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Sunday, Sep 25, 2022

Will LegalZoom Grow Post IPO?

Legal tech company LegalZoom.com Inc. went public last week, giving the company a valuation of more than $7.3 billion.

In its second attempt at executing an IPO, the Glendale-based company started trading shares at $36.75 and closed at $37.85 on June 30, well above its projected mid-point price of $25.50.

In its prospectus with the Securities and Exchange Commission, LegalZoom expected to sell 19.1 million and garner approximately $541 million, or $610 million if underwriters exercise in full their options to purchase additional shares.

Per the prospectus, entities affiliated with TCV Investments had agreed to buy $90 million of stock through a private placement. TCV Investments is the private equity arm of venture capital firm TCMI Inc. in Menlo Park. In addition to TCV, entities affiliated with investment management firms BlackRock Inc. and Neuberger Berman Group expressed interest in $75 million worth of IPO shares.

“We currently intend to use the net proceeds to us from this offering and the concurrent private placement primarily to repay in full $523 million of outstanding indebtedness under our 2018 Credit Agreement, and for general corporate purposes, including working capital, operating expenses and capital expenditures,” LegalZoom wrote in the filing.

A portion of the net proceeds will also be used for acquisitions or investments in technologies, businesses, services and products that complement LegalZoom’s business operations.

The company applied for a listing under ticker “LZ.”  LegalZoom declined to speak with the Business Journal, citing the legally required “quiet period” after a company files for an IPO.

The company first proposed going public in 2012 but postponed it and later withdrew the prospectus.  “Our goal is to level the playing field for small businesses by making the law accessible with simple and affordable services,” LegalZoom Chief Executive Dan Wernikoff said in a statement. “At business formation, small businesses are looking for a lot more than just legal help. We’re excited to help remove roadblocks that get in their way, legal or otherwise.”  Low-cost documents LegalZoom sells templates and instructions for do-it-yourself legal documents such as wills, incorporations, limited liability companies, living trusts and divorces. The price to form an LLC starts at $79 plus state filing fees, while a living trust starts at $279. The company also provides low-cost consultations with lawyers using a monthly subscription model.

In the prospectus, the company states: “Our mission is to democratize law.” The proposed IPO comes after LegalZoom experienced tailwinds driven by the COVID-19 pandemic, when an increasing number of small businesses used online services to establish themselves.  In 2020, LegalZoom revenue grew 15.2 percent to $471 million from $408 million in 2019. According to the company’s initial SEC filing in May, 10 percent of all new limited liability companies and 5 percent of all new corporations in the U.S. were formed using LegalZoom. The company cites small businesses as its prime market.

In the prospectus, the company warned of potential risks to its business, including its recent pandemic-fueled growth not being indicative of future growth and a highly competitive legal market. LegalZoom also has a history of net losses and anticipates increasing expenses, which may impact profitability.   Perhaps the most direct risk for investors is LegalZoom’s weakness in internal controls for financial reporting. “If we fail to remediate these material weaknesses, we may not be able to accurately or timely report our financial condition or results of operations, which may adversely affect investor confidence and the price of our common stock,” LegalZoom wrote in the filing.

Despite the risks that lay ahead, LegalZoom views its opportunity as a $48.7 billion serviceable market. The company wrote in its SEC filing that by increasing access to legal and compliance solutions for small businesses, its total addressable market could grow to be multiples of the serviceable addressable market.   Plenty of competition The emergence of LegalZoom and other companies that provide online legal services represents a threat to the traditional law firm.

Woodland Hills personal injury attorney Barry Goldberg, a former president of the San Fernando Valley Bar Association in Woodland Hills, has kept track of LegalZoom since its early days.  “Whether you see it as a threat or not, it absolutely positively is,” he said. “If you track what LegalZoom and Rocket Lawyer and some of the others are doing, you can almost track the demise of the solo and small law firm.”  Goldberg’s outlook for the future comes from two looming developments in the legal industry that he says would act as a boon for LegalZoom and companies like it: Nonlawyer ownership of law firms and the licensing of paraprofessionals to provide services usually offered by attorneys.

The California Paraprofessional Program Working Group, a committee under the State Bar of California, sees the licensing of paraprofessionals as a means of closing the justice gap and providing services at a lower cost than attorneys. The working group is currently examining what legal services and areas of practice paraprofessionals could take on through licensing.

“In other words, if you’re not a lawyer, you can be a lawyer. That’s huge for (companies) like Legal Zoom,” Goldberg said.

California would be following similar footsteps of states such as Utah and Arizona if it enacted the nonlawyer ownership of law firms.  “People are simply going to hire LegalZoom and other big companies to handle their real estate case, their family law case, their personal injury case, their estate and trust case. And they will probably be paying less for it,” Goldberg explained.

Goldberg added that although LegalZoom won’t have the traditional lawyer-client relationship, it may still be able to deliver a high-quality product.

Jeffrey Sklar, a corporate lawyer and co-chairman of Sklar Kirsh in Century City, doesn’t see LegalZoom as much of a disruptor, at least not for his area of practice.

“I think they have a market and they serve it,” he said.

The critical component for LegalZoom moving forward, Sklar said, is what it decides to do after its IPO in terms of operational advancements that can disrupt the legal industry.

Both Sklar and Goldberg noted the possibility of accounting firms being able to own law firms in the future as another development that could transform the industry.

Goldberg explained that adaptation is going to be crucial for legal professionals as technology continues to change the fabric of the industry.

“Not only do we have to see the change and embrace the change, but we have to distinguish ourselves,” he said. “Number one, with niche areas of law and number two, with the traditional attorney-client relationship.”  Lawyers not taking these steps, Goldberg added, will be the first ones to lose clients.

Antonio Pequeño IV
Antonio Pequeño IV
Antonio “Tony” Pequeño IV is a reporter covering health care, finance and law for the San Fernando Valley Business Journal. He specializes in reporting on some of the biggest names in the Valley’s biotechnology sector. In addition to his work with the Business Journal, Tony has reported with BuzzFeed News on the unsupervised use of Clearview AI, a controversial facial recognition technology. Tony, who also conducts freelance reporting, graduated from the USC’s Master of Science in Journalism program in 2021. He is in his fifth year as a journalist as of 2021.

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