[00:00:06.680] – Doug Austin
Hi, I’m Doug Austin. I’m the editor of Ediscovery Today, a daily blog about Ediscovery information governance, cybersecurity and data privacy trends, best practices, and case law. Welcome to another edition of Ediscovery Today’s Thought Leader Interview Series, where we interview thought leaders in Ediscovery and related legal technologies. Today we’re conducting another Thought Leader interview by video. And our guest is Rick Weber, managing partner of Arbor Ridge Partners. Welcome, Rick.
[00:00:34.040] – Rick Weber
Thanks. Glad. Happy to be here.
[00:00:36.440] – Doug Austin
Rick has been in the industry for quite a while, started as an attorney at an MLA 50 law firm and then became a federal prosecutor for the SEC. In 2000, Rick left the practice of law and co founded Advocate Solutions, becoming one of the pioneers in the Ediscovery industry with the creation of Discovery Cracker, which I not only remember, but used for several years. Since then, Rick has personally sold three other litigation technology companies, having led negotiations and due diligence for all of them. Having started and sold several litigation technology companies, rick has deep industry contacts and an inside working knowledge of legal technology mergers and acquisitions. Rick’s background as an attorney and prosecutor for the SEC allows for a skillful understanding for how to best structure mergers and acquisitions. Rick is also an arbitrator for FINRA and is frequently invited to speak as an expert in the field of electronic discovery and litigation data management at conferences and coe seminars sponsored by corporations, law firms, the American Bar Association and state bar associations. Rick’s overall experience has generated relationships and connections outside of the legal technology industry, thereby creating expanded opportunities for clients. Ready to get started, Rick?
[00:01:54.230] – Rick Weber
I am happy to be here.
[00:01:56.160] – Doug Austin
All right, great. So, Rick, as I mentioned before, you were managing partner of Arbor Ridge Partners. You were a lawyer at an Amla 50 firm, co founded the company that created Discovery Cracker and then had several more exits in the legal industry after that. So how do those roles prepare you for MNA advisory in legal tech and legal services?
[00:02:19.720] – Rick Weber
I think different experiences. So, on the legal side, the front end of the career was able to sort of see where deals went well and where deals didn’t go well. Not all lawyers are created equally, and some lawyers are really good at getting deals done where other lawyers sometimes get bogged down in minutiae, thinking that their role is to eliminate risk. And if you eliminate all risk and both parties are sort of trying to do that, then deals get stuck. So being able to see as an attorney where deals get stuck and to be able to sort of spot check along the way has enabled us to sort of have much smoother transactions. The experience in the industry really is where I’ve spent the bulk of my career the last 25 years, and it’s all been in legal tech and legal services. Having run these businesses myself and having had my own successes and failures we have a very intimate understanding of ediscovery companies, litigation technology companies, legal services companies. And that enables us really to work very well and very closely with our clients, really to try to help shape not only the best story, but also the best opportunity for a successful exit.
[00:03:32.340] – Rick Weber
One of the things that we do is exit planning consultation where we’ll work with companies six months, a year, two years, even three years out before they want to actually even sell their company. And we can start helping them make decisions in real time, but through the lens of M and A. So what decisions you make in business may have a different impact and you’re dealing with an M and A at the end of it versus running your business or building your business along the way. So recognizing the choices and decisions that companies can make on the front end, to have a better exit in six months or a year or two years is really something that we’re able to do with our clients. And I guess lastly, every company has a story and every deal has a story. And to be able to tell that story most effectively really helps us help our clients get the best exit possible. So it’s really that industry expertise and experience and then obviously the deep relationships after 20 years, I mean, it’s maybe one or two degrees of separation from most of the industry players and we’re able to mix and match our clients to sellers with really the best buyers.
[00:04:40.520] – Doug Austin
There you go. You’re a Kevin Bacon of the industry.
[00:04:45.720] – Rick Weber
[00:04:47.400] – Doug Austin
So I’m going to ask a couple of kind of investment type questions that might be helpful for our audience. First one is what’s the difference between venture capital and private equity? And what is MNA Advisory and where does that fit?
