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.
Private equity is making its way into the legal industry, and law firms are starting to take a closer look at what outside investment could mean for their businesses. But unlike other industries, law firms have a unique set of ethical rules that make these deals more complicated.
In this episode of Financially Legal, Emery Wager sits down with Trisha Rich and Josh Porte of Holland & Knight to talk through the ethics behind management service organizations (MSOs). With over 100 law firm MSO transactions closed or in progress at Holland & Knight, the two have seen firsthand how these deals work and where the challenges come up.
This is the second episode in our three-part series, So, You Want to Sell Your Law Firm?, moving from the financial side of MSOs to the rules and regulations shaping these transactions.
At its core, an MSO is a third-party service provider that handles a law firm's non-legal business operations. While these arrangements can bring outside capital into the business, the law firm itself remains independently owned and controlled by lawyers.
Trisha explains that maintaining this separation is central to structuring an ethical transaction. An MSO cannot make decisions about which cases a firm accepts, when cases settle, or who the firm hires and fires as attorneys.
Rather than viewing MSOs as a way around professional conduct rules, Trisha emphasizes the importance of having legal ethicists involved from the beginning to ensure that every part of a transaction complies with those rules.
ABA Model Rule 5.4 is one of the most important regulations governing MSO relationships. In most states, it prohibits non-lawyers from owning law firms or sharing in legal fees.
But ownership is only part of the equation. An MSO also cannot exercise improper control over the practice of law, even if it doesn't technically own the firm.
Trisha and Josh explain that MSOs can generally handle functions like HR, accounting, technology, and other administrative services. Decisions involving legal representation, attorney compensation, and case strategy must remain with the law firm.
They also highlight Rule 5.3, which allows lawyers to outsource non-legal services as long as they properly supervise those providers and ensure compliance with their professional obligations.
One of the more complicated aspects of an MSO transaction is determining how the law firm pays the organization for its services. Under the framework Josh describes, MSOs cannot simply collect a percentage of the law firm's revenue or profits. Instead, these arrangements typically use fixed monthly management fees or cost-plus structures.
A fixed fee establishes a recurring payment for services, while a cost-plus model calculates the MSO's operating expenses and adds a reasonable markup.
Josh explains that independent valuation firms are frequently brought in to determine whether these fees reflect fair market value. The goal is to compensate the MSO for legitimate services without creating an improper fee-sharing arrangement.
As private equity activity in legal grows, state lawmakers and regulators are paying closer attention to how these partnerships operate.
Trisha discusses recent legislation in Illinois and Colorado, where lawmakers have introduced additional requirements around outside investment and lawyer independence. She argues that these laws largely reinforce existing ethical obligations rather than fundamentally changing which MSO structures are permissible. Holland & Knight continues to work on transactions in both states.
The conversation also explores the broader question of who should regulate the legal profession. Trisha raises concerns about legislative involvement in an area traditionally overseen by state supreme courts, while discussing the different regulatory approaches emerging across the country.
For law firm owners considering an MSO partnership, understanding the financial opportunity is only half the equation. The terms of the agreement matter just as much.
Trisha and Josh identify several areas that deserve particular attention, beginning with whether the investor truly understands and respects the law firm's professional independence.
Another concern is personal liability. If a law firm temporarily cannot afford its management fee, Josh explains that the unpaid amount should generally be deferred rather than becoming a personal obligation of the attorneys. Restrictive covenants are another important consideration. Unlike many other industries, lawyers generally cannot be bound by non-compete agreements that restrict their right to practice law.
These differences make legal MSO transactions particularly complex and reinforce the importance of experienced legal and ethics counsel.
One of the biggest questions surrounding MSOs is whether outside investment will change the attorney-client relationship.
Trisha and Josh agree that, when structured correctly, an MSO partnership should not fundamentally change a client's experience with their law firm. Clients should continue working with the same lawyers, under the same engagement agreements, with legal decisions remaining entirely within the firm.
The potential upside comes from improvements behind the scenes. With more capital available for technology, staffing, and operational efficiency, firms may be able to improve how they deliver legal services.
As Trisha explains, the combination of increased capital and technology could create opportunities for better models of accessing and delivering legal services.
As private equity continues to enter the legal industry, understanding the rules behind MSO deals is becoming increasingly important. For law firms considering outside investment, protecting lawyer independence and maintaining ethical boundaries are just as important as the financial opportunity.
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 final episode in our series, where we'll explore law firm succession, sales, and building a business beyond its founder.