Taken from El confidencial
Capital must learn to understand the soul of the legal profession: its relational logic, its reputation-building dynamics, and its trust-based management. In turn, the legal profession must learn to coexist with new logics of accountability, efficiency, and growth.
The increasing interest from investment funds, family offices, and private equity structures in acquiring stakes in law firms is no longer speculation—it is an established trend in markets such as the UK and Australia, now gradually gaining traction in Latin America, particularly in Spain. This shift is driven by several factors: the growing corporatization of the legal sector, the emergence of scalable business models (especially in commoditized legal services), and the organizational maturation of many mid-sized firms.
In Spain, recent publicized transactions—both investments and divestments (e.g., Sagardoy and Ufenau, Lexer, Auren, Ecija, and Alia Capital)—reflect this trend, including the launch of an investment fund dedicated solely to law firms.
However, the entry of non-lawyer capital brings not only capital but also complexity and the potential for deep change. This transformation poses three systemic challenges:
- The structural difficulty in valuing intangible assets (previously addressed in other articles).
- The governance crisis that may arise from introducing new stakeholders with priorities different from the traditional legal ethos.
- Ultimately, the question of whether external capital can coexist with a system historically grounded in artisanal meritocracy among peers.
Let’s take a closer look at these three critical challenges.
On Valuation: Soul-less Multiples
Though this article does not focus primarily on valuation, it’s worth noting that traditional multiples-based valuation models fall short in the legal sector—a business rooted in talent, reputation, and client retention. The goodwill of a law firm, unlike in other industries, is inseparable from its people.
As such, any attempt to apply standard valuation criteria must adopt a hybrid model, centered on the current partners—those staying and those departing. It must include conditional earn-outs, adjustments for founder dependency, and a prudent assessment of relational capital. As with any professional service firm, the key lies in team continuity and strategic coherence—not in last year’s EBITDA.
Previously, we identified the main challenges involved in valuation—challenges that often come as unpleasant surprises to partners seeking to cash out:
- Correctly applying discounted cash flow techniques, starting with the difficult task of determining the “normalized” cash flow.
- Assigning appropriate discount rates for each inherent business risk—going beyond generic models or benchmarked expectations.
- Accurately valuing key intangibles—a near art form in itself.
- Deeply understanding the business logic of legal practice.
- And lastly, using multiples only as a reference tool, given the heterogeneous and scattered data in the sector.
In short: don’t use soul-less multiples.
Culture Clash: From Co-Governance to Accountability
The entry of external capital not only alters a firm’s financial structure but also reshapes its power architecture. Historically, law firms have operated as flat, horizontal organizations where partners are simultaneously producers, governors, and custodians of firm culture. This model, dating back to the professional partnership structure described by Lorsch & Tierney, is built on professional autonomy and peer-based governance—principles deeply rooted in the liberal nature of the legal profession.
As David Maister (1993), a leading thinker on professional service firms, observed:
“Law firms are not businesses—they are tribes. Their functioning depends not on hierarchies, but on professional legitimacy.”
The arrival of a non-lawyer capital partner introduces a new axis of tension: the asymmetry between the “capital partner” and the “professional partner.” The former seeks return, efficiency, scalability, and liquidity; the latter values prestige, technical independence, and team cohesion.
This raises a crucial question: Can the short- or medium-term returns expected by investors coexist with the long-term management of trust, reputation, and human relationships necessary for a firm’s longevity?
Law, especially in its most bespoke and strategic areas, does not easily lend itself to financial metrics—let alone short-term horizons. Many capital infusion attempts fail not due to liquidity issues, but because of unresolved cultural frictions.
Still, as we’ve argued before, it is possible. Capital is not suicidal—but the vision shared among new stakeholders must be executed with precision.
Hybrid Governance: Is Balance Possible?
Given these tensions, firms and their new owners must rethink their governance models.
With extreme compensation systems influencing governance structures, the arrival of non-lawyer partners creates friction. Traditional lockstep models—based on seniority and firm contribution—struggle when applied to a partner who does not generate billable hours but holds a significant stake. Conversely, the “Eat What You Kill” model—geared toward individual performance—only intensifies commercial logic without resolving power legitimacy. The same applies, to varying degrees, to mixed or hybrid compensation systems.
Some firms have adopted dual structures, where the financial partner joins a non-executive board focused solely on financial or strategic matters, with no say over technical or talent decisions. Others have created segregated corporate vehicles dividing “professional” and “commercial” ownership—like the UK’s Alternative Business Structures (post-Legal Services Act 2007).
To make such models work, firms need:
- A clear shareholder agreement defining decision-making boundaries.
- Principle-based governance—not percentage-based—recognizing knowledge as the core productive asset.
As legal scholars point out: “A firm is not just a business; it is a community of purpose.” If the capital partner doesn’t share that purpose, integration will always be contentious. If they do, they can be a catalyst for growth, investment, innovation, and professionalized management.
Majority Capital and the New Partner Profile
Another major implication arises when external capital becomes the majority shareholder. At this point, the firm technically ceases to be a professional company (SLP in Spain) and transitions into a conventional corporate entity. This structure may also be present from the outset if non-lawyer founders are behind the firm.
In these scenarios, the role of the professional partner evolves. A new archetype emerges: the managing or technical partner with substantial responsibilities—but no expectation of equity. There is no track to partnership, no co-governance, and no voting rights beyond one’s role.
This shift transforms traditional compensation models. Gone are classic profit-sharing or lockstep-based schemes. In their place, executive-style compensation arises: high fixed salaries, performance bonuses, KPI-driven incentives, and even phantom equity or shadow capital schemes that align interests without transferring ownership.
These changes have consequences. On one hand, they help attract top managerial and technical talent without diluting capital. On the other, they may erode professional belonging, weaken firm culture, and hinder generational continuity—especially in firms where the equity promise has historically served as a powerful incentive.
Capital as a Solution to Succession Challenges
We have previously suggested that, paradoxically, the introduction of purely financial partners might offer a solution to the succession dilemmas faced by many firms founded in the 1990s or early 2000s. The retirement of founding partners presents continuity, leadership transition, and capital monetization challenges.
External capital can act as a stabilizing force, enabling senior partners to exit the firm. Sometimes, funds act as intergenerational intermediaries—holding equity until the next generation is ready to assume control.
This succession issue is compounded by an emerging trend: younger generations are less inclined to take on the risk and responsibility of equity ownership. This is not a matter of capability but of life expectations and lower entrepreneurial appetite. Many senior and junior lawyers alike aspire to lead teams or manage key accounts—but not necessarily to be equity partners. In such cases, external capital can ensure structural continuity when no internal successor is in place.
Additionally, this model allows for a structural and cultural trial run between capital and knowledge, facilitating the conversion of current partners into future shareholders. The goal is not just for third parties to buy out the founders, but for founders or current partners to explore new forms of long-term involvement beyond active partnership.
This way, outgoing partners can step back from day-to-day responsibilities while remaining passive shareholders—much like retired partners in a family business. This separation of economic rights from management roles allows for smoother transitions.
By José Luis Pérez Benítez, Partner at BlackSwan Consultoría