Sponsored Article: Private Equity and Law Firm MSOs: Managing the Risks

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Sponsored Article: Private Equity and Law Firm MSOs: Managing the Risks

Private equity investment in the business infrastructure surrounding law firms has moved quickly from speculation to an active deal market. By late September 2026, Holland & Knight’s Legal Services Transactions Team reported closing its 35th law firm management services organization (MSO) deal of the year, with many more in the pipeline. Although the earliest publicly announced transactions involved large personal injury practices, activity now extends to estate planning, family law, general practice, and technology-driven firms.

The legal market offers many of the features that attracted private equity to healthcare and accounting: a large, fragmented industry; recurring demand; aging ownership with limited exit options; and growing technology costs. For the owner of a small or midsize firm, an MSO may therefore be pitched as both a source of capital and a succession plan. But these arrangements also concentrate risks that most firms have not previously had to analyze.

The Structure

Rule 5.4 of the New York Rules of Professional Conduct generally prohibits nonlawyer ownership of a law practice and the sharing of legal fees with nonlawyers. The MSO is the market’s principal response. The lawyers retain ownership of the firm and control of the practice of law. A separate entity, owned by outside investors and often by the firm’s partners as well, acquires some or all of the business infrastructure, including technology, marketing, intake, human resources, billing, finance, and administrative staff. The MSO provides those services under a long-term agreement.

The management fee is typically fixed or based on nonrevenue measures such as headcount or services provided. A fee that rises and falls with legal revenue, profits, settlements, or case outcomes may constitute impermissible fee sharing regardless of its label.

The guidance remains limited. Texas Ethics Opinion 706 concluded in 2025 that a lawyer may invest in a nonlawyer-owned support business that does not practice law, but may not compensate it based on a percentage of firm revenue. No published New York opinion directly addresses a private-equity-backed MSO, and reported case law remains sparse. Meanwhile, Colorado and Illinois enacted measures in 2026 addressing MSO compensation or outside influence over law firms, following a 2025 California statute restricting fee arrangements with nonlawyer-owned firms. The rules governing a transaction signed today may look different in two years.

The Risks

Most firms already outsource some combination of intake, marketing, technology, billing, and collections. The MSO concentrates those functions in a single counterparty with an investor, a board, and growth targets. The familiar professional obligations remain; the stakes change.

Pressure on professional judgment. An MSO will track case volume, resolution speed, staffing, and revenue per lawyer. Rule 5.4(c) prohibits a lawyer from permitting a person who pays for or recommends the lawyer’s services to direct the lawyer’s professional judgment. If a former client later alleges that a matter was settled early or staffed too thinly, the MSO’s reports and performance metrics may become the claimant’s theory of the case. Firms should assume that anything reported to the MSO may one day be read to a jury.

The management fee. A revenue-based fee may create disciplinary exposure as well as restitution, forfeiture, or contract-enforceability arguments. Nor is a fee necessarily permissible because it is called “fixed.” True-ups, minimum payments, bonuses, sweeps, and termination payments must be evaluated together. The fee should reflect documented fair market value and be revisited when the services change.

Conflicts, intake, and confidentiality. The investor may have an extensive portfolio, and the MSO may serve several firms. Conflicts procedures must account for those relationships, but conflict determinations and waivers must remain with the firm. The firm also remains responsible for outsourced advertising and intake, including information received from prospective clients and the decision to accept a matter. Client information should be segregated, access should be restricted and logged, and investor diligence should use anonymized or aggregated information whenever possible.

Trust accounts. Escrow and IOLA accounts, including signatory authority, must remain with the firm and its lawyers. Billing and collections may move to the MSO; the obligations imposed by Rule 1.15 do not.

Operational dependence and departures. An MSO may control the firm’s website, telephone numbers, intake system, practice-management platform, and administrative workforce. The agreement must address data ownership, continued access during a dispute, transition assistance, disaster recovery, and the MSO’s insolvency. Restrictions affecting departing lawyers, client files, or continued representations may also implicate Rule 5.6 and the client’s right to choose counsel.

Essential Risk Management Considerations

Before signing, a firm should:

Retain independent ethics counsel. The sponsor’s counsel represents the sponsor. The firm needs its own advice concerning the services agreement, fee design, and governance terms.

Document the boundary. Reserved powers and escalation procedures should establish that lawyers control professional judgment, client relationships, conflicts, matter acceptance, legal staffing, fees, and settlement recommendations. Budgetary provisions should not provide indirectly the control the MSO cannot exercise directly.

Test the entire economic arrangement. Obtain fair-market-value support for the management fee and examine adjustments, advances, bonuses, affiliated transactions, and termination payments.

Control conflicts and data. Map the investor’s relevant relationships, restrict access to client information, establish diligence protocols, and require written confidentiality and cybersecurity commitments.

Plan for separation. Provide for data portability, transition assistance, continued access to critical systems, control of telephone numbers and web domains, and continuity of client service.

Call the broker and carrier before closing. Determine whether the MSO and its personnel are insured, whose coverage responds if MSO staff mishandle an intake or deadline, what must be disclosed, how restructuring affects prior-acts coverage, and whether the MSO carries adequate errors and omissions and cyber insurance. An indemnity is only as valuable as the MSO’s balance sheet and coverage. These questions should be resolved while the parties can still revise the transaction and obtain appropriate insurance.

Conclusion

An MSO can provide capital for succession, technology, and growth. It can also make the firm dependent on a commercial enterprise whose incentives and obligations differ from those of the lawyers. The deal documents should be evaluated with that tension in mind. The lawyers will remain answerable to clients, courts, regulators, and carriers for the practice conducted in the firm’s name.

A firm considering an MSO should retain its own counsel, define the powers reserved to lawyers, examine the entire fee arrangement, protect client data, and plan for separation. Those steps also provide a useful framework for reviewing ordinary vendors that handle intake, marketing, technology, or billing. In either setting, the firm remains responsible for the work performed in its name and the client information entrusted to it.

This article was prepared by Aaron M. Barham of the New York City-based law firm of Furman Kornfeld & Brennan LLP. Aaron is part of a team of over 40 lawyers and paralegals devoted to the defense of attorneys and other professionals in malpractice and disciplinary matters, as well as the defense of construction and personal-injury accidents. For more information about the above topic or the author, please visit www.fkblaw.com.

We trust that the above article was useful and thought-provoking; however, please note that it is intended as a general guide and opinion only, not a complete analysis of the issues addressed, and readers should always seek specific legal guidance on particular matters.

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