[00:05:02.460] – Rick Weber
So it’s a good question. Investors and VC and PE, a lot of people sort of just sort of use those terms interchangeably and they’re really quite different terms. So investment and venture capital tend to be sort of the beginning of life for a company when they’re really like just getting off the ground and looking to bring on investors and maybe they’ll sell five or ten or 15 or 20% of their company, but they’re really looking for money to come into the company and use that money as growth capital to really start hiring new programmers, new salespeople, what have you. So when people talk about VC or investors, really what we’re talking about is helping companies get off the ground and really start to expand their businesses. Private equity is really at the end of the business’s life when it’s, hey, we built this thing, we’re looking for an exit, we’re looking for our payday. Then you’re really looking at that point at private equity groups or in our industry, you’ve got a lot of larger companies, whether they have private equity money behind them or not. But really that exit or that private exit. Private equity stage really is when an owner of a company is really looking to get out of the business or sell 70, 80, 90%.
[00:06:14.420] – Rick Weber
Oftentimes they’ll maybe stick around and have ten or 20% of equity rolled over. So they’ve got still some skin in the game. And that’s good for both the buyers and the sellers. The sellers, it gives them another bite at an Apple maybe 2345 years down the road. And from a buyer’s perspective, a private equity investor, they like having founders with sticking around and having some skin in the game because the business was built on their backs. And most private equity groups recognize that the business will probably prosper better if the key people stick around. So VC is beginning of life. Private equity is sort of the end of life. I tell people that venture capitalists usually invest in dreams and private equity usually invests and buys in realities. So profitability is something that private equity groups will look at. Projections and forecasts are something that venture capitalists will look at. MNA Advisory falls into this, I think it was part of the question. MNA Advisory really is helping businesses who are looking for an exit, either 100% of the company or like I said, 70, 80, 90%, really helping those companies find the right buyers.
[00:07:23.680] – Rick Weber
Again, whether it’s a private equity buyer or whether it’s a larger company in the space who’s looking to buy the company.
[00:07:32.380] – Doug Austin
Okay, well, so you talked about finding the right buyers. So why do companies need an MNA advisor? Couldn’t they just find the right buyer themselves?
[00:07:43.840] – Rick Weber
Yeah, look, in theory, you can in theory, I can cut my own hair and do a few other things. But it’s like anything else. It’s an expertise, it’s a profession. It’s not like selling a house where you just stick a sign outside your door and hope a stranger rings the doorbell and says, we want to buy you. Unlike a house, when we’re helping our clients find a buyer, we have deep relationships with the buyers, so we’re able to bring buyers and sellers together. And finding a buyer really is just part of the process. Getting from an offer, which is typically memorialized in a letter of intent or an loi from that stage all the way through actually closing a deal, that’s a pretty tricky process with a lot of minefields. I mean, it’s a bit like a pregnancy. 100 things have to go perfectly right, and only one thing to go wrong to kill the deal. So working with our clients to maximize the value of their business, as well as navigating all the minefields along the way, are really probably the most important things that we do for our clients. So again, in theory, absolutely someone could find a buyer.
[00:08:56.700] – Rick Weber
But typically when that happens, it’s almost like that someone rings the doorbell and says, hey, we’re interested in your company. And then they get into a discussion, they oftentimes try to sell it. I guess I would say this too, it’s very time consuming. We had a deal not last about four months ago. We had over 100 buyers take a look at this company. And because of our deep understanding of the business and our clients business, we’re able to have one or two phone calls with any prospective buyer before our client even has to get on a phone. We were literally talking about a couple of hundred hours of conversations without having to have the founder or the CEO on a single phone call. And when you’re trying to run a business, those hours are pretty precious. So to have to deal with tire kickers and literally hundreds of hours of conversations with people who may have no interest, real serious interest, it’s probably one of the bigger value adds that we have with our clients is that we’re able to really free their time up so that we can run this process in the background and really not have to bring them into a conversation until it gets serious.
