What PE firms typically do once they buy into a legal tech software vendor, why they do it, and where customers can get burned.
|
Playbook Step
|
What PE Sponsors
Actually Do
|
Legal-Tech
Examples
|
Customer-Side
Risks & Harms
|
|
1. Buy with Leverage
|
Use 50-70 % debt to fund the deal and load that debt on the target’s balance sheet.
|
• Warburg Pincus & Cove Hill recap NetDocuments in 2021 (undisclosed purchase price).
• Hg takes Litera private in 2019, funds 10+ bolt-ons with unitranche debt.
|
High fixed debt service → pressure to cut costs (support, R&D) and raise prices.
|
|
2. Roll-up Bolt-ons
|
Acquire direct competitors or adjacent workflow tools, then collapse them into one platform to grow ARR fast.
|
• NetDocuments → Worldox (Oct 2022) adds 6,000 SMB firms in one shot. LawSites
• Onit (K1, $200 M) buys SimpleLegal (2019), BusyLamp (2021), Bodhala (2022). Onit
|
• Forced migrations (Worldox desktop → NetDocs cloud). LexWorkplace reports higher TCO and data-conversion fees. LexWorkplace
|
|
3. Raise List Prices & Retire “Overlaps”
|
After integrations, sunset duplicate SKUs, impose subscription-only licensing, and embed annual uplift clauses (+7–12 %).
|
• Litera ends support for Workshare Compare & DocsCorp suites, pushing firms to new Litera bundles. Innovative Computing Systems, Inc.Legal IT Insider
|
• Price hikes during renewal; customers pay to re-train staff or re-platform.
|
|
4. Cut SG&A to expand EBITDA
|
Trim overlapping marketing & support teams to hit the 20–30 % EBITDA margin PE funds expect.
|
• Litera cut AUS marketing & product staff after DocsCorp acquisition. Legal IT Insider
|
• Reduced regional support windows; slower bug-fix cycles.
|
|
5. Cross-sell & Bundle
|
Use the new, larger install base to upsell add-ons (e-billing, contract AI) and squeeze more ARR per customer.
|
• Onit bundles Bodhala spend analytics with SimpleLegal mid-market ELM.
• NetDocuments sells ndThread & CollabSpaces to Worldox converts.
|
• Increased vendor lock-in; switching costs escalate as more workflows sit in one stack.
|
|
6. Refinance or Exit in 3–7 yrs
|
Sell to another PE firm, list via IPO, or flip to a strategic—pocket the multiple expansion.
|
• Silver Lake buys into Relativity at a $3.6 B valuation (2021) and will seek a 2–3× return at exit. Built In Chicago
|
• Another owner can restart the cycle—new debt, new price schema, new road-map priorities.
|
Why PE likes legal tech
- Sticky revenue: Once mission-critical data (contracts, work product) is inside a platform, churn is <5 %.
- Highly fragmented market: Easy to bolt-on smaller vendors and create scale economies.
- Pricing power: Law-firm & corporate legal budgets are still a small slice of total matter value, giving head-room for increases.
Customer risks in detail
- Price inflation outpacing value.
Post-deal list prices often jump 8-15 % at the first renewal; some firms report a 40 % TCO hike moving from Worldox to NetDocuments’ cloud LexWorkplace
- Forced migrations & product sunsets.
Litera’s EOL notices give <24 months before legacy Workshare/DocsCorp tools stop patching security bugs. Innovative Computing Systems, Inc.Litera
- Support degradation.
Lay-offs of regional teams (e.g., Litera Australia) mean slower ticket response and fewer local experts. Legal IT Insider
- Innovation stall.
Debt service + EBITDA targets redirect cash from R&D to interest payments, delaying needed features (e.g., Worldox users waited years for modern cloud search).
- Change-of-control uncertainty.
When Silver Lake exits Relativity, a new owner could split cloud vs. on-prem SKUs or spin-off analytics—customers have no seat at that table.
Mitigation checklist for buyers
|
Clause / Action
|
What it Protects Against
|
|
Price-cap clause: max CPI+2 %
|
Shields against post-buyout hikes.
|
|
Change-of-control opt-out
|
Right to terminate or demand free migration if ownership changes.
|
|
Road-map escrow / source-code escrow
|
Coverage if acquirer sunsets or pivots the product.
|
|
Support-staff SLA (FTE ratio)
|
Prevents aggressive head-count cuts from crippling service.
|
|
Data-export in open standard (JSON, XML)
|
Lowers switching cost if PE roll-up forces an unwanted bundle.
|
Key take-away
Investor-owned platforms can deliver real scale and innovation—but the PE playbook (debt, roll-ups, price lifts, support cuts) creates predictable customer pain points. Write strong contract clauses (price caps, change-of-control escape, support SLAs, open-data export) and keep an eye on ownership news so you’re protected before a deal closes.
Add one more lever—look beyond the funded crowd.
Bootstrapped or family-owned vendors such as LEAP (small-firm PMS), Dennemeyer (global IP management), mot-r (legal work orchestration) and long-standing niche tools like Tabs3 often:
- price more predictably (no EBITDA targets to hit),
- maintain stable road-maps for decades, and
- offer direct access to founders for support.
Including at least one “un-funded” alternative in every RFP keeps pressure on PE-backed suppliers—and gives you a fallback if the next roll-up cycle makes your current vendor too expensive or too risky.
Mike Tobias: May 1, 2025 11:00:00 AM