When evaluating legal Managed Services Organizations (MSOs), law firm founders often make a critical mistake: they either talk exclusively with the first MSO that contacts them or try to speak with every MSO that reaches out.
Neither approach is likely to produce the best deal, as the first approach leaves founders with no basis for comparison, while the second can lead to confusion and fatigue.
This mistake is not unique to legal MSOs; it has been made in legal recruiting, law firm mergers, and private equity dealings.
In legal recruiting, the prevailing philosophy 30 years ago was to get attorneys in front of as many firms as possible and tell them to accept the highest offer.
However, this approach often resulted in every law firm sounding the same, with only the steak dinner being memorable.
Compensation matters, but it is only one variable.
Founders who understand deal structures are more likely to make informed decisions than those who focus solely on valuation multiples.
The stakes are high in legal MSO transactions, as the chosen partner will help determine the firm’s technology, recruiting, marketing, finance, client intake, and strategic direction for years to come.
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Education is far more important than volume.
Founders should prioritize understanding the deal structures and terms rather than getting mesmerized by valuation multiples.
As Trisha Rich, a legal ethics attorney, 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.”
Some legal MSOs may try to circumvent ethics rules, such as Rule 5.4.
Others may prioritize profitability over the firm’s best interests.
After interviewing over 70 legal MSOs and turning down more than 60, it is clear that the likelihood of some participants running afoul of ethics rules is high.
The answer to evaluating legal MSOs is not talking to one or 20 organizations.
Instead, founders should speak with a limited number of well-qualified MSOs.
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This creates meaningful competition without turning the process into a part-time career.
By applying this approach, founders can create leverage, compare different strategies, and distinguish genuine partners from polished presentations.
Sophisticated buyers know that the first number on the page is only the beginning of the negotiation, and sophisticated sellers should think the same way.
In practice, this means that law firm founders will need to carefully consider their goals and priorities when evaluating legal MSOs.
They must look beyond the initial offer and consider the long-term implications of the partnership, including the potential impact on their firm’s culture, autonomy, and growth strategy.
As the legal industry continues to evolve, it is essential for law firm founders to approach legal MSO transactions with a clear understanding of the deal structures, terms, and potential risks.
By doing so, they can make informed decisions that will benefit their firms and their clients in the long run.
