The Sterling Family Law Show

What I Learned About PRIVATE EQUITY at the 2025 Business of Law - #184

• Jeff Sterling Hughes

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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.

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📄 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

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SPEAKER_00:

In my opinion, creating the right LSO will actually allow attorneys to live their best life because they won't have to worry about billing. They won't have to worry about HR or cash flow. They'll be able to be a great attorney and know that they're part of an organization that's growing and thriving. Welcome back to the Sterling Family Law Show. You know, this podcast is designed for family attorneys to build and live out the uh the law firm of their dreams. And uh Jeff Hughes, who is my co-host as well as the co-founder of Sterling Law, was just at the Business of Law conference. And I said, Jeff, you got to tell us everything that's happening here. I know our listeners will want to find out how that went. So give us the breakdown. You know, what was the agenda? What did you learn? What were your biggest takeaways?

SPEAKER_01:

Yeah, I'm really excited to share with everyone what we discovered at the Business of Law conference down in Scottsdale. So Jeff Curlin and I went a few weeks ago. And what I'm gonna share with you is our three forces that are converging in family law. And if you stay to the end, I'm gonna talk about what we as a firm are doing to prepare and to counter those forces that are coming. So let me jump into it. So the reason why we wanted to go to this conference is because it's mainly geared toward personal injury attorneys. And PI attorneys is where, you know, personal injury is where all the money's at, the big money. And so they tend to be on the cutting edge of developments. The vendors that are there start first in personal injury before they move into other areas of the law. And I wanted to hear what was happening with the structure of these PI firms under the new ABS rules coming out of Arizona. I wanted to figure out what's going on with MSOs. And I wanted to kind of peek under the tent and see what's going on with all of these vendors that are coming up with these cutting-edge products, AI products, and so forth that first start servicing PI firms and maybe we could steal an idea or two. So that's the context for going to this particular conference. And I believe we're one of two family law attorneys at the conference when there were 100 plus PI firms that were there. So um, so that that's the context for for going there and and and visiting that particular conference. So let me start first with uh that makes sense so far, Tyler. I know I'm like droning on here.

SPEAKER_00:

No, it's great. I think the one the only thing I would add is as we think about marketing for family law firms, we know that PI firms have always led the charge as it relates to spending lots of advertising dollars uh building brands. You know, family attorneys haven't had to build brands yet because uh of where the market is, but PI has had to crack that code. So I totally agree that they're on the cutting edge as it relates to doing whatever it takes in new uh interesting endeavors to help their firms grow.

SPEAKER_01:

Yeah, on the marketing point, what's interesting, there were about seven of the top 10 size-wise PI firms represented at the conference. So we had the big dogs that were there that many of them actually spoke and had little segments that they gave a talk on, whether that be on marketing or or on MSOs or whatever. So, okay, so first off, force number one, this is the big takeaway, is that ABSs are flourishing. And now let me just break down what that is. ABS is an alternative business structure. And currently, Arizona is the only U.S. state that allows non-lawyer ownership of law firms. So let me just kind of put some caveat around that. Utah is exploring this right now. They have what they're calling a sandbox. We're testing it in a combined, a con a confined environment. Washington state um is has announced that they're going to be doing something similar to Utah. Um, I just two weeks ago, Tennessee announced that they're looking at this. There is non-lawyer ownership coming out of Puerto Rico. And in Washington, D.C., you can own part of a law firm, and that's mainly set up for all the lobbyists that are out there. So um it's it's the first, Arizona's the first state to completely deregulate um the ownership of law firms under Rule 5.4 of the of the ABA model code.

SPEAKER_00:

So And Jeff, when did that happen?

SPEAKER_01:

