthat for each of these ABSs.
There's all kinds of like hoopsthat these different firms have
(05:44):
to jump through.
And really, what they have foundis that the program has been
wildly successful.
Other states are reaching outright now to try to understand
what they've done, why they'vedone it, how it's actually
worked.
And I would not be surprised inthe next two or three years we
see multiple more states comingon board with this type of type
of program.
And always the hand-wringing andthe concern has been around the
(06:08):
ethics.
The idea is this you allownon-lawyer capital money to come
into a law firm that will takeover the firm and will force non
unethical decisions, right?
By the lawyers.
And that's fair, fair, totallyfair point.
That may happen, and at somepoint it will happen, no doubt.
But as a whole, she said thatethics has not been an issue
(06:32):
whatsoever.
It has been no different thanwhat has what has existed for
100 plus years with respect tothe ethics, lawyers following
the ethical guidelines, and soforth.
So that was that's been veryinteresting, and it's totally
cuts against all of theprotectionist type arguments
that we can't have non-lawyerownership of law firms.
(06:54):
So, in my view, it was prettyclear ABS's have been successful
in Arizona.
They're getting they're becomingmore successful, they're
growing.
Other states are going to startfollowing, and we'll see what
happens.
And one interesting point onthis, Tyler.
California, a couple years ago,maybe four or five years ago,
started exploring, they puttogether kind of a task group or
(07:16):
a committee or something likethat to look at non-lawyer
ownership.
And then they completely reversecourse and have become outright
hostile to non-lawyer ownership.
And the head scratcher to me ismy one of my closest friends, my
roommate from law school, is apartner in a really large firm
down there in San Diego.
(07:38):
And he has told me likehair-raising stories of the
level of absolute rankcorruption that exists top to
bottom in California within thelegal bar.
So the ethics, um, just in theway he describes it, just don't
exist there.
It's so bad that you can't doanything about it because the
lawyers just run it and theythey run it to their benefit,
(08:01):
for their benefit.
So um maybe that's why they'reso against these ABS um
structures coming intoCalifornia.
SPEAKER_00 (08:08):
Wow, I mean, that's insane.
Now, I know you're not an experton ABS and so you don't claim to
be, but I remember when you weretelling us, our team here about
this opportunity.
In my head, I thought, great, weshould go acquire a firm in
Arizona tomorrow, right?
But it's not that easy, right?
There's a process and approvalsand all the things, all the
(08:29):
hoops to jump through, correct?
SPEAKER_01 (08:30):
Yeah, yeah.
And I have no interest injumping through those hoops.
I don't think we need to dothat.
But um, regardless, it's a lotof uh it's it's interesting.
So that's really the first bigtakeaway of what I consider
these forces that are converginginto family law, and we need to
be prepared for them.
SPEAKER_00 (08:47):
Just to stay on that subject and we can cut around
this, but um were there anypredictions during this section
of what the future may hold asit relates to private equity
entering law firms?
Are they gonna do PI first andthen into family?
Like what were the kind offuturists thinking and saying
about this?
SPEAKER_01 (09:06):
Yeah, I'll get to that in a moment, but there
weren't a lot around the ABSstructure because that's just in
Arizona, and we're alreadyseeing tons of private equity
money come into Arizona forthose ABS structures.
Like, for example, KPMG, one ofthe largest accounting firms in
the world, started their own lawfirm a couple months ago, and
they did that out of Arizona.
So we're seeing private equitymoney coming into that, but
(09:30):
that's just in Arizona, it'sreally confined, and that's the
only state that allows thesestructures right now in the way
that they do.
But there were predictions, andI'm gonna get to those in a
second, with respect to otherways private equity money is
coming into family law.
So let me jump over to the MSO.
So MSO stands for managedservice organization.
(09:51):
You you could hear it call itLSO or whatever.
And so, what they are is aseparate entity from a law firm
that essentially takes all ofthe assets out of the law firm
with the exception of the clientinformation or the client
agreements, the retaineragreements, and the lawyers.
So all the other expenses comeout of the law firm entity and
(10:15):
they go into this managedservice organization that can be
owned by non-lawyers.
Okay.
And so it strips all thosenon-legal assets out except
client info and the lawyers.
These MSOs cannot adviseclients, only the lawyers can
advise clients on legal matters.
So there is a pretty bright,bright line there with respect
(10:37):
to that.
And those are already happeningin law today.
Now, everyone has seen these insome fashion or another in other
professional services.
So look at dental, okay, AspenDental, Forward Dental.
The largest group, the largestMSO is Heartland Dental.
Now, these are all managedservice organizations for
(10:57):
dentists.
