Demystifying mergers and acquisitions in legal tech
Ari Kaplan. Photo by Lauren Hillary.
Ari Kaplan recently spoke with Rick Weber, the co-founder and managing partner of Arbor Ridge Partners, a legal technology and legal services mergers-and-acquisitions advisory firm based in Chicago.
Ari Kaplan: Tell us about your background and the genesis of Arbor Ridge Partners.
Rick Weber: After graduating from law school, I spent three years at Mayer Brown in Chicago and left to become a prosecutor for the SEC. When I left the government, I found myself at a crossroads in my career, so a good friend and I decided to combine his legal technology talent and my legal background to start a litigation software development company called Advocate Solutions. We developed a pioneering e-discovery product called Discovery Cracker and sold the company in 2003. In 2006, I got involved with another legal technology and legal services company called eDirect Impact, which developed project management tools and also provided e-discovery hosting and processing. We ultimately sold that company as well and reacquired it a few years later, merging it with Elijah Ltd. to provide end-to-end computer forensics. And we sold that company’s discovery business unit to a private equity group. Having had four exits in the discovery and legal technology space, my business partner, Andrew Reisman, and I started Arbor Ridge Partners to leverage our relationships, industry knowledge and experience to help companies looking to sell find a better exit and giving companies interested in buying find better targets.
Ari Kaplan: What exactly is legal technology and legal services M&A advisory?
Rick Weber: We are business brokers giving advice on buying and selling legal technology and legal services. We have focused on this vertical because of our strengths and our skill set. We have lived in this space for so long that we know, either directly or indirectly, most of the buyers and sellers, so we are often capable of matching them.
Ari Kaplan: How does this process work?
Rick Weber: It depends on whether we have a sell-side mandate or a buy-side mandate. Often, people that we have known for a while or people that know of us decide that now is the time to sell their company, and we begin by providing exit planning consulting to help those companies evaluate their business and financial decisions through the lens of an exit down the road. We can have strategic conversations with them about what impact any given initiative will make if they want to hit the market in nine to 12 months. It is similar to a real estate agent staging a house. We help companies get into the optimal position to earn the best exit. Depending on the company, deals are getting done in five to nine months.
Ari Kaplan: What is the difference between private equity and venture capital in these legal industry transactions?
Rick Weber: M&A is associated with private equity because those groups are looking to buy a majority stake or obtain complete ownership in a company. Venture capital refers to organizations that are looking to make investments for broad growth and typically don’t take a majority interest. I like to tell people that venture capitalists buy dreams, while private equity teams buy realities. Private equity groups are not investors per se. They are buying for growth, but their growth expectations are significantly different than a venture capitalist, which recognizes that a lot of the investments it makes will fail to produce a return. It is similar to baseball, where a career built on striking out seven out of 10 times still gets you into the hall of fame. Since private equity groups would not be very successful if they had a .300 batting average, they are looking to buy companies that are strong and solid, have an executive team that’s looking to either leave or cash out in part, and can be sold for a higher multiple.
Ari Kaplan: What is the current state of M&A for legal technology and legal services companies today?
Rick Weber: It is strong and has been very strong for the last few years, especially because there has been a lot of industry consolidation, particularly in the e-discovery space. For example, we are seeing a lot of small and medium-sized e-discovery companies take on private equity investments because it has become harder to grow organically than it used to be. Instead of trying to expand by hiring sales professionals and opening new offices, some companies are finding it easier to buy the revenue from an existing litigation services or e-discovery and computer forensics company. Moving forward, I think the market will remain strong through 2019 and probably into 2020, though the window will probably begin to tighten up a little bit. One development we will see in the next year or two is larger buyers backed by private equity becoming sellers, which could have a double impact because there will be fewer buyers and more sellers. That could place upside-down pressure on the existing groups that are selling.
Listen to the complete interview at Reinventing Professionals.
Ari Kaplan regularly interviews leaders in the legal industry and in the broader professional services community to share perspective, highlight transformative change and introduce new technology at his blog and on iTunes.