That happened in 20, I believe. Yeah. So at the conference, we had the Arizona Supreme Court Chief Justice that was there. She came and talked about the history of it within Arizona, why they did it. It was super enlightening. So what she shared was there are currently 152 ABS firms that are in existence, with about 40 to 50 that are in some stage of pending or review or whatever the case is. And I had always assumed that these AB, Arizona did this because they wanted to increase the access to justice for those who are unrepresented, who couldn't find or couldn't afford, rather, legal counsel. That was always my assumption. But she actually said, no, that was not why they came up with this structure. They really did it to help solo and small firms compete, um, allowing those firms to take on capital and compete better with the big, bigger firms that were out there. Access to justice was a subpart of that, and they believe that that was part of the consideration, but it certainly wasn't the major one, which was a pretty, pretty big surprise to me. And she also explained in detail what Arizona has done to really get this right. They studied it for a long period of time, and they were very thoughtful with how they went into non-lawyer ownership. They require an ethical lawyer that for each of these ABSs. There's all kinds of like hoops that these different firms have to jump through. And really, what they have found is that the program has been wildly successful. Other states are reaching out right now to try to understand what they've done, why they've done it, how it's actually worked. And I would not be surprised in the next two or three years we see multiple more states coming on board with this type of type of program. And always the hand-wringing and the concern has been around the ethics. The idea is this you allow non-lawyer capital money to come into a law firm that will take over the firm and will force non unethical decisions, right? By the lawyers. And that's fair, fair, totally fair point. That may happen, and at some point it will happen, no doubt. But as a whole, she said that ethics has not been an issue whatsoever. It has been no different than what has what has existed for 100 plus years with respect to the ethics, lawyers following the ethical guidelines, and so forth. So that was that's been very interesting, and it's totally cuts against all of the protectionist type arguments that we can't have non-lawyer ownership of law firms. So, in my view, it was pretty clear ABS's have been successful in Arizona. They're getting they're becoming more successful, they're growing. Other states are going to start following, and we'll see what happens. And one interesting point on this, Tyler. California, a couple years ago, maybe four or five years ago, started exploring, they put together kind of a task group or a committee or something like that to look at non-lawyer ownership. And then they completely reverse course and have become outright hostile to non-lawyer ownership. And the head scratcher to me is my one of my closest friends, my roommate from law school, is a partner in a really large firm down there in San Diego. And he has told me like hair-raising stories of the level of absolute rank corruption that exists top to bottom in California within the legal bar. So the ethics, um, just in the way he describes it, just don't exist there. It's so bad that you can't do anything about it because the lawyers just run it and they they run it to their benefit, for their benefit. So um maybe that's why they're so against these ABS um structures coming into California.

SPEAKER_00:

Wow, I mean, that's insane. Now, I know you're not an expert on ABS and so you don't claim to be, but I remember when you were telling us, our team here about this opportunity. In my head, I thought, great, we should go acquire a firm in Arizona tomorrow, right? But it's not that easy, right? There's a process and approvals and all the things, all the hoops to jump through, correct?

SPEAKER_01:

Yeah, yeah. And I have no interest in jumping through those hoops. I don't think we need to do that. But um, regardless, it's a lot of uh it's it's interesting. So that's really the first big takeaway of what I consider these forces that are converging into family law, and we need to be prepared for them.

SPEAKER_00:

Just to stay on that subject and we can cut around this, but um were there any predictions during this section of what the future may hold as it relates to private equity entering law firms? Are they gonna do PI first and then into family? Like what were the kind of futurists thinking and saying about this?

SPEAKER_01:

