Legal MSO Insider

LEGAL MSO RISKS

Legal MSOs can deliver meaningful benefits when properly structured. They can also introduce risks that law firm leaders underestimate, particularly when deals move quickly or are framed as “standard.” Understanding these risks early is essential.

A recurring principle applies across every MSO structure: You can pay back a loan, you can’t pay back equity.

Capital Comes With Incentