Mea Culpa: What I Got Wrong About Private Equity in Law Firms

I didn’t see this coming: Meet the regulation agency MSO mannequin, non-public fairness’s favourite loophole sporting a enterprise informal smile.

I’ll admit it: in “Exit on Prime,” I made a prediction that’s now getting older about as gracefully as a grocery-store avocado. I stated non-public fairness would watch for bar associations to loosen up on non-attorney possession earlier than swooping into the authorized sector.

TL;DR: The MSO Loophole and Non-public Fairness

The Shift: Non-public Fairness (PE) isn’t ready for regulatory modifications; they’re utilizing Administration Companies Organizations (MSOs) to amass regulation agency operations right now.

The Mannequin: In a authorized MSO, the agency stays attorney-owned to fulfill Bar guidelines, whereas the PE-backed MSO manages operations — billing, IT, HR, advertising and marketing —to drive predictable income streams.

The Backside Line: To remain aggressive or put together for an exit, regulation agency house owners and companions should transition from “proudly owning a job” to constructing a scalable enterprise infrastructure with a transparent regulation agency valuation.

Technically, I wasn’t hallucinating.

Arizona and Utah opened the doorways, Washington State slid in after, and Puerto Rico will enable as much as 49% non-attorney possession beginning in 2026. However right here’s the half I didn’t see coming: PE corporations aren’t ready for the Bar’s permission slip. They’ve discovered one other door, and, shock, it’s already vast open.

Non-public fairness loves effectivity virtually as a lot as attorneys love a superb loophole. So fairly than twiddling their thumbs via regulatory debates, PE borrowed a web page straight from healthcare: the Administration Companies Group, or MSO.

What’s a Administration Companies Group (MSO) within the Authorized Trade?

In medication, the MSO owns all the things besides the physician’s license. Buildings? Sure. Billing? Sure. HR, tech, advertising and marketing, branding? All sure. The physician retains the medical work; the MSO runs the enterprise.

Now change “physician” with “lawyer,” and voilà, the MSO is the authorized trade’s new acquisition mannequin. The regulation agency stays 100% attorney-owned. However operations, admin and different enterprise features? These get scooped into the MSO, a separate entity owned by non-public fairness buyers.

And PE loves MSOs as a result of they’re tidy, scalable, and (let’s be trustworthy) simpler to standardize than the typical solo lawyer’s submitting cupboard.

Associated studying: “Non-public Fairness Comes Knocking: The New Frontier of Regulation Agency Possession” by Roy Ginsburg.)

Why the Regulation Agency MSO Mannequin Works, and Why It’s Shifting on the Pace of a Bar Examination Panic Assault

Right here’s the playbook:

No rule modifications required. Bar guidelines limit law-firm possession, not administration firms. Briefly, the regulation agency MSO mannequin complies with Mannequin Rule 5.4 due to the clear division between authorized and enterprise operations.

Copy-and-paste scalability. As soon as PE builds one MSO, it will probably roll the mannequin into agency after agency.

Predictable income streams. Operations = money circulation = PE catnip.

This isn’t principle. That is taking place.

Only a few weeks in the past, I spoke with an lawyer who has acquired 27 corporations in 12 years. He’s now launching a PE fund, constructing an MSO in Puerto Rico, and shifting quicker than most corporations replace their web sites.

Translation: the market is maturing, and when you assume your five-attorney follow in Topeka is safely off the radar, effectively … let’s name that optimism “aspirational.”

Time for Some Exhausting Questions (the Enjoyable Form … Form of)

Earlier than you resolve whether or not this pattern is thrilling, terrifying or each, take a minute to ask your self:

Have you learnt what your agency is price?In case your reply is, “Uh, relies upon who’s asking,” that’s not a valuation, that’s a guess.

Might your agency run with out you for 30 days?If the thought offers you full-body hives, congratulations: you personal a job, not a enterprise.

Are you constructing a model or simply training regulation beneath your title?PE-backed MSOs don’t purchase identities; they purchase infrastructure.

Would you ever think about shopping for one other agency?Consolidation isn’t simply one thing that occurs to corporations. It’s one thing corporations do after they wish to develop. (Learn: “Acquisition

These aren’t theoretical questions. These are the questions PE patrons, MSOs and critical rivals are already asking — quietly, systematically and with precise spreadsheets.

And right here’s the uncomfortable reality: In the event you can’t reply these questions confidently, you’re already a step behind the corporations that may.

So, What Now?

I’m not saying each lawyer ought to run out and promote their agency tomorrow. (Actually, if that have been the plan, half of you would want at the very least three extra years to get your books prepared.)

What I’m saying is that this:

The authorized trade is consolidating.Non-public fairness is right here.The regulation agency MSO mannequin is the brand new Malicious program, minus the Greeks, plus loads of spreadsheets.

Some regulation corporations will promote. Some will scale. Some will simply attempt to keep related whereas the panorama shifts beneath their ft. However each agency will likely be affected.

And that’s the place, sure, individuals like me are available in. (You already know I run a fractional CFO firm, Cathcap, however I’m not going to thump you over the top with a gross sales pitch. You’re welcome.) However right here’s the truth: Whether or not you wish to purchase, promote, or just survive, it’s essential to perceive your numbers, your worth, and your small business mannequin.

The Backside Line: Deal with Your Regulation Agency Like a Enterprise

The corporations that put together now can have choices later. And the corporations that don’t? Properly, they received’t have to fret about promoting; somebody will ultimately purchase them for elements.

I used to be unsuitable about how non-public fairness would enter the authorized area. Mea culpa. However I’m not unsuitable about what’s coming subsequent. Authorized trade consolidation isn’t looming on the horizon; it’s already pulling into the car parking zone.

And the legal professionals who deal with their corporations like actual companies? They’re not simply prepared. They’re already taking part in a distinct sport.

Attorneys work tirelessly to construct their practices and are starting to appreciate that these companies have worth.

In Exit On Prime, monetary advisor Brooke Full of life addresses the sensible features of making an easy-to-sell regulation agency, offering the roadmap and instruments that may permit you to… exit on prime. Study extra at www.ExitOnTopBook.com.