Yeah, I'll get to that in a moment, but there weren't a lot around the ABS structure because that's just in Arizona, and we're already seeing tons of private equity money come into Arizona for those ABS structures. Like, for example, KPMG, one of the largest accounting firms in the world, started their own law firm a couple months ago, and they did that out of Arizona. So we're seeing private equity money coming into that, but that's just in Arizona, it's really confined, and that's the only state that allows these structures right now in the way that they do. But there were predictions, and I'm gonna get to those in a second, with respect to other ways private equity money is coming into family law. So let me jump over to the MSO. So MSO stands for managed service organization. You you could hear it call it LSO or whatever. And so, what they are is a separate entity from a law firm that essentially takes all of the assets out of the law firm with the exception of the client information or the client agreements, the retainer agreements, and the lawyers. So all the other expenses come out of the law firm entity and they go into this managed service organization that can be owned by non-lawyers. Okay. And so it strips all those non-legal assets out except client info and the lawyers. These MSOs cannot advise clients, only the lawyers can advise clients on legal matters. So there is a pretty bright, bright line there with respect to that. And those are already happening in law today. Now, everyone has seen these in some fashion or another in other professional services. So look at dental, okay, Aspen Dental, Forward Dental. The largest group, the largest MSO is Heartland Dental. Now, these are all managed service organizations for dentists. And in most states, just like with law firms, you have to be a dentist to own a dental practice. And so the way that that non-dental money, private equity money, other private investors or whatever, are getting into the dental space is through these MSOs. And so we are really the last profession to see this happen in our profession where MSOs are coming into law. We've seen it in medical, especially in elective medical stuff like plastic surgery and things like that. We've seen it obviously in dental, with the example I just gave. We've seen it in the vet space. Uh, we've seen it in all of these medical specialties from even like dermatology. There's like, you know, that's one of the biggest ones that I've that I've seen. Um, we've seen it in engineering, uh, where you you have uh you have these um MSOs that are buying these engineering firms, which is you wouldn't ordinarily think of that as a as a place they would go, but they have done that and and to a large degree there. So right now it's it's not as pro it it hasn't proliferated as much as you might think it has. Um in the dental space, only 13% of dental practices are owned by an MSO. So it's still a wide open space and it's still growing. A lot of money is still coming into the to the dental space. We do know that the first MSO in law happened back, at least the first recorded one, the one that people know about, it was in 2006 in North Carolina. That was the very first one. So we've seen it start to gather some steam. And what we're being told, what they shared with us at the conference, is that there are literally billions of dollars kind of stacked on the sidelines, ready to come into law, working its way in right now. There are transactions already happening, and they're really starting at the B2B business level, these big business firms. That's really kind of where it's starting, personal injury for sure. I don't know of any that have happened in family law just yet. Um is it because of the lack of LSOs in family? Uh well, it's just I I think it's because family is a little further down the pecking order. Um, I do know of one home office group. So uh it's basically uh, I don't know what they call these, but a bunch of families pool their their capital and they start their own investment vehicle. And I believe there's been a transaction that is about to close in Virginia of an MSO with a family law and estate planning firm. So I that's what I've been told. I've talked to that group and they've shared with me that they're moving in that direction. They think they're gonna get the deal done. So we'll see if that actually happens. I don't know if that's happened just yet. So the way that they handle the fees is pretty simple. They cannot do it on a percentage basis. So, like if the law firm does a million dollars, the MSO can't say we get 50% of all the money that you bring in as a law firm. They have to do it on a monthly fee basis or a cost plus basis. So if it's cost plus 30% or whatever the case is, that's how that's how they do that. That's how they get around Rule 5.4, which prohibits the the sharing of attorney's fees with non-lawyers. Make sense?

SPEAKER_00:

Yeah. So for the MS, so step one, create your MSO or called an LSO now. Um, in order to get paid, it has to be a retainer-based monthly fee so that you're not sharing lawyer fees.

SPEAKER_01:

Yeah, and I would say anyone that's looking to do this, create their own MSO, you need to get legal help for that. I mean, we we are looking at it right now, and we've retained or we're going to retain a firm to help us put that together for our firm just to have that there, which is part of our prep. Hey, family law firm leaders, my partner Tony Carls just released his book where he lays bare our precise blueprint for growing sterling lawyers from zero to 17 million. This is the blueprint that we still use daily. And Tony explains it in very simple terms. The truth is, this is not simple to do. Success requires and demands hard work, but if you have the patience and the work ethic to do it, your family law firm will succeed.

SPEAKER_00:

As you were talking to the people at the conference as it relates to MSOs and capital injections, is the idea to, or do people believe it'll it'll go the same way the the DSOs went, and that there'll be some large conglomerates that come out, they consolidate a bunch of small firms in a given area so that they create a full brand awareness?

SPEAKER_01:

Well, they didn't talk about that in like in a formal context at the conference and how they see it happening in law. I had a bunch of sidebar conversations with this some of the speakers, and in general, what they anticipate will happen is a kind of a repeat of what we've seen happen in some of these other professional services where they'll come in, they'll buy some of the bigger players that they call kind of platforms. And then once they acquire a platform, then they'll start acquiring other smaller non-platform firms to fold into that and bolt on or whatever, whatever their strategy is. So um that's how they see that that coming, which is I'm gonna get to in a second on what we are doing as a firm to prepare for that. So, okay, so the first big force that I see is the are the ABSs growing outside of Arizona. The second are these MSOs coming into law. It's already happening, and I see it coming into family law in the next two to three years in a big in a big way. Third one is uh all of this consolidation has kind of poured gas on the competitive pressures that we already see right now with respect to especially marketing and client acquisition costs. And so this consolidation, I think, is going to certainly amp that up. The competitive pressures are coming, they're gonna trickle down to us and family law as well. So um private equity money changes everything. And one thing I noticed at this conference, because you had, you know, you had you had the um the trade 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 acquiring these AI companies. They're coming in and they're already in the tent. They are already in our space. And now that they can see our data and they can see what's happening with respect to transactions, they have a lot of intelligence on acquiring these firms and amping up the competitive pressure. So we're seeing we're gonna see more and more competitive pressure, which will force firms to consolidate, I think, a little bit more. So, and private equity money, private equity firms love law. Okay, they love it. It's recession resistant to some extent. It's not as cyclical as many other areas of the economic sector. Law firms are scalable. Um, they like law family law firms. I've talked to two private equity companies, and both of them were like, yeah, we really like family law firms. We like the model. It's very predictable revenue. There's not this volatile set, you know, spikes that happen within personal injury where you'll have, you know, 10 months of kind of normal settlements, then you'll have that big mega settlement, which will spike everything up, which makes fee sharing a little bit harder whenever you have, you know, a 10x event um on a settlement, on a harvest like that. So um they they like family law. So that's kind of interesting to hear. Um, and across the board, Tyler, we heard, yeah, 12 to 36 months, you're gonna see a lot of law firms transact.

