Reinventing Professionals Podcast Host, Ari Kaplan, interviews Rick Weber, Managing Partner of Arbor Ridge Partners, about Legal Technology & Legal Services M&A and the current trends.
Reinventing Professionals Podcast is designed to offer ideas, guidance, and perspectives on how to effectively navigate a perpetually shifting professional landscape, with a unique focus on the legal industry and the technology that is driving its evolution. Host, Ari Kaplan, is an attorney, author, and leading legal industry analyst. He has been sharing interviews with industry leaders shaping the next generation of legal and professional services since 2009.
Arbor Ridge Partners is a business broker that focuses on mergers and acquisitions for legal software, litigation support, computer forensics, and eDiscovery companies. With over 60+ years of combined industry experience, legal backgrounds, first-hand industry M&A experience, and deep relationships, Arbor Ridge Partners helps maximize value in the purchase and sale of Legal Technology & Legal Services Businesses. Rick is an attorney and former federal prosecutor and the co-founder of Advocate Solutions – becoming one of the pioneers in the eDiscovery industry with the creation of Discovery Cracker.
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Ari: This is Ari Kaplan and I’m speaking today with Rick Weber, the co-founder and managing partner of Arbor Ridge Partners, a Legal Technology and Legal Services M&A Advisory Firm. Hi Rick. How are you?
Rick: I’m good, how are you?
Ari: I’m great. I’m looking forward to speaking with you today. So, tell us about your background and the genesis of Arbor Ridge partners.
Rick: I’ll try to do 25 years in less than 25 years. I started after law school in 1994 as a lawyer in Chicago at a firm called Mayer Brown and was there for three years. I left Mayer Brown to become a prosecutor for the United States Securities & Exchange Commission where I got to investigate and prosecute the bad guys – which was a fun job. And then in around 2000, I knew that I didn’t want to stay in the government forever, so at that point I decided to leave. I realized that I really didn’t want to go back into the law firm environment and kind of found myself in a sticky situation and at a crossroads in my career. A good friend of mine at the time was a legal technologist, for lack of a better word, and he and I got to speaking and one thing led to another in the conversation and we decided to take his legal technology background and my legal background and start a litigation software development company called Advocate Solutions.
We ended up developing and pioneering eDiscovery with a product called Discovery Cracker, so for any of your older listeners that should hopefully at least resonate a little bit. We sold that company in 2003 and I stayed on with the company that bought us until 2006. In 2006 I ended up getting involved with another legal technology/legal services startup company called eDirect Impact out of Houston. We were developing some eDiscovery project management tools as well as doing traditional eDiscovery hosting and processing, so it was a combination of litigation software development as well as some legal services. In 2010, we sold 51% of that company to a bigger company that ultimately got bought out. We had yet to be fully integrated into their company at the time that they sold, so through a long series of events ended up getting that company back in 2012. In 2013, I then merged it with a company called Elijah out of Chicago.
Elijah was and is a computer forensics company doing some eDscovery and the CEO and founder of Elijah, coincidentally – or maybe not so coincidentally, was a good friend of mine. His name is Andy Reisman and he also started at Mayer Brown with me back in 1994. He and I had been friends for years and we decided to put those two companies together where we could provide end to end computer forensics work with the eDiscovery piece. As those two companies began to grow, we saw that while they fit really nicely on EDRM model – as a lot of companies in industry see where forensics leads into data harvesting, which leads into eDiscovery processing and hosting – that they’re two very different businesses. One is a technology business where you sell by the gigabyte and the other one is more of a consulting business or even like a law firm where you’re selling a very specialized skillset on typically an hourly basis and there’s very little crossover between the skills of the people doing the forensics work and the skills of those doing the eDiscovery work. So, we ended up spinning off the eDiscovery business unit and selling that to a private equity group in 2017. After that, a lot of what I was doing went away since I was managing all of the due diligence that led up to that acquisition as well as the eDiscovery business unit. In the summer of 2018 – taking lessons learned with having had four exits in the eDiscovery and legal technology space, having bought a few companies along the way and my legal background (as with my business partner who also had had some exits and bought some companies and has the legal background) – we started a brokerage partners with the idea being that we could leverage all the relationships, industry knowledge, industry experience, legal backgrounds and help companies that were looking to sell, find a better exit and companies looking to buy companies, help them find better targets. We’ve since added another person to the team who’s also an attorney and has over 20 years of industry experience as well. So really again, it’s a long arc that got me from the traditional practice of law to cobbling everything together to help industry companies find better exits or find companies to purchase.
Ari: What exactly is legal technology and legal services M&A advisory?
Rick: It’s a lot of words that really means something very simple. M&A is mergers and acquisitions. Advisory is really just giving advice on buying and selling. So, we’re kind of fancy business brokers for legal technology and legal services companies where we have confined ourselves to the vertical. Given that our strength and our skillset and really our value proposition is that we have lived in this space for so long, that we pretty much know either directly or indirectly most of the buyers and most of the sellers. We are very good at being able to match sellers with buyers and buyers with sellers. In short, it’s really just mergers and acquisitions for companies that fall into the legal technology and legal services arena and includes eDiscovery, computer forensics and other Legal services companies. We help sellers who want to sell get a better exit and we help companies looking to buy, find the right target.
Ari: Take us through that process. Who contacts you? Who do you then contact? How does this generally work?
