Do-It-Yourself Law Firm IPO Looks a Bit Too Feisty

Bankers are valuing LegalZoom at a whopping 40 times last year’s earnings.

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The upcoming stock-market debut for America’s best-known do-it-yourself law firm looks a bit feisty. Bankers are valuing LegalZoom at a whopping 40 times last year’s earnings. That’s justifiable if the online legal site can turn impressive revenue growth into consistent earnings. But potential lawsuits and rising competition are just two of the company’s biggest risks. 

LegalZoom has also struggled to crank out a profit. After two years of losses it finally earned $12 million last year. Revenue, at least, is growing - by a third last year. The company has built a solid following over the past 13 years and funded most of its growth internally. About 2 million customers have used the company’s services so far and it has a star co-founder, former O.J. Simpson attorney Robert Shapiro. 

But even annualizing the 43 percent improvement in this year’s first-quarter numbers compared to 2011 means LegalZoom’s valued at 28 times 2012 earnings, at the top of its IPO range. Assuming a similar improvement next year still puts LegalZoom’s worth at 20 times earnings. 

Its business model is somewhat akin to’s. Yet the online family history site trades at just 18 times next year’s earnings even though revenue has grown by a third and profit by some 70 percent in each of the past two years. And that multiple’s the result of putting itself up for sale last month. 

LegalZoom, meanwhile, faces a number of risks. It settled three cases alleging unauthorized legal practice last year for $5.4 million, though the final amount could reach $16 million. LegalZoom credibly denies that supplying legal forms and other services can be deemed practicing law, but more suits are likely. 

Savvier attorneys may try to beat the company at its own game. Small private competitors like BizFilings, RocketLawyer and The Company Corporation are making inroads. Traditional lawyers have also launched similar sophisticated services and, unlike LegalZoom, can offer legal advice and personal consultations. 

But LegalZoom has been giving small businesses and individuals an efficient, inexpensive way to handle simple legal issues for more than a decade. That’s a tough advantage to beat. 

To keep it, the company needs to show sustained earnings and healthy subscriber growth. With others hot on their tail, that may prove harder to do than LegalZoom’s valuation implies. 

Read more at Reuters Breakingviews.