SPEAKER_00:

I think this is a really exciting kind of rose-colored glasses. You know, all this money is being poured in. Let's talk about the negative side. What bad things could potentially happen as a result of all of this change?

SPEAKER_01:

Well, I think the competitive pressures are gonna be much more acute than they even are today. And if firms aren't ready for that, they don't have real good control of their numbers, their cost per acquisition, what it takes to get a client, I think they're gonna be in real big trouble. So, uh, and we've got a couple years to prepare for that, I believe, to some extent. So there's a lot of time left on the clock to kind of prep for these opportunities as well as these threats. So I know that you've been a part of our discussions at Sterling Lawyers on what we are thinking through on preparing our firm for competitive pressures, for MSO opportunities. And um, what we are doing internally is that you know, we have a law firm here and we are gonna create an MSO that will meet the compliance standards. We've already talked with an S ethicist, and we're going to put her under retainer to make sure everything we do with respect to the MSO is completely up to code, so to speak. So we're gonna formalize that structure. Um, we are also preparing for the competitive pressures by just being very, very direct and thoughtful about making sure we get to the right margins that make sure we're really healthy for volatility in the marketplace as some of this consolidation starts to happen. So for us, what that looks like is we need to get our margins north of 25%. I think that would give us a healthy standing to withstand some of these pressures. So that requires, in our case, quite a bit of work to and time to get there, to get our cost structure where it needs to be. Um so we're working, we're working hard on that. Another thing we're doing as a firm is we're starting to focus on acquiring other firms that we could bring into our family of law firms. And we think could help in a great way the owners of these other law firms. And together, I think we can we can create some defense and opportunity to what's happening with MSOs, what's happening with private equity money coming in and competitive pressures. I don't want to get into a situation where we are forced to sell because there's just too much pressure. We want to get to be one of those big players where we can withstand that and provide that insulation to some of the other smaller law firms as well.

SPEAKER_00:

So 100%. I think one of the benefits of that ideology and what you and and Jeff and Tony have built at Sterling is in my opinion, creating the right LSO will actually allow attorneys to live their best life because they won't have to worry about billing, they won't have to worry about HR or cash flow. They'll be able to be a great attorney and know that they're part of an organization that's growing and thriving.

SPEAKER_01:

Yeah, that's absolutely true. The majority of lawyers I interface with is are are lawyers who look, I just want to be an excellent lawyer. I want to take care of my clients, I want to be proud of what I do, I want to offer good service and know I can go to bed at night knowing I gave my all and I gave really good service to my clients. That's like across the board of how most attorneys look at their craft. Um, one more thing that I forgot to mention that we are that I'm in particular doing right now is there are a lot of really good models out there, Tyler, for us to look at and get a sense for the timing and the structure of some of these MSO deals, how it's going to change our marketplace a little bit by looking at what's happened in dental and medical and vets and all these other spaces of these professional service corp companies where MSOs have come into their space. So I'm studying that right now. I'm my research assistants is going after everything she can find to pull this data together so we can get a real good feel for how quickly and how it'll happen. What will the multiples be like, how long will it take, all that kind of stuff. I think we can get some real good insight and anticipate what's happening around the corner.

SPEAKER_00:

It is going to be very fun to watch. I love that you're on the bleeding edge. We need to keep our listeners up to speed as we learn more. So appreciate your time. Excited for the next one already.

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Jeff Hughes

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