Rick: It depends on whether we have a sell-side mandate or a buy-side mandate. I’ll answer the question from a sell-side mandate, since we do more of that and it is a bit more traditional. It’s usually one of two things: either people that we’ve known for a while or it’s people that know of us that decide that now’s the time to sell their company. Or, it can be that a company is thinking of selling their company in let’s say the next year or two and wants to plan ahead. In this case, if they know they want to sell in a couple of years from now, we can do what we call Exit Planning Consulting whereby we help those companies evaluate business decisions and financial decisions today through the lens of M&A with an eye toward an exit down the road. For example if one of these company’s is say looking to spend money on a new server farm or whether to hire a new employees or sales person, we can have strategic conversations with them about what impact those decisions will have – for better or for worse – if they want to hit the market in say 9 or 12 months.
It’s kind of like when a real estate agent stages a house. We can help companies be in the best position to get the best exit.
Now, the way the process works typically is we’ll enter into an engagement with them whereby we’ve become their exclusive representative and help based on what they’re looking for. In some circumstances, some of the executives are looking to get out of the business completely where in other circumstances, some or all of the executives are looking to stay on, and depending on their particular circumstances and what they’re looking for, we generally have a pretty good idea of who in the industry is acquiring and who would be a good fit for the right group. That’s where our relationships really come in handy as we can match the right buyer with the right seller. In the process, I typically would put together a list of potential buyers that I think would be a good fit and go over that list with my client. We would then reach out to potential buyers and start presenting to them the opportunity with data – whether it be financials and/or business documents – and trying to get interest from particular groups. And then that generally whittles itself down to groups that are somewhat interested to then more interested. It’s a process and can be kind of like dating: you have a first date where you talk about things generally, followed maybe with a second day where you talk about things more and then things progress. The first big event is what’s called a letter of intent where it would be a letter from a specific company that says we want to buy you and we’d like to buy you at this purchase price. A seller would then agree in principle to those terms and generally means that that buyer and that seller would then be working exclusively towards getting a deal done. LOI’s typically have what’s called a “no shop clause” whereby a seller wouldn’t be allowed date on the side if you will, i.e. not be allowed to have discussions with other companies about a deal while they’re going through a due diligence process. Depending on the company and the buyer deal can take four or five months on the short end to anywhere from nine to twelve months – and sometimes even longer – on the longer end. But, right now in the industry, I would say deals are getting done in five to nine month range.
Ari: What’s the difference between private equity and venture capital in the context of M&A?
Rick: M&A really would be more wedded with the term Private Equity because private equity groups are looking to buy usually a majority to a complete ownership interest in a company. That lends itself towards mergers and acquisitions because it’s in essence an acquisition by acquiring a majority ownership in the company. Venture capital is more of an investment – i.e. companies that are looking to fund early stage companies for broad growth. Typically they don’t take a majority interest. Instead, they come in maybe in the five, ten, fifteen, or twenty percent range and there’s often different stages in which a venture capitalist would come in and invest. Series A, B, C, and so on. Valuations of target companies change over time depending on the growth of the company. In a nutshell, venture capitalist look to invest in early stage companies that are looking to grow and have really large returns on the initial investment.
I like to tell people that the venture capitalists buy dreams where private equity groups by realities. Private Equity groups are not investors per se, where they’re buying for growth. They are, but they’re really buying companies to then hopefully see some growth, but their growth expectations are significantly different than a venture capitalists’. Venture Capitalists would be looking for usually a 10X return on their investment, recognizing that a few of the investments they make are going to hit, but many are going to lose. It’s kind of like in baseball where you can strike out seven out of ten times, but get on base three out of ten and you then would go to the hall of fame. That’s kind of similar to venture capitalists. Private Equity groups wouldn’t be very successful if they had a .300 batting average. They’re looking to buy companies that are strong and solid, but maybe has an executive team that’s looking to either leave or cash out in part, and then maybe they bring in some investment funds along with maybe a different management team, but look to continue a trend to then sell it within a couple of years at some multiple that is usually significantly less than a 10X. If they can get that type of return, they’re happy obviously, but their expectations are significantly different.
So, private equity, again, is really more buying companies or a majority interest in companies that have growth and a stable client base and growing it. They’re also looking for companies that typically have a minimum amount of net profits anywhere from $1M on the very low end and some won’t even come in until there’s at least $3M of profitability and above. Whereas venture capitalists oftentimes we’ll invest in companies that are actually even losing money.
The parameters are very different. The two terms are oftentimes conflated, but they’re really quite different entities looking for different things.
Ari: What’s the current state of M&A for legal technology and legal services companies today?
Rick: I think it’s strong. I think it’s been very, very strong for the last few years. There’s been a lot of industry consolidation, certainly the eDiscovery space. We’ve seen a lot of small and medium size eDiscovery companies take on private equity investment with the idea that it’s become harder to grow organically in the vertical than it used to be. Companies instead of trying to grow by hiring a bunch of sales people and building an office in a particular area are finding it easier to buy the revenue from an existing litigation services or eDiscovery or computer forensics company. M&A has thus been very hot for the last several years. I think it’s going to remain strong through 2019 and probably into 2020. I do think that the window’s probably going to start to tighten up a little bit. One of the things that I think we’re going to see in the next year or two is that some of the larger buyers, the groups that have been private equity backed, that had been buying up companies, are going to become sellers at some point in the near future. That will have a double impact as one, there will be less buyers and more sellers, and two that could have upside down pressure on the existing groups that are selling. Also, over time, there are less and less groups out there. There are definitely more companies coming online that are doing litigation services, but I think you’re seeing more companies selling then you’re seeing startups. There’s less sellers out there today and less than there were probably two, three years ago. I think there will be a slowing down in activity over the next couple of years, but I do expect that we’re going to still see M&A being relatively strong for the next couple of years.
Ari: This is Ari Kaplan speaking with Rick Weber, the co-founder and managing partner of Arbor Ridge partners, a legal technology and legal services M&A advisory firm. Rick, thanks so much.