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A Tale of Two Law Firms part 1

How had it all gone so horribly wrong?  That was the question that Jim McCann, the Managing Shareholder of Abel, Bennett & Comings Inc. kept asking himself as he watched his office being packed up.  The numerous reminders of his 30 year legal career had been reduced to a stack of transfiles and several large recycling bins.

 

The files were awaiting the movers who would transport them to his new firm, a thriving, business focused law firm where he and ten of the original Abel Bennett partners had landed.  As he walked the now vacant floors he recalled how, just a few months ago, they hummed with activity, excitement was in the air, they were making history!

 

It all started back in 2007 in Great Britain.  They passed the “Legal Services Act” in that year which allowed, for the first time, outside investment and the sharing of law firm profits with non-lawyers for the first time.  The Legal Services Act was similar to the legislation passed in Australia a few years before and where several investor owned firms thrived.  There had been discussions of profit sharing with non-lawyers for years in the United States.  Back in the late 1990’s the Multi Disciplinary Firm or “MDF” as they were then called was the “new” thing.  Several of the then Big Eight Accounting Firms held preliminary discussions with law firms about how such a firm might be structured and how the sharing of clients could lead to much greater revenues and profits for all concerned.  Then came the Arthur Anderson debacle and overnight the talk of MDF’s vanished.  To much risk, not enough reward after all.

 

Then, in 2007 the Brits passed that damn act!  But of course, they did it with characteristic British restraint and safe guards.  The investments were smaller, the return to investors more modest and execution more measured.

 

By the time it got to the US in 2015 after the Jacoby & Meyers lawsuit was settled there were no constraints on the free exercise of capitalism and one of the last bastions of professionalism in business was lost.

 

Abel Bennett was a mid-sized general practice law firm at that time.  With offices in New York, Chicago and Los Angeles the firm was solidly in the AmLaw 100 and while not as profitable as some of its peers the partners did well for themselves.  The broad range of financial and corporate work kept the associates and partners well utilized and the firm’s PPP were over $750,000.

 

In mid 2018 he had received the call from an investment banker.  The banker wanted to know if Abel Bennett would be interested in expanding its business while monetizing the partner’s investment in the firm.  It would be a “win-win” with the firm expanding, profits increasing and a reduction in the risk to partner capital and while McCann did not think much of the idea he went to lunch anyway.  After all, the investment bank was a potential client and it was an excellent restaurant.

 

The banker presented an interesting case.  His investors wanted to build a top tier national law firm with offices in every major city in America.  They would leverage their multiple locations in smaller and less costly cities to provide lower cost legal services to national clients.  The firm would share a portion of the cost spread with its clients and keep the majority of it for the new shareholders (the old partners) and the investors.  The bricks and mortar expansion costs would be paid for with money borrowed from banks.  Now that the firm was a corporation he reasoned, banks would be more inclined to loan money an on more favorable terms (no more PGs!).

 

It took more than a year.  The discussions went from pleasant lunch conversations to exploratory discussions to deal points.  In the end Abel Bennett & Comings LLP became Abel Bennett & Comings, Inc. on January 1, 2020.

 

The firm was valued at three times a novel interpretation of EBITDA that included partner compensation in the excluded categories.  The partners received a third of their payout at the close of the deal in stock and cash with the remainder (all in stock) vesting equally 5 and 7 years after the acquisition completion date.

 

The first two years after the acquisition were a blur of office openings, acquisitions of other firms and lateral partner hiring’s.  Abel Bennett went from its historical three offices to 22 by January of 2023.  No longer listed on the AmLaw 200, Abel Bennett was number 878 (ahead of the Blackstone Group) on Fortune magazine’s 1,000 list with a bullet to denote its rapid rise.

 

As the banker had promised, Abel Bennett’s rapid growth was all bank financed and the partners (now shareholders) received W-2’s that reflected the growth and apparent success of the firm.

 

In 2023 however, the economy turned sour and gross revenue fell almost eight percent.  This modest downturn in revenue however resulted in a 25 percent decline in profits.  Once the investors were paid there stipulated dividends out of the profits, the shareholders received only their base compensation amount and a small portion of their anticipated bonus.  As a result, PPPs (measured in the traditional way) fell more than 30 percent.

 

By Mid 2024, as the economy continued its slow recovery and as the prospect of no bonus payments became a reality the first shareholders left Abel Bennett.  The trickle of departures became a flood when within two months the entire Houston, Salt Lake and Buffalo offices left.

 

At the end of 2024, Abel Bennett had lost more than 500 attorneys and was saddled with more than 300,000 sq. feet of unoccupied and very expensive office space around the country.  In an effort to stem the flow of red ink, the professional managers that the investors had insisted be installed when they were acquired to run Abel Bennett did what corporate managers do.  They cut expenses.

 

The expense cuts included everything from the library and subscription services to the hours that administrative staff worked.  Attorneys who did not report daily billable hours by noon and the close of business were reprimanded.  Repeat offenders were written up for corporate policy violations and ultimately some attorneys and one shareholder was fired.

 

Invoices, which were processed by outsourced Sri Lankan accounting clerks and sent via e-mail to “customers” were followed up on by multiple collection calls from an outside collection agency 35 days after there issuance.  Strict “customer” credit limits were imposed and frequent stop work orders delivered to shareholders.  In one memorable case McCann had to personally intervene so that a will could be taken to a hospital for the dying patient to sign.  It happened that the attorney who was preparing the will (and was the appointed executor) thought it more important to get her clients last wished documented than pay a 38 day old invoice.

 

The cost cutting moves served to antagonize the attorneys and demoralize the staff.  In March of 2025 the heads of both the Corporate and Bankruptcy Departments announced that not only were they leaving but that they were suing both the investment bank and Abel Bennett for fraud and misrepresentation.  The shares that they had received at the 2020 deal close and in the 2025 distribution were now valued at $2.50 a share.  Down from the initial 2020 valuation of $20 a share and a cruel reminder of the 2023 high of $87.25.

 

By mid 2025 the banks had grown very nervous about the attorney departures, the debt and the continued decline in Abel Bennett’s revenue.  Additional cost saving cuts were made, offices closed and staff dismissed but it did no good.  The dream that began over lunch seven years before ended in early August when the lenders seized the firm’s bank accounts and Abel Bennett declared bankruptcy.

 

As he walked towards the elevator McCann reflected on the past five years.  He concluded that like many other investors in professional service firms had found out before him, there is just not enough money to satisfy both the talent that produces the revenue and investors who demand a return on their capital.  The old expression that “the assets go down the elevator every night’ was indeed true and that law firms are not like private companies after all.  If you can not reward and motivate the attorneys, in a manner that respects the culture of the firm and the honor of the profession no investment deal will work.

 

McCann was not sure if any investment vehicle in law firms would work but it was clear that “Going Public” did not.

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