And in most states, just likewith law firms, you have to be a
dentist to own a dentalpractice.
And so the way that thatnon-dental money, private equity
money, other private investorsor whatever, are getting into
the dental space is throughthese MSOs.
And so we are really the lastprofession to see this happen in
(11:19):
our profession where MSOs arecoming into law.
We've seen it in medical,especially in elective medical
stuff like plastic surgery andthings like that.
We've seen it obviously indental, with the example I just
gave.
We've seen it in the vet space.
Uh, we've seen it in all ofthese medical specialties from
even like dermatology.
There's like, you know, that'sone of the biggest ones that
I've that I've seen.
(11:40):
Um, we've seen it inengineering, uh, where you you
have uh you have these um MSOsthat are buying these
engineering firms, which is youwouldn't ordinarily think of
that as a as a place they wouldgo, but they have done that and
and to a large degree there.
So right now it's it's not aspro it it hasn't proliferated as
much as you might think it has.
(12:01):
Um in the dental space, only 13%of dental practices are owned by
an MSO.
So it's still a wide open spaceand it's still growing.
A lot of money is still cominginto the to the dental space.
We do know that the first MSO inlaw happened back, at least the
first recorded one, the one thatpeople know about, it was in
(12:21):
2006 in North Carolina.
That was the very first one.
So we've seen it start to gathersome steam.
And what we're being told, whatthey shared with us at the
conference, is that there areliterally billions of dollars
kind of stacked on thesidelines, ready to come into
law, working its way in rightnow.
There are transactions alreadyhappening, and they're really
(12:41):
starting at the B2B businesslevel, these big business firms.
That's really kind of where it'sstarting, personal injury for
sure.
I don't know of any that havehappened in family law just yet.
Um is it because of the lack ofLSOs in family?
Uh well, it's just I I thinkit's because family is a little
further down the pecking order.
(13:02):
Um, I do know of one home officegroup.
So uh it's basically uh, I don'tknow what they call these, but a
bunch of families pool theirtheir capital and they start
their own investment vehicle.
And I believe there's been atransaction that is about to
close in Virginia of an MSO witha family law and estate planning
firm.
So I that's what I've been told.
(13:23):
I've talked to that group andthey've shared with me that
they're moving in thatdirection.
They think they're gonna get thedeal done.
So we'll see if that actuallyhappens.
I don't know if that's happenedjust yet.
So the way that they handle thefees is pretty simple.
They cannot do it on apercentage basis.
So, like if the law firm does amillion dollars, the MSO can't
say we get 50% of all the moneythat you bring in as a law firm.
(13:47):
They have to do it on a monthlyfee basis or a cost plus basis.
So if it's cost plus 30% orwhatever the case is, that's how
that's how they do that.
That's how they get around Rule5.4, which prohibits the the
sharing of attorney's fees withnon-lawyers.
Make sense?
SPEAKER_00 (14:02):
Yeah.
So for the MS, so step one,create your MSO or called an LSO
now.
Um, in order to get paid, it hasto be a retainer-based monthly
fee so that you're not sharinglawyer fees.
SPEAKER_01 (14:16):
Yeah, and I would say anyone that's looking to do
this, create their own MSO, youneed to get legal help for that.
I mean, we we are looking at itright now, and we've retained or
we're going to retain a firm tohelp us put that together for
our firm just to have thatthere, which is part of our
prep.
Hey, family law firm leaders, mypartner Tony Carls just released
his book where he lays bare ourprecise blueprint for growing
(14:39):
sterling lawyers from zero to 17million.
This is the blueprint that westill use daily.
And Tony explains it in verysimple terms.
The truth is, this is not simpleto do.
Success requires and demandshard work, but if you have the
patience and the work ethic todo it, your family law firm will
(14:59):
succeed.
SPEAKER_00 (15:01):
As you were talking to the people at the conference
as it relates to MSOs andcapital injections, is the idea
to, or do people believe it'llit'll go the same way the the
DSOs went, and that there'll besome large conglomerates that
come out, they consolidate abunch of small firms in a given
area so that they create a fullbrand awareness?
SPEAKER_01 (15:23):
Well, they didn't talk about that in like in a
formal context at the conferenceand how they see it happening in
law.
I had a bunch of sidebarconversations with this some of
the speakers, and in general,what they anticipate will happen
is a kind of a repeat of whatwe've seen happen in some of
these other professionalservices where they'll come in,
(15:43):
they'll buy some of the biggerplayers that they call kind of
platforms.
And then once they acquire aplatform, then they'll start
acquiring other smallernon-platform firms to fold into
that and bolt on or whatever,whatever their strategy is.