[00:09:57.180] – Doug Austin
Makes perfect sense. So let’s talk trends here for a moment. According to complex discovery, merger, acquisition and investment activity in Legal Services and Ediscovery dropped dramatically last year with barely more than a third of the transit transactions compared to 2021. So what factors do you think caused investment to slow last year, and what do you think the provider landscape will look like in the next few years?
[00:10:23.780] – Rick Weber
So I think there’s probably a couple of items at play. I mean, number one, 2021, I think when we look back, will have been the high watermark for the sellers market. 2022, interest rates were going up, capital was becoming more expensive. So it becomes harder for purchasers to rely on debt, which they oftentimes do to do deals. So the cost of deals goes up. So I think the private equity markets, by and large kind of mirror to some degree the capital markets. And we saw a slowdown, obviously economically across the board. That’s part of it. I think also we’ve seen a fair amount of consolidation amongst certainly Ediscovery companies over the last several years. And companies that were buyers got acquired themselves. Agility and H, five and exact half a dozen to a dozen good medium to large size companies that were good buyers were now absorbed and consolidated. So now instead of six buyers, now Conciliate owns all six of those. You’re down to one buyer. So the number of buyers has shrunk. So I think there’s probably a combination of like musical chairs at some point, there’s just less chairs. That’s part of it.
[00:11:45.980] – Rick Weber
And then I think the other part of it. Again, the private equity market, the capital market, the M and A market has sort of mirrored what’s happened sort of with the housing market and the general economy going forward. Look, good companies are still getting bought out every day. I think things are moving more slowly and buyers are getting a little more picky and again taking a little bit longer with diligence and whatnot. So I still think it’ll be a strong market in the next several years, maybe similar to what it was last year, probably not as fervent as it was in 2021.
[00:12:27.820] – Doug Austin
Okay, so what do you think are some of the current trends in legal tech and Ediscovery that will influence investment and MNA in the industry this year and beyond?
[00:12:40.720] – Rick Weber
Well, I think probably one of the biggest trends right now, and I think it’s a bit of an unknown, and I think you even wrote on this maybe last month, is really AI and where we may now be with AI. I think people certainly in our industry have been talking about AI for easily the last decade. But I think we’re finally now at the point where there’s real AI or AI that could have a very disruptive or potentially disruptive force within not just Ediscovery and not just litigation and legal technology, but obviously across the board, but really to the practice of law. I think lawyers are probably when we look back, I think this might be the tipping point for AI and how it’s being used in the practice of law. And I think lawyers who embrace AI will prosper. I think lawyers that don’t could be in a bit of a difficult situation. I think we could potentially be at the point where AI is able to start managing document reviews easily, sort of rough drafts of motions and things like that. So as AI has a direct impact on the practice of law, that will then have an indirect impact on legal service providers and legal technology providers.
[00:14:06.950] – Rick Weber
So I think it’ll be interesting to see the full impact that AI has in the next several years on the practice of law and what that then has on the service providers and the technology providers. I think being Nimble is going to be an important aspect. Again, the technology is there to augment the practice of law and the service providers are there to augment the practice of law. So I think having a very watchful eye on how the practice of law changes over the next few years is going to have a very direct impact on the service providers and the technology providers, which will then have an impact on the M and A markets. I guess I would say, in short, legal technology companies that are based on true AI are probably going to prosper significantly more than technologies that maybe are a little older or don’t. And I think service providers who embrace AI to augment their services are going to prosper better than those that don’t.
[00:15:08.160] – Doug Austin
Certainly doesn’t surprise me. Seems like in the past couple of months I’ve joked with a couple of people that anytime I want to boost my views on Ediscovery today, I should write an article about Chat Gbt or something like that, because it seems like everybody’s talking about the AI technology today. Yeah, for sure. Absolutely. So certainly in the past few months there have been layoffs at several, well, several companies throughout all industries and certainly several legal tech companies, including those in the Ediscovery space, and many of them are publicly or capital partner owned. So what influence do you think outside investment has on staffing and potential layoffs?
