What Is Your Law Firm Actually Worth? The New Economics of Law Firm Valuation

For decades, law firms have operated largely outside the world of private equity. But that is changing. Investors are taking a closer look at the legal industry, valuations are rising, and management services organizations (MSOs) are creating new opportunities for firm owners to access outside capital.

In this episode of Financially Legal, Emery Wager sits down with Chris Hildreth, an investment banker at Marks Baughan who advises law firms on M&A and MSO transactions. They discuss how law firms are valued, why investors are entering the market, what owners actually receive when they sell, and where the industry could be headed.

This conversation kicks off our three-part series, So, You Want to Sell Your Law Firm?, exploring the financial, ethical, and practical considerations of law firm ownership and transitions.

Why Investors Are Suddenly Interested in Law Firms

Law is one of the oldest professional services industries, yet it has historically attracted relatively little private equity investment. So why now?

Chris points to the accounting industry as a major turning point. Beginning around 2022 and 2023, several large investments in CPA firms demonstrated the potential for outside capital in highly regulated, people-driven businesses. Investors began looking at law firms through a similar lens.

The legal industry is highly fragmented, and many firms have yet to fully embrace technology, automate back-office functions, or modernize operations. For investors, that creates an opportunity to improve efficiency and support growth. Chris estimates that roughly 50 to 75 law firm MSO deals were in the market at the time of the conversation, reflecting just how quickly interest has grown.

How MSO Deals Actually Work

In most U.S. jurisdictions, non lawyers cannot directly own law firms or share in legal fees. MSOs create a structure for investors to participate in the business operations surrounding a law firm while keeping legal services separate.

The law firm continues to employ attorneys and serve clients, while the MSO handles functions like technology, marketing, finance, and administrative support. The law firm pays the MSO a contracted fee for those services, generally based on fair market value.

Importantly, the founders continue to own the law firm itself. Chris explains that they may also retain a 25% to 50% ownership stake in the MSO after a transaction. This allows owners to receive liquidity upfront while maintaining an interest in future growth. These arrangements must still comply with applicable professional conduct rules, including restrictions on fee sharing and interference with legal judgment.

What Is a Law Firm Actually Worth?

Most law firm MSO transactions are valued using multiples of EBITDA, or earnings before interest, taxes, depreciation, and amortization. Investors evaluate profitability alongside growth, margins, leadership, and future earnings potential.

And those multiples are changing quickly. Chris points to personal injury firms, which account for roughly half to two-thirds of MSO deal activity. Just two years ago, these firms were trading around 4–5x EBITDA. At the time of the interview, Chris estimated the average had climbed to 6–7x, with the potential to reach 9–11x over the next 24 to 36 months.

But not every firm commands the same valuation. Investors want sustainable earnings, predictable revenue, strong operations, and a business that can continue growing beyond its founder. A firm dependent on one attorney or a handful of unusually large cases can be a riskier investment.

Selling Your Firm May Mean Taking a Pay Cut

One of the less obvious parts of selling a law firm is what happens to the owner's compensation afterward.

Law firms often distribute most of their profits to partners at the end of the year. But investors need to identify a sustainable earnings stream to determine the value of the business. Chris describes a process called a "scrape," where a portion of partner compensation is treated as business profit to establish a normalized EBITDA figure. For some founders, that can mean accepting a 20%, 30%, or even 40% reduction in ongoing compensation.

In exchange, owners may receive a significant upfront payment and retain equity in the MSO. The decision becomes a trade-off between immediate liquidity, future income, and the potential value of that retained ownership.

What Makes a Law Firm Attractive to Investors?

Size matters, but it is far from the only factor. Chris explains that investors generally look for firms with meaningful scale, consistent growth, strong profitability, and decisive leadership. He points to businesses generating $10 million to $15 million or more in EBITDA as particularly attractive opportunities.

There is also an interesting balance when it comes to ownership. Investors want leaders who can make decisions and move a transaction forward, but they do not want the firm's success to depend entirely on one person.

For personal injury firms, case inventory is another consideration. A large pipeline of cases does not automatically increase a firm's valuation, but it can provide visibility into future earnings. Ultimately, investors want to understand not just how a firm performed last year, but how reliably it can grow over the next several years.

Where Does the Market Go From Here?

Chris believes the law firm investment market could follow a path similar to the accounting industry, where a handful of early private equity deals eventually led to hundreds of investments and successful exits.

One important milestone will be more second transactions, where investors sell their stakes after several years. These exits could help demonstrate the long-term value of MSO investments and encourage more activity in the market.

Questions remain around regulation, professional independence, and the impact of outside investment on clients. But law firm owners are facing a changing market with more options than ever before. Whether a sale is on the horizon or not, building a firm with sustainable earnings, strong operations, and less dependence on any one individual is becoming increasingly valuable.

Going Further

Selling a law firm is about more than finding a buyer. It is about building a business that can grow, operate efficiently, and succeed beyond its founder.

At Confido, we help law firms modernize their financial operations through digital payments, disbursements, and automated workflows.

To learn more, visit confidolegal.com or connect with us on LinkedIn.

And don't forget to subscribe to Financially Legal on YouTube or Spotify to catch the next episode in our series on the ethics of private equity, MSOs, and law firm ownership.