So um that's how they see thatthat coming, which is I'm gonna
get to in a second on what weare doing as a firm to prepare
(16:06):
for that.
So, okay, so the first big forcethat I see is the are the ABSs
growing outside of Arizona.
The second are these MSOs cominginto law.
It's already happening, and Isee it coming into family law in
the next two to three years in abig in a big way.
Third one is uh all of thisconsolidation has kind of poured
(16:27):
gas on the competitive pressuresthat we already see right now
with respect to especiallymarketing and client acquisition
costs.
And so this consolidation, Ithink, is going to certainly amp
that up.
The competitive pressures arecoming, they're gonna trickle
down to us and family law aswell.
So um private equity moneychanges everything.
And one thing I noticed at thisconference, because you had, you
(16:50):
know, you had you had the um thetrade show out there outside the
conference.
Every one of those companies,almost every single one of them,
were owned by private equity.
So private equity is acquiringthese AI companies.
They're coming in and they'realready in the tent.
They are already in our space.
And now that they can see ourdata and they can see what's
(17:11):
happening with respect totransactions, they have a lot of
intelligence on acquiring thesefirms and amping up the
competitive pressure.
So we're seeing we're gonna seemore and more competitive
pressure, which will force firmsto consolidate, I think, a
little bit more.
So, and private equity money,private equity firms love law.
(17:32):
Okay, they love it.
It's recession resistant to someextent.
It's not as cyclical as manyother areas of the economic
sector.
Law firms are scalable.
Um, they like law family lawfirms.
I've talked to two privateequity companies, and both of
them were like, yeah, we reallylike family law firms.
We like the model.
It's very predictable revenue.
There's not this volatile set,you know, spikes that happen
(17:55):
within personal injury whereyou'll have, you know, 10 months
of kind of normal settlements,then you'll have that big mega
settlement, which will spikeeverything up, which makes fee
sharing a little bit harderwhenever you have, you know, a
10x event um on a settlement, ona harvest like that.
So um they they like family law.
So that's kind of interesting tohear.
(18:16):
Um, and across the board, Tyler,we heard, yeah, 12 to 36 months,
you're gonna see a lot of lawfirms transact.
SPEAKER_00 (18:27):
I think this is a really exciting kind of
rose-colored glasses.
You know, all this money isbeing poured in.
Let's talk about the negativeside.
What bad things couldpotentially happen as a result
of all of this change?
SPEAKER_01 (18:39):
Well, I think the competitive pressures are gonna
be much more acute than theyeven are today.
And if firms aren't ready forthat, they don't have real good
control of their numbers, theircost per acquisition, what it
takes to get a client, I thinkthey're gonna be in real big
trouble.
So, uh, and we've got a coupleyears to prepare for that, I
believe, to some extent.
So there's a lot of time left onthe clock to kind of prep for
(19:02):
these opportunities as well asthese threats.
So I know that you've been apart of our discussions at
Sterling Lawyers on what we arethinking through on preparing
our firm for competitivepressures, for MSO
opportunities.
And um, what we are doinginternally is that you know, we
have a law firm here and we aregonna create an MSO that will
(19:27):
meet the compliance standards.
We've already talked with an Sethicist, and we're going to put
her under retainer to make sureeverything we do with respect to
the MSO is completely up tocode, so to speak.
So we're gonna formalize thatstructure.
Um, we are also preparing forthe competitive pressures by
just being very, very direct andthoughtful about making sure we
(19:49):
get to the right margins thatmake sure we're really healthy
for volatility in themarketplace as some of this
consolidation starts to happen.
So for us, what that looks likeis we need to get our margins
north of 25%.
I think that would give us ahealthy standing to withstand
some of these pressures.
So that requires, in our case,quite a bit of work to and time
(20:10):
to get there, to get our coststructure where it needs to be.
Um so we're working, we'reworking hard on that.
Another thing we're doing as afirm is we're starting to focus
on acquiring other firms that wecould bring into our family of
law firms.
And we think could help in agreat way the owners of these
other law firms.
And together, I think we can wecan create some defense and
(20:33):
opportunity to what's happeningwith MSOs, what's happening with
private equity money coming inand competitive pressures.
I don't want to get into asituation where we are forced to
sell because there's just toomuch pressure.
We want to get to be one ofthose big players where we can
withstand that and provide thatinsulation to some of the other
smaller law firms as well.
SPEAKER_00 (20:53):
So 100%.
I think one of the benefits ofthat ideology and what you and
and Jeff and Tony have built atSterling is in my opinion,
creating the right LSO willactually allow attorneys to live
their best life because theywon't have to worry about
billing, they won't have toworry about HR or cash flow.
