What Law Firm MSOs Can Learn From Accounting Co. Model

Outside capital has been flowing into accounting firms for years, with investors developing creative structures to work within that field’s specific ownership restrictions. The framework developed through these transactions offers valuable insights for another type of professional services firm: law firms.

Though U.S. law firms have effectively been off-limits for this type of investment due to rules restricting ownership and fee sharing, in recent years investors have developed workable structures, such as the managed services organization (MSO), that allow outside capital to flow into law firm-affiliated entities while complying with applicable restrictions.

In a recent article for Law360, Russell Shapiro takes a deep dive into what advisors have learned from accounting firm M&A, and provides law firms and investors considering these transactions with key recommendations, including:

• Address partner concerns proactively. Anticipate questions about equity, compensation, decision rights, and retirement timelines before they become obstacles. Clearly communicate both the risks and benefits of outside investment to all partners.
• Make use of incentives. Because non-competes are unenforceable against attorneys, deal terms must rely on strong financial incentives rather than restrictive covenants to retain partners and reduce friction.
• Choose your PE investor carefully. Cultural fit matters as much as economics. Misaligned growth expectations or management philosophies will create friction that no deal structure can fully resolve.
• Understand the timeline. PE firms typically operate on a five-year horizon before seeking an exit. The eventual “flip” is a feature of the model, not a surprise, and firms that plan for it negotiate better terms.
• Understand the liquidity structure. PE-backed deals can offer multiple cash-out opportunities: an up-front payment, rollover equity, and additional liquidity events at exit. This is virtually unheard of in traditional firm mergers, but remaining partners will need to commit to staying on in order to maximize their position.
• Know where growth will come from. PE investors build scale through add-on acquisitions and deploy capital toward technology, talent, and additional firm acquisitions. Practice areas with high volume, systematized work, and scalable economics are currently the most attractive for investors (though targets could evolve to include additional practice areas).
• Understand the debt. PE acquisitions are leveraged, and law firm partners are often unfamiliar with debt obligations. Management must understand how the MSO’s debt is structured and how it will need to be serviced.

To read the full article in Law360, click here.

LP represents law firms with respect to a variety of needs, including their partnership agreements, financing arrangements, and strategic transactions. For more information, reach out to Russell Shaprio or another member of our Law Firm M&A focus area.