What Non-Lawyer Firm Ownership Will Mean for Your Law Firm
7–9 minutes to read
Law firm owners, we need to talk about something that’s heading your way — a new development that could signal the end of your firm as you know it.
We’re talking about changes to Rule 5.4.
Rule 5.4: Professional Independence of a Lawyer prohibits non-lawyer ownership of law firms and fee-sharing by lawyers with non-lawyers. Under Rule 5.4, legal services must be provided solely by a law firm that is owned, managed, and financed exclusively by lawyers.
But in 2020, Arizona eliminated Rule 5.4 in favor of alternative business structures (ABS), making it possible for non-lawyers to invest in and own law firms. Since then, other states have started following suit, such as Utah’s “regulatory sandbox” pilot program for firms to test alternative business structures.
<It’s only a matter of time before this legal industry standard disappears altogether.
What does that mean for you?
As it stands currently, only lawyers can own law firms and even compete with other lawyers.
But once non-lawyers can start owning, operating, and fee-sharing with law firms, seasoned business professionals — think Fortune 500 CEOs, venture capitalists, and hedge funds — will start entering the scene.
These are people who are experts at maximizing efficiency, gaining market share, and creating a competitive edge in the businesses they lead, potentially leaving you in the dust.
This change will bring new threats to your market — but also new opportunities.
With a little preparation, you can stay ahead of the curve and leverage these changes to the benefit of your law firm. Read on to discover how.
Threats to Your Law Firm Without Rule 5.4
Fortune 500 CEOs and private equity are no strangers to growing and scaling businesses. Their competitive edge is unmatched, and if they have full access to entering the legal market, they’re going to do everything in their power to bring competing law firms down — and that’s mostly because they’ll have more access to investors that traditional lawyer-run firms don’t.
Here are some of the biggest threats your firm will face:
Massive Budgets to Compete Against
According to Forbes, marketing matters more now than it ever has before — but only a few firms are willing or able to make the large investments it takes to truly dominate their market with their law firm’s messaging.
Guess who wouldn’t think twice about that amount of money?
To hedge fund managers, that’s pocket change.
If the cost of acquisition in a legal market is $3,000 per case, nothing is stopping them from paying $10,000 to beat out competitors with fewer resources.
It’s hard to compete with that.
Great Talent You Wish You Could Attract
In most non-lawyer corporate structures, one of the things that attracts great talent and great leaders is the ability to share in equity and share in stock — but lawyer-owned firms can only do that with other lawyers.
With the elimination of Rule 5.4 and the introduction of non-lawyer firm ownership and fee sharing, there’s going to be the opportunity to be able to attract the best people and the best talent with an equity package that was previously unavailable.
Personnel challenges will likely only get harder for you as non-lawyer ownership enters your market, so now is a good time to start planning to respond.
Industry Expansion & Consolidation
Throughout the entire legal industry — a $370 billion industry — there’s not a single firm in the world that generates even one percent of gross legal fees paid annually.
This is true even of large, established firms such as Kirkland and Ellis. This firm started in 1909 and generates $4.83 billion a year, with over 3,000 attorneys in 18 offices, and they don’t even get one percent of gross legal fees paid annually.
In a fragmented industry like legal, private equity firms will swoop in to consolidate as soon as they are able.
This happened in the dental industry a few decades ago, with the introduction of DSOs, or Dental Support Organizations.
Small, dentist-owned “mom and pop” dental practices used to be the standard, but then in the 1990s, private equity swooped in with the DSOs. Before you knew it, all those small practices started consolidating under DSO umbrellas, such as Aspen Dental.
Who do you think is now employed by Aspen Dental? The dentists who used to own the mom and pop shops.
Nine out of 10 DSOs are now owned by private equity, and by 2030, 50% of all dental practices will be owned by DSOs. Aspen Dental is in 46 states, with almost a thousand locations and 13,000 staff.
If you think for one minute that the same fate isn’t heading straight for committed law firm owners like you and the legal industry, it’s time to wake up.
The Looming Leadership Vacuum
No one enjoys thinking that their future is at risk, but for those in the legal industry, the threat is all too real. Check out some of these stats:
- 67% of all law firms in America are owned by baby boomers.
- Over 25% of all lawyers practicing today are over 65 years old.
- There’s almost been a 12% decrease in law school applications over the past year.
Baby boomers currently lead the industry, and they will soon have to leave their firms. What will happen when they’re all gone? What will the new regime of law firm owners look like? How will they combat the changes that are coming their way?
If you aren’t setting your practice up to live on after you, it could disappear forever. If that happens, then what was the point of it all?
Opportunities for Your Law Firm Without Rule 5.4
While many new threats are coming to the industry with the introduction of non-lawyer firm ownership, it’s important to realize that there are plenty of opportunities to seize as well.
The removal of Rule 5.4 gives law firms access to critical funding and the opportunity to partner and create new kinds of businesses that better serve the legal needs of modern America.
Here are the top opportunities you can start taking advantage of today:
Be the First to Innovate
Let’s face it: innovation has been slow to come to the legal industry.
That means those who act fast will gain a competitive advantage.
Former ABA President Judy Perry Martinez said, “We need new ideas. We’re one-fifth into the 21st century, yet we continue to rely on 20th century processes, procedures, and regulations.”
Something has to change.
Perhaps moving from a closed system to an open system is just the change this industry needs.
The fact that most law firms are significantly behind the times when it comes to keeping up with consumer expectations means that the firms that do adjust now will be leagues ahead of their competition — lawyer-owned or not.
To quote the late Steve Jobs, “Innovation is the ability to see change as an opportunity — not a threat.”
Steve Jobs also got another thing right: The ones that are willing to do what others aren’t are the ones who are going to gain the competitive advantage.
Differentiate With Client Experience
Today’s consumers expect a certain level of service. Most law firms are not providing it. Amazon is out here giving you minute-by-minute updates on your toothpaste delivery, while many clients working with lawyers can’t get a weekly update on their case.
More capital (whether you make it by successfully competing or attract it from investors) means you will be able to provide the highest level of support to your clients.
Without clients, you wouldn’t have a law firm.
When you invest in your client experience, it pays off in huge ways, both instantly and in the long run — and when you invest in your client experience in ways that competing lawyer-owned firms are not, you’ll beat them.
Treat Your Law Firm Like a Business
The only way compete with the venture capital and seasoned business leadership coming to the industry is to run your practice like a business.
You’ll need to invest in your own learning and growth. You’ll need to hire the right team to support the growth of your business and develop a great firm culture. You’ll need to keep a pulse on your law firm’s metrics and key performance indicators. You’ll need to build a differentiated brand and establish a strong presence in your community.
Here are a few areas to start rethinking as you adapt to the new legal landscape — one where non-lawyer ownership is a reality:
- What must you do to effectively lead your team?
- What sources of information will equip you to act as CEO of your law firm?
- How can you dial in your operations, systems, and processes?
- What opportunities are there for diversifying investments in your firm?
- How can you make sure that your firm brings in a predictable, consistent stream of new cases and reliable cash flow?
You are a CEO. Invest in your own learning and growth.
Strategically hire the right team to support the growth of your business.
Given these threats and opportunities, you now see the importance of treating your law firm like the business it is. It will be your ultimate competitive advantage.
If you’re ready to step into your role as leader of your law firm and take action to adapt to these changes, join Crisp Coach today.
It’s a closed-door community of like-minded law firm owners who are all focused on growing their law firms and establishing lasting legacies. It’s full of brave, selfless leaders like you who aren’t afraid of what the future holds.
Join them and see what you’re made of.