One of the biggest mistakes law firm founders make when evaluating legal MSOs is believing they have only two choices: Talk exclusively with the first MSO that calls or talk with every potential investment firm that calls.
Neither Approach Is Likely to Produce the Best Deal
One approach leaves you with no meaningful basis for comparison. The other leaves you wondering whether Platform G had the former BigLaw partner or the former Goldman Sachs banker, and whether Platform K was the one that promised to “reimagine legal services” or “redefine the client experience.”
That lesson is hardly unique to Legal MSOs. It’s a mistake the legal profession has been making for decades. Legal recruiting did it. Law firm mergers did it. Private equity does it. Apparently, no one ever stopped to ask whether confining or exhausting managing partners was actually a strategy.
Sold to the highest bidder!
When I started in legal recruiting 30 years ago, the prevailing philosophy was simple. Get attorneys in front of as many firms as possible, then tell them to accept the highest offer. It sounded perfectly logical until you watched it happen in real life. After 12 interviews, every law firm started sounding exactly the same. Every firm had “the best culture,” “unparalleled mentorship,” and “a collegial environment.”
The only thing anyone could remember by the end was who had the better steak dinner.
The opposite approach was no better.
Some recruiters forcefully steered attorneys toward whichever firm paid the upfront retainer. Funny how the “perfect opportunity” always seemed to be the one that retained the recruiting firm.
Both approaches missed the point. Compensation matters, but it is only one variable. Anyone who has ever met a seventh-year associate billing 2,500 hours a year while showing off photos of the boat they’ve been in one time knows that.
The same principle applies to Legal MSO transactions, except the stakes are considerably higher. A founder is not choosing an employer. They are selecting a long-term business partner who will help determine the firm’s technology, recruiting, marketing, finance, client intake and strategic direction for years to come.
That makes education far more important than volume.
Going Deep When Vetting Legal MSOs
Founders who understand deal structures are going to move in a more sophisticated direction than founders who get mesmerized by valuation multiples, meaning the amount offered for the firm. Obviously, price matters, but it’s like being offered a great price on a car, provided you agree to finance it at 40% interest. Terms matter.
‘Getting Around’ Rule 5.4
Consider a few examples we have encountered. I had a “finance bro” directly ask me about ways to “get around” Rule 5.4. Another told me, “We just want to be able to help them (partners) pick the most profitable cases.”
After interviewing more than 70 legal MSOs and turning down more than 60 of them, let me be clear:
The likelihood that some participants in this rapidly expanding market will eventually run afoul of the ethics rules seems high. Whether the consequences are minor or catastrophic will depend on the facts.
As legal ethics attorney Trisha Rich has observed:
“Every transaction needs to be structured and thought about, from the beginning, as structuring to comply with, and not ‘get around,’ the ethics rules. For the people that want to transact and work in this space, that is imperative.”
Then There’s Bad Deal Structure
Attorneys with little or no experience in private equity or capital markets often walk into negotiations believing that simply being an attorney qualifies them to negotiate these transactions.
They’re wrong.
We have seen deal structures that eradicate autonomy, undermine culture, and leave partners with pennies while the investors ultimately cash out for millions or even hundreds of millions.
These examples illustrate a broader point. The quality of a transaction is determined by far more than the purchase price. Governance, economic incentives, growth strategy, capital commitments, management philosophy and long-term alignment often have a greater impact on founder outcomes than a modest difference in valuation.
Another challenge is emerging as more capital enters the legal industry. Legal MSOs are increasingly contacting successful partners. Every introductory meeting promises the best technology, the best leadership, the best growth strategy and, of course, “transformational AI.” If every pitch deck were accurate, every law firm in America would already be doubling in size every 18 months.
After enough conversations, the distinctions begin to blur, and all legal MSOs begin sounding suspiciously alike. By the eighth meeting, founders are trying to remember whether platform A was the one with the AI strategy, the roll-up thesis, or the managing director who used the word “synergy” 17 times in 45 minutes.
Use the Rule of 2 to 5 When Evaluating Legal MSOs
The answer is not talking with one MSO. That is negotiating against yourself. The answer is not talking with 20. At some point, the process stops creating leverage and starts creating confusion and fatigue.
Most founders are better served by speaking with two to five well-qualified MSOs that have been carefully vetted to match their culture and goals. That creates meaningful competition without turning the process into a part-time career, and gives partners the opportunity to compare not only economics, but also the people they may spend the next decade working with.
Choosing among legal MSOs is not simply a sale. It is the selection of a long-term strategic partner. Those are fundamentally different decisions, and they should be approached with the same level of diligence.
As Al Taj, a Skadden-trained M&A attorney and former private equity buyer who represents sellers exclusively at Mantle Legal, put it:
“An MSO isn’t a sale. It’s a partnership that opens with a check. You keep operating and have to live with what you signed. So you’re choosing the best partners and not just the best purchase price. Align on values, take care of your people, and the equity you rolled ends up worth more than the check at closing. Alignment isn’t part of the deal. It is the deal.”
Austin Maloney, a Legal MSO Partner with Hunton Andrews Kurth, agrees.
“Upfront cash is the shiny object that catches a seller’s attention. It does matter, but it is just one of numerous factors that determine the long-term value of a transaction to a law firm seller.”
The Rule of 2 to 5 is not a magic number. It is simply enough competition to create leverage, enough diversity to compare different strategies, while keeping the number low enough, so that founders can still distinguish genuine partners from polished presentations.
Sophisticated buyers know the first number on the page is only the beginning of the negotiation. Sophisticated sellers should think the same way.
Frederick Shelton is the CEO of Shelton & Steele, which advocates for attorneys and law firms on M&A and Legal MSOs. Fred can be reached at fs@sheltonsteel.com. Ayven Dodd is the President of Shelton & Steele, and he can be reached at ad@sheltonsteele.com.
More Resources on PE and the Legal Industry
“The Private Equity Buzz: Will MSOs Gain Traction in Small and Midsize Firms?” Roy S. Ginsburg breaks down the state of PE investment in law firms, who benefits from the MSO model, and what it means for small firm owners and retiring partners.
In “Partner Psychology: Expert Strategies for Negotiating Legal MSO Deals,” Frederick Shelton and Ayven Dodd explain why preparation and mindset are just as important as spotless financials, if not more so.
In “The Seven Pillars of MSO Deals,” the two dig into the fundamentals that law firm owners must understand if they expect to get the best terms. (Listen to the article below on Attorney at Work Today.)
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