(21:16):
They'll be able to be a greatattorney and know that they're
part of an organization that'sgrowing and thriving.
SPEAKER_01 (21:22):
Yeah, that's absolutely true.
The majority of lawyers Iinterface with is are are
lawyers who look, I just want tobe an excellent lawyer.
I want to take care of myclients, I want to be proud of
what I do, I want to offer goodservice and know I can go to bed
at night knowing I gave my alland I gave really good service
to my clients.
That's like across the board ofhow most attorneys look at their
(21:42):
craft.
Um, one more thing that I forgotto mention that we are that I'm
in particular doing right now isthere are a lot of really good
models out there, Tyler, for usto look at and get a sense for
the timing and the structure ofsome of these MSO deals, how
it's going to change ourmarketplace a little bit by
looking at what's happened indental and medical and vets and
(22:06):
all these other spaces of theseprofessional service corp
companies where MSOs have comeinto their space.
So I'm studying that right now.
I'm my research assistants isgoing after everything she can
find to pull this data togetherso we can get a real good feel
for how quickly and how it'llhappen.
What will the multiples be like,how long will it take, all that
(22:28):
kind of stuff.
I think we can get some realgood insight and anticipate
what's happening around thecorner.
SPEAKER_00 (22:33):
It is going to be very fun to watch.
I love that you're on thebleeding edge.
We need to keep our listeners upto speed as we learn more.
So appreciate your time.
Excited for the next onealready.
In my opinion, creating the right LSO will
actually allow attorneys to livetheir best life because they
won't have to worry aboutbilling.
They won't have to worry aboutHR or cash flow.
They'll be able to be a greatattorney and know that they're
part of an organization that'sgrowing and thriving.
(00:20):
Welcome back to the SterlingFamily Law Show.
You know, this podcast isdesigned for family attorneys to
build and live out the uh thelaw firm of their dreams.
And uh Jeff Hughes, who is myco-host as well as the
co-founder of Sterling Law, wasjust at the Business of Law
conference.
And I said, Jeff, you got totell us everything that's
(00:41):
happening here.
I know our listeners will wantto find out how that went.
So give us the breakdown.
You know, what was the agenda?
What did you learn?
What were your biggesttakeaways?
SPEAKER_01 (00:51):
Yeah, I'm really excited to share with everyone
what we discovered at theBusiness of Law conference down
in Scottsdale.
So Jeff Curlin and I went a fewweeks ago.
And what I'm gonna share withyou is our three forces that are
converging in family law.
And if you stay to the end, I'mgonna talk about what we as a
firm are doing to prepare and tocounter those forces that are
(01:13):
coming.
So let me jump into it.
So the reason why we wanted togo to this conference is because
it's mainly geared towardpersonal injury attorneys.
And PI attorneys is where, youknow, personal injury is where
all the money's at, the bigmoney.
And so they tend to be on thecutting edge of developments.
The vendors that are there startfirst in personal injury before
(01:35):
they move into other areas ofthe law.
And I wanted to hear what washappening with the structure of
these PI firms under the new ABSrules coming out of Arizona.
I wanted to figure out what'sgoing on with MSOs.
And I wanted to kind of peekunder the tent and see what's
going on with all of thesevendors that are coming up with
these cutting-edge products, AIproducts, and so forth that
(01:57):
first start servicing PI firmsand maybe we could steal an idea
or two.
So that's the context for goingto this particular conference.
And I believe we're one of twofamily law attorneys at the
conference when there were 100plus PI firms that were there.
So um, so that that's thecontext for for going there and
(02:17):
and and visiting that particularconference.
So let me start first with uhthat makes sense so far, Tyler.
I know I'm like droning on here.
SPEAKER_00 (02:24):
No, it's great.
I think the one the only thing Iwould add is as we think about
marketing for family law firms,we know that PI firms have
always led the charge as itrelates to spending lots of
advertising dollars uh buildingbrands.
You know, family attorneyshaven't had to build brands yet
because uh of where the marketis, but PI has had to crack that
code.
So I totally agree that they'reon the cutting edge as it
(02:46):
relates to doing whatever ittakes in new uh interesting
endeavors to help their firmsgrow.
SPEAKER_01 (02:52):
Yeah, on the marketing point, what's
interesting, there were aboutseven of the top 10 size-wise PI
firms represented at theconference.
So we had the big dogs that werethere that many of them actually
spoke and had little segmentsthat they gave a talk on,
whether that be on marketing oror on MSOs or whatever.
So, okay, so first off, forcenumber one, this is the big
(03:15):
takeaway, is that ABSs areflourishing.
And now let me just break downwhat that is.
ABS is an alternative businessstructure.
And currently, Arizona is theonly U.S.
state that allows non-lawyerownership of law firms.
So let me just kind of put somecaveat around that.
Utah is exploring this rightnow.
(03:36):
They have what they're calling asandbox.
We're testing it in a combined,a con a confined environment.
Washington state um is hasannounced that they're going to
be doing something similar toUtah.
Um, I just two weeks ago,Tennessee announced that they're
looking at this.
There is non-lawyer ownershipcoming out of Puerto Rico.
And in Washington, D.C., you canown part of a law firm, and
(04:00):
that's mainly set up for all thelobbyists that are out there.
So um it's it's the first,Arizona's the first state to
completely deregulate um theownership of law firms under
Rule 5.4 of the of the ABA modelcode.
SPEAKER_00 (04:14):
So And Jeff, when did that happen?
SPEAKER_01 (04:16):
That happened in 20, I believe.
Yeah.
So at the conference, we had theArizona Supreme Court Chief
Justice that was there.
She came and talked about thehistory of it within Arizona,
why they did it.
It was super enlightening.
So what she shared was there arecurrently 152 ABS firms that are
in existence, with about 40 to50 that are in some stage of
(04:41):
pending or review or whateverthe case is.
And I had always assumed thatthese AB, Arizona did this
because they wanted to increasethe access to justice for those
who are unrepresented, whocouldn't find or couldn't
afford, rather, legal counsel.
That was always my assumption.
But she actually said, no, thatwas not why they came up with
(05:02):
this structure.
They really did it to help soloand small firms compete, um,
allowing those firms to take oncapital and compete better with
the big, bigger firms that wereout there.
Access to justice was a subpartof that, and they believe that
that was part of theconsideration, but it certainly
wasn't the major one, which wasa pretty, pretty big surprise to
(05:23):
me.
And she also explained in detailwhat Arizona has done to really
get this right.
They studied it for a longperiod of time, and they were
very thoughtful with how theywent into non-lawyer ownership.
They require an ethical lawyerthat for each of these ABSs.
There's all kinds of like hoopsthat these different firms have
(05:44):
to jump through.
And really, what they have foundis that the program has been
wildly successful.
Other states are reaching outright now to try to understand
what they've done, why they'vedone it, how it's actually
worked.
And I would not be surprised inthe next two or three years we
see multiple more states comingon board with this type of type
of program.
And always the hand-wringing andthe concern has been around the
(06:08):
ethics.
The idea is this you allownon-lawyer capital money to come
into a law firm that will takeover the firm and will force non
unethical decisions, right?
By the lawyers.
And that's fair, fair, totallyfair point.
That may happen, and at somepoint it will happen, no doubt.
But as a whole, she said thatethics has not been an issue
(06:32):
whatsoever.
It has been no different thanwhat has what has existed for
100 plus years with respect tothe ethics, lawyers following
the ethical guidelines, and soforth.
So that was that's been veryinteresting, and it's totally
cuts against all of theprotectionist type arguments
that we can't have non-lawyerownership of law firms.
(06:54):
So, in my view, it was prettyclear ABS's have been successful
in Arizona.
They're getting they're becomingmore successful, they're
growing.
Other states are going to startfollowing, and we'll see what
happens.
And one interesting point onthis, Tyler.
California, a couple years ago,maybe four or five years ago,
started exploring, they puttogether kind of a task group or
(07:16):
a committee or something likethat to look at non-lawyer
ownership.
And then they completely reversecourse and have become outright
hostile to non-lawyer ownership.
And the head scratcher to me ismy one of my closest friends, my
roommate from law school, is apartner in a really large firm
down there in San Diego.
(07:38):
And he has told me likehair-raising stories of the
level of absolute rankcorruption that exists top to
bottom in California within thelegal bar.
So the ethics, um, just in theway he describes it, just don't
exist there.
It's so bad that you can't doanything about it because the
lawyers just run it and theythey run it to their benefit,
(08:01):
for their benefit.
So um maybe that's why they'reso against these ABS um
structures coming intoCalifornia.
SPEAKER_00 (08:08):
Wow, I mean, that's insane.
Now, I know you're not an experton ABS and so you don't claim to
be, but I remember when you weretelling us, our team here about
this opportunity.
In my head, I thought, great, weshould go acquire a firm in
Arizona tomorrow, right?
But it's not that easy, right?
There's a process and approvalsand all the things, all the
(08:29):
hoops to jump through, correct?
SPEAKER_01 (08:30):
Yeah, yeah.
And I have no interest injumping through those hoops.
I don't think we need to dothat.
But um, regardless, it's a lotof uh it's it's interesting.
So that's really the first bigtakeaway of what I consider
these forces that are converginginto family law, and we need to
be prepared for them.
SPEAKER_00 (08:47):
Just to stay on that subject and we can cut around
this, but um were there anypredictions during this section
of what the future may hold asit relates to private equity
entering law firms?
Are they gonna do PI first andthen into family?
Like what were the kind offuturists thinking and saying
about this?
SPEAKER_01 (09:06):
Yeah, I'll get to that in a moment, but there
weren't a lot around the ABSstructure because that's just in
Arizona, and we're alreadyseeing tons of private equity
money come into Arizona forthose ABS structures.
Like, for example, KPMG, one ofthe largest accounting firms in
the world, started their own lawfirm a couple months ago, and
they did that out of Arizona.
So we're seeing private equitymoney coming into that, but
(09:30):
that's just in Arizona, it'sreally confined, and that's the
only state that allows thesestructures right now in the way
that they do.
But there were predictions, andI'm gonna get to those in a
second, with respect to otherways private equity money is
coming into family law.
So let me jump over to the MSO.
So MSO stands for managedservice organization.
(09:51):
You you could hear it call itLSO or whatever.
And so, what they are is aseparate entity from a law firm
that essentially takes all ofthe assets out of the law firm
with the exception of the clientinformation or the client
agreements, the retaineragreements, and the lawyers.
So all the other expenses comeout of the law firm entity and
(10:15):
they go into this managedservice organization that can be
owned by non-lawyers.
Okay.
And so it strips all thosenon-legal assets out except
client info and the lawyers.
These MSOs cannot adviseclients, only the lawyers can
advise clients on legal matters.
So there is a pretty bright,bright line there with respect
(10:37):
to that.
And those are already happeningin law today.
Now, everyone has seen these insome fashion or another in other
professional services.
So look at dental, okay, AspenDental, Forward Dental.
The largest group, the largestMSO is Heartland Dental.
Now, these are all managedservice organizations for
(10:57):
dentists.
And in most states, just likewith law firms, you have to be a
dentist to own a dentalpractice.
And so the way that thatnon-dental money, private equity
money, other private investorsor whatever, are getting into
the dental space is throughthese MSOs.
And so we are really the lastprofession to see this happen in
(11:19):
our profession where MSOs arecoming into law.
We've seen it in medical,especially in elective medical
stuff like plastic surgery andthings like that.
We've seen it obviously indental, with the example I just
gave.
We've seen it in the vet space.
Uh, we've seen it in all ofthese medical specialties from
even like dermatology.
There's like, you know, that'sone of the biggest ones that
I've that I've seen.
(11:40):
Um, we've seen it inengineering, uh, where you you
have uh you have these um MSOsthat are buying these
engineering firms, which is youwouldn't ordinarily think of
that as a as a place they wouldgo, but they have done that and
and to a large degree there.
So right now it's it's not aspro it it hasn't proliferated as
much as you might think it has.
(12:01):
Um in the dental space, only 13%of dental practices are owned by
an MSO.
So it's still a wide open spaceand it's still growing.
A lot of money is still cominginto the to the dental space.
We do know that the first MSO inlaw happened back, at least the
first recorded one, the one thatpeople know about, it was in
(12:21):
2006 in North Carolina.
That was the very first one.
So we've seen it start to gathersome steam.
And what we're being told, whatthey shared with us at the
conference, is that there areliterally billions of dollars
kind of stacked on thesidelines, ready to come into
law, working its way in rightnow.
There are transactions alreadyhappening, and they're really
(12:41):
starting at the B2B businesslevel, these big business firms.
That's really kind of where it'sstarting, personal injury for
sure.
I don't know of any that havehappened in family law just yet.
Um is it because of the lack ofLSOs in family?
Uh well, it's just I I thinkit's because family is a little
further down the pecking order.
(13:02):
Um, I do know of one home officegroup.
So uh it's basically uh, I don'tknow what they call these, but a
bunch of families pool theirtheir capital and they start
their own investment vehicle.
And I believe there's been atransaction that is about to
close in Virginia of an MSO witha family law and estate planning
firm.
So I that's what I've been told.
(13:23):
I've talked to that group andthey've shared with me that
they're moving in thatdirection.
They think they're gonna get thedeal done.
So we'll see if that actuallyhappens.
I don't know if that's happenedjust yet.
So the way that they handle thefees is pretty simple.
They cannot do it on apercentage basis.
So, like if the law firm does amillion dollars, the MSO can't
say we get 50% of all the moneythat you bring in as a law firm.
(13:47):
They have to do it on a monthlyfee basis or a cost plus basis.
So if it's cost plus 30% orwhatever the case is, that's how
that's how they do that.
That's how they get around Rule5.4, which prohibits the the
sharing of attorney's fees withnon-lawyers.
Make sense?
SPEAKER_00 (14:02):
Yeah.
So for the MS, so step one,create your MSO or called an LSO
now.
Um, in order to get paid, it hasto be a retainer-based monthly
fee so that you're not sharinglawyer fees.
SPEAKER_01 (14:16):
Yeah, and I would say anyone that's looking to do
this, create their own MSO, youneed to get legal help for that.
I mean, we we are looking at itright now, and we've retained or
we're going to retain a firm tohelp us put that together for
our firm just to have thatthere, which is part of our
prep.
Hey, family law firm leaders, mypartner Tony Carls just released
his book where he lays bare ourprecise blueprint for growing
(14:39):
sterling lawyers from zero to 17million.
This is the blueprint that westill use daily.
And Tony explains it in verysimple terms.
The truth is, this is not simpleto do.
Success requires and demandshard work, but if you have the
patience and the work ethic todo it, your family law firm will
(14:59):
succeed.
SPEAKER_00 (15:01):
As you were talking to the people at the conference
as it relates to MSOs andcapital injections, is the idea
to, or do people believe it'llit'll go the same way the the
DSOs went, and that there'll besome large conglomerates that
come out, they consolidate abunch of small firms in a given
area so that they create a fullbrand awareness?
SPEAKER_01 (15:23):
Well, they didn't talk about that in like in a
formal context at the conferenceand how they see it happening in
law.
I had a bunch of sidebarconversations with this some of
the speakers, and in general,what they anticipate will happen
is a kind of a repeat of whatwe've seen happen in some of
these other professionalservices where they'll come in,
(15:43):
they'll buy some of the biggerplayers that they call kind of
platforms.
And then once they acquire aplatform, then they'll start
acquiring other smallernon-platform firms to fold into
that and bolt on or whatever,whatever their strategy is.
So um that's how they see thatthat coming, which is I'm gonna
get to in a second on what weare doing as a firm to prepare
(16:06):
for that.
So, okay, so the first big forcethat I see is the are the ABSs
growing outside of Arizona.
The second are these MSOs cominginto law.
It's already happening, and Isee it coming into family law in
the next two to three years in abig in a big way.
Third one is uh all of thisconsolidation has kind of poured
(16:27):
gas on the competitive pressuresthat we already see right now
with respect to especiallymarketing and client acquisition
costs.
And so this consolidation, Ithink, is going to certainly amp
that up.
The competitive pressures arecoming, they're gonna trickle
down to us and family law aswell.
So um private equity moneychanges everything.
And one thing I noticed at thisconference, because you had, you
(16:50):
know, you had you had the um thetrade show out there outside the
conference.
Every one of those companies,almost every single one of them,
were owned by private equity.
So private equity is acquiringthese AI companies.
They're coming in and they'realready in the tent.
They are already in our space.
And now that they can see ourdata and they can see what's
(17:11):
happening with respect totransactions, they have a lot of
intelligence on acquiring thesefirms and amping up the
competitive pressure.
So we're seeing we're gonna seemore and more competitive
pressure, which will force firmsto consolidate, I think, a
little bit more.
So, and private equity money,private equity firms love law.
(17:32):
Okay, they love it.
It's recession resistant to someextent.
It's not as cyclical as manyother areas of the economic
sector.
Law firms are scalable.
Um, they like law family lawfirms.
I've talked to two privateequity companies, and both of
them were like, yeah, we reallylike family law firms.
We like the model.
It's very predictable revenue.
There's not this volatile set,you know, spikes that happen
(17:55):
within personal injury whereyou'll have, you know, 10 months
of kind of normal settlements,then you'll have that big mega
settlement, which will spikeeverything up, which makes fee
sharing a little bit harderwhenever you have, you know, a
10x event um on a settlement, ona harvest like that.
So um they they like family law.
So that's kind of interesting tohear.
(18:16):
Um, and across the board, Tyler,we heard, yeah, 12 to 36 months,
you're gonna see a lot of lawfirms transact.
SPEAKER_00 (18:27):
I think this is a really exciting kind of
rose-colored glasses.
You know, all this money isbeing poured in.
Let's talk about the negativeside.
What bad things couldpotentially happen as a result
of all of this change?
SPEAKER_01 (18:39):
Well, I think the competitive pressures are gonna
be much more acute than theyeven are today.
And if firms aren't ready forthat, they don't have real good
control of their numbers, theircost per acquisition, what it
takes to get a client, I thinkthey're gonna be in real big
trouble.
So, uh, and we've got a coupleyears to prepare for that, I
believe, to some extent.
So there's a lot of time left onthe clock to kind of prep for
(19:02):
these opportunities as well asthese threats.
So I know that you've been apart of our discussions at
Sterling Lawyers on what we arethinking through on preparing
our firm for competitivepressures, for MSO
opportunities.
And um, what we are doinginternally is that you know, we
have a law firm here and we aregonna create an MSO that will
(19:27):
meet the compliance standards.
We've already talked with an Sethicist, and we're going to put
her under retainer to make sureeverything we do with respect to
the MSO is completely up tocode, so to speak.
So we're gonna formalize thatstructure.
Um, we are also preparing forthe competitive pressures by
just being very, very direct andthoughtful about making sure we
(19:49):
get to the right margins thatmake sure we're really healthy
for volatility in themarketplace as some of this
consolidation starts to happen.
So for us, what that looks likeis we need to get our margins
north of 25%.
I think that would give us ahealthy standing to withstand
some of these pressures.
So that requires, in our case,quite a bit of work to and time
(20:10):
to get there, to get our coststructure where it needs to be.
Um so we're working, we'reworking hard on that.
Another thing we're doing as afirm is we're starting to focus
on acquiring other firms that wecould bring into our family of
law firms.
And we think could help in agreat way the owners of these
other law firms.
And together, I think we can wecan create some defense and
(20:33):
opportunity to what's happeningwith MSOs, what's happening with
private equity money coming inand competitive pressures.
I don't want to get into asituation where we are forced to
sell because there's just toomuch pressure.
We want to get to be one ofthose big players where we can
withstand that and provide thatinsulation to some of the other
smaller law firms as well.
SPEAKER_00 (20:53):
So 100%.
I think one of the benefits ofthat ideology and what you and
and Jeff and Tony have built atSterling is in my opinion,
creating the right LSO willactually allow attorneys to live
their best life because theywon't have to worry about
billing, they won't have toworry about HR or cash flow.
(21:16):
They'll be able to be a greatattorney and know that they're
part of an organization that'sgrowing and thriving.
SPEAKER_01 (21:22):
Yeah, that's absolutely true.
The majority of lawyers Iinterface with is are are
lawyers who look, I just want tobe an excellent lawyer.
I want to take care of myclients, I want to be proud of
what I do, I want to offer goodservice and know I can go to bed
at night knowing I gave my alland I gave really good service
to my clients.
That's like across the board ofhow most attorneys look at their
(21:42):
craft.
Um, one more thing that I forgotto mention that we are that I'm
in particular doing right now isthere are a lot of really good
models out there, Tyler, for usto look at and get a sense for
the timing and the structure ofsome of these MSO deals, how
it's going to change ourmarketplace a little bit by
looking at what's happened indental and medical and vets and
(22:06):
all these other spaces of theseprofessional service corp
companies where MSOs have comeinto their space.
So I'm studying that right now.
I'm my research assistants isgoing after everything she can
find to pull this data togetherso we can get a real good feel
for how quickly and how it'llhappen.
What will the multiples be like,how long will it take, all that
(22:28):
kind of stuff.
I think we can get some realgood insight and anticipate
what's happening around thecorner.
SPEAKER_00 (22:33):
It is going to be very fun to watch.
I love that you're on thebleeding edge.
We need to keep our listeners upto speed as we learn more.
So appreciate your time.
Excited for the next onealready.
Popular Podcasts
Stuff You Should Know
If you've ever wanted to know about champagne, satanism, the Stonewall Uprising, chaos theory, LSD, El Nino, true crime and Rosa Parks, then look no further. Josh and Chuck have you covered.
Dateline NBC
Current and classic episodes, featuring compelling true-crime mysteries, powerful documentaries and in-depth investigations. Follow now to get the latest episodes of Dateline NBC completely free, or subscribe to Dateline Premium for ad-free listening and exclusive bonus content: DatelinePremium.com
Are You A Charlotte?
In 1997, actress Kristin Davis’ life was forever changed when she took on the role of Charlotte York in Sex and the City. As we watched Carrie, Samantha, Miranda and Charlotte navigate relationships in NYC, the show helped push once unacceptable conversation topics out of the shadows and altered the narrative around women and sex. We all saw ourselves in them as they searched for fulfillment in life, sex and friendships. Now, Kristin Davis wants to connect with you, the fans, and share untold stories and all the behind the scenes. Together, with Kristin and special guests, what will begin with Sex and the City will evolve into talks about themes that are still so relevant today. "Are you a Charlotte?" is much more than just rewatching this beloved show, it brings the past and the present together as we talk with heart, humor and of course some optimism.