April 27, 2023
When Law Firms Go Public: 5 Strategies for Effective IPO Communication
If the prospect of a publicly traded U.S. law firm seems unlikely, consider that more than five decades ago, there was no such thing as a publicly traded American investment bank. Due to a nearly 200-year-old rule requiring that the New York Stock Exchange approve all shareholders of its member firms, the NYSE didn’t allow them. But thanks to Dan Lufkin, who engineered the 1970 initial public offering of his investment banking and brokerage firm, Donaldson, Lufkin & Jenrette, the NYSE amended its rules and it’s now difficult to imagine the big Wall Street firms like Goldman or Morgan Stanley as private partnerships. But they were. Just like today’s big law firms.
According to William Cohan, who relays this story in his article, The Next Big I.P.O. Scramble, it may be only a matter of time before a bold and enterprising law firm follows in Lufkin’s radical footsteps and converts its private partnership into a public corporation – a structure that would provide greater access to capital, help streamline law-firm mergers and allow retiring partners to cash out their shares. Like the NYSE once prevented investment bank listings, most state bar associations still have rules against non-lawyer ownership of law firms. But that has begun to change.
Utah and Arizona have relaxed the American Bar Association rule barring nonlawyers from sharing in law firm ownership. To a fiercely competitive industry that has few options for raising capital, these changes could open a door to a source of affordable growth capital, a liquid market for partners’ equity, and a reliable method for determining a firm’s relative value in a highly acquisitive marketplace. The two states have granted a total of 91 licenses for alternative legal business entities, according to The American Lawyer. Once a major law firm walks through that door, many more could follow.
Skeptical? If the true story of the investment banking industry’s conversion isn’t a sufficient analog, the rapidly growing appetite for litigation finance, even among the legal industry’s biggest firms, is further evidence that law firms are eager to tap alternative sources of capital to fund their growth.
So if this potential shift becomes reality, law firms that take the IPO plunge will need to communicate frequently with an entirely new audience — public shareholders. And meeting shareholders’ demand for information will require significant, fundamental changes to how law firms share information with stakeholders.
What does this mean for you? Effective shareholder communication is not a switch you can flip on the first day of trading. If you harbor hope that your law firm will someday ring that iconic opening bell, plan to implement the following five tactics well before you file your registration statement. Doing so will support a successful IPO and enhance your ability to communicate effectively with your shareholders going forward, supporting quarterly earnings and other material disclosures, and ultimately an appropriate valuation.
1. Generate Pre-Filing Awareness
When contemplating a public offering, the way your firm communicates right now matters. Once you file your S-1, or registration statement, you can’t be perceived as promoting the offering as you prepare to begin trading. But you are permitted to continue sharing certain information about your business as you have in the past.
To establish an appropriate baseline, your external communication plan should include:
- Announcements of your involvement in major matters, litigation wins, and other noteworthy milestones
- Timely content conveying unique positions of authority from your firm’s partners and subject matter experts
- Media interviews that result in your partners’ appearance in the press, sharing points-of-view on issues that matter to clients
- Information about your firm’s social impact, e.g. pro bono and DEI initiatives
Chances are you’re already doing many of these things as part of your owned and earned media efforts. And of course, all of these activities are valuable and worthwhile even if the opportunity or desire to take your firm public never arises. But to set your firm up to communicate more freely throughout the process of going public, begin covering all these bases by ramping up your external comms strategies now.
2. Establish Metrics for Your Business
Partnerships are evaluated differently than publicly traded firms. The American Lawyer ranks its A-List firms based on these measurements: revenue per lawyer, associate satisfaction, diversity, pro bono initiatives, and the percentage of female equity partners. Firms rank on the AmLaw 100 according to self-disclosed or estimated figures like gross revenue, profits per partner, and revenue per lawyer. This will not satisfy Wall Street.
Law firms weighing IPOs should consider a mix of metrics that your shareholders demand – which would be similar to those disclosed by most listed companies (revenue, income, and earnings per share) – and those that you want your shareholders to track as well, such as realization rate, total billable hours and utilization rates, and client acquisition and attrition rates.
Regardless of which metrics you choose, you need to identify them before your offering, educate investors about their value and importance during the offering roadshow, and set up systems that allow you to track those metrics on a weekly basis. Weekly? Yes. Most newly public companies trade below their offering prices within six to nine months of the IPO, often because management lacks visibility into their own metrics. This can result in quarterly financial results falling short of expectations and surprising shareholders. And surprised shareholders sell stock.
Establishing the right metrics now — and tracking them weekly — is the best way to guard against a future market flop.
3. Identify Appropriate Comps
Investment bankers always look at comparable companies when valuing an IPO. And naturally, analysts and brokers will want research on other publicly traded firms like yours in order to better understand your performance and persuade their investors to bet on you. But until several law firms go public, it will be difficult for them to find the comps they’re looking for.
This is another area where being proactive matters. Look for publicly traded firms in industries with similar models, like consulting, to give analysts and investors the comps they’ll need to evaluate your business.
4. Adopt IPO Disclosure Policies and Procedures
As a law firm, you’ll likely have a leg up in understanding the regulatory landscape that listed companies must navigate, particularly regarding the disclosure of material information. But it’s still worth mentioning that once you’ve filed to go public, leadership and other members of the firm can no longer engage in casual conversations about financial performance and news that might impact your valuation.
According to SEC guidelines, anything your firm discloses to one person must be disclosed to everyone. And if you share material non-public information — even if it’s done unintentionally — you could be accused of enabling insider trading.
5. Ramp Up Internal Communications
When the time comes, it will also be essential to communicate openly with employees about your IPO and protect your firm from confidentiality breaches and legal liability.
Employees would need to understand:
- The rationale and business case for the IPO
- How the shift from a partnership model to a publicly traded model will impact them
- Specific guidelines regarding what they can and cannot say to outsiders about their work
- Guidance on how they should answer questions they’re asked about your IPO
- Examples of common confidentiality breaches (like sharing information with a spouse, friend or a colleague from another firm)
Keep in mind that going public would represent a significant organizational change. To win employee buy-in and support, you must be proactive about managing the change internally.
Going Public Requires a New Approach to Law Firm Communication
Embarking on an IPO could be an incredibly exciting, all-eyes-on-your-firm moment. To leverage the opportunity a public offering could present, you must start planning early.
But it’s not enough to launch successfully. You’d also have to sustain (and build on) your success quarter after quarter and year after year. And all the while, you need to communicate with a level of openness and transparency that might feel totally foreign.
You don’t have to make this leap alone. The Greentarget team has experience helping clients navigate the IPO landscape, and we speak the unique language of partnership-based law firms. So if your firm explores going public, we’d love to walk with you every step of the way.