Should Law Firms Go Public?

canstockphoto3283240Not all law firms are financially stable. While they continue to get clients, some are still finding ways to keep their finances in a sound state. This is a reality particularly as many clients now are becoming more cost conscious. Reports have noted that the complaints of some clients about being overcharged by lawyers and not availing of quality service.

A Georgetown University law professor, Jonathan Molot, has noted that although the partnership structure of law firms is fine, there’s a tendency for partners to withdraw later on when they retire or leave the company for another job. For this reason, he is calling for firms to go public instead to gain more financial benefits. Molot cited that the current partnership structure is not ideal for long-term growth and pushes his proposal despite its non-traditional approach.

In a normal scenario, equity partners also known as shareholders of a law firm usually contribute capital to sustain the company, according to personal injury attorneys. These capital contributions, they said, are made one time only and are returned when a lawyer leaves the firm. This strategy also ensures the firm has cash reserves thereby avoiding the need to loan from banks. Meanwhile, the partners earn a compensation from the firm’s profits each year after expenses are paid.

Benefits of Going Public

One of the main advantages when a law firm goes public is the opportunity to receive funding from outsiders. This means the firm will be able to enjoy cash which they can use then to invest in other areas such as new staff, technology and training for their lawyers.

Outside investors can also buy shares of the law firm which in turn can provide permanent equity to the company. Retired shareholders will then be given incentives to invest in younger lawyers.

With regards to retiring partners, Molot proposed that they will continue to own stock in the firm but instead of receiving a salary and bonus, they will earn dividends. With this scenario, investors would care about ensuring that the business remains vibrant in the long term considering that they have a share in the company.

Business management experts confirm that law firms will be able to grow faster when they can raise equity capital with the help of outside investors rather than relying on their partners’ capital. Also, their listed paper will allow them to make acquisitions such as a smaller law firm from which they can earn profits moving forward. When shares are listed, share incentives can as well be more effectively operated.

Law firms best suited for public listing are those that don’t face a risk of key people leaving. A company considered to be a consolidator in a fragmented market is also most suited.

Currently, law firms in the U.S. remain to be privately owned. State judiciaries, specifically the supreme court in each state, still regulate the rules on whether non-lawyers will be allowed to own law firms. So far, no state in the U.S. has seriously considered making changes that would allow a law firm to be publicly traded. Right now, only Washington D.C. allows non-lawyers to be shareholders of a law firm.