[00:15:53.100] – Rick Weber
I think part of it depends on how much of the business the private equity groups own. Again, typically in sort of the perfect case or the typical case, I would say for a private equity group when they come into a business is they buy 70, 80, 90% of the business. The founders of the business retain 1020 30%, with the idea being that those guys or women got the company. To that point, they’re best equipped to continue to run the business. I think some private equity groups are more hands on than others. Obviously the playbook for a private equity group is to buy a company, grow it over three, four, five years, both organically and then through consolidation and more MNA and then to flip it. So in order to make money, they have to grow not just the top line, but they also have to grow the bottom line. And obviously, if you’ve got an overinflated payroll, a good way to increase the bottom line is to reduce expenses. So I think there is definitely an influence of the third party owners over maximizing profitability. Some are a little more hands on and get involved in the micro and the macro of hiring and firing.
[00:17:11.420] – Rick Weber
But I think there’s also a bit of contagion. You see one, Facebook does a ton of layoffs and now all of a sudden if you have a bunch of layoffs, it may not make news. So you see concilio do layoffs or you see relativity. They did some layoffs. I think Disco did some layoffs. If those groups are laying people off, then all of a sudden you laying people off. Doesn’t look so bad and it doesn’t even get talked about. So I do think there is some level of contagion amongst the like minded or like companies that are of similar nature. Certainly there were some hiring challenges for companies over the last few years. It was a very tight labor market. I think companies probably overhired and now realizing that maybe they’ve got a little bit overcapacity in certain areas. So we’re not as close to the sort of the staffing side of things. But I think there’s probably a combination of factors involving that and like anything else in our industry, it’s cyclical. So companies might get a little too lean and may have to start staffing back up again. So I would not anticipate that this is going to be a long trend.
[00:18:28.400] – Doug Austin
Yeah, certainly last year we were talking about the this time we were talking about the great resignation. So kind of exactly what you mean when you talk about it being cyclical goes from one kind of range to the other. So certainly something to keep an eye on. So, last question I have for you, and this would be something that I think a lot of people would be interested in, is what advice do you have for a company that’s thinking about selling and trying to position for the best success?
[00:19:01.660] – Rick Weber
Maybe a few things. It’s always better to sell from a position of strength and growth than it is from a position of weakness. And it’s probably a good time to start thinking. First of all, you should always be thinking about selling your business, whether you’re going to sell it or not. Running your business as if you are going to sell it is just a smart way to run a business. It just makes you more lean and effective. It probably makes sense for companies to start thinking about the choices that they make early, going back to the beginning part of the conversation, the exit planning consultation. So it’s probably better to start thinking six months or a year or even a couple of years out where you want to be. It’s important to understand the mechanics of how deal flow works and what buyers look at. And that’s something again, we can kind of work with our clients and help them navigate on the early side of things. But you need to build your business so you’re not going to want to make choices that are going to hurt the business just because you think they may help something else down the road.
[00:20:18.730] – Rick Weber
So it’s a bit of a balance, but I would just say grow the best business that you can. Profitability is important. Revenue is important. Growth is important. Positioning yourself for what other companies are going to want is important. Client distribution is something that’s very important. Companies that have a disproportionate amount of revenue coming in from a small number of clients can oftentimes hurt a company. It’s client concentration. So it’s obviously better to have more clients than less. That said, you’re not going to tell a client to stop giving you work because all of a sudden but diversification is an important factor as well. But I think it’s a very still legal technology, legal services is still extremely robust. Lawyers have become very busy over the last few years. The legal industry seems to be very strong right now. So I anticipate that the next several years will continue to be strong for legal technology, legal Services, M and A.
[00:21:22.280] – Doug Austin
Yeah, I certainly agree with that. All right, so I want to thank my guest, Rick Weber of Arbor Ridge Partners, for the interview. Thanks, Rick.
[00:21:31.310] – Rick Weber
Thank you. It was great.
[00:21:32.890] – Doug Austin
Yeah. And I want to thank you all for tuning in to another edition of Ediscovery today’s Thought Leader interview series. We’ll see you next time on the Ediscovery today video.
[00:21:42.330] – Rick Weber
[00:21:42.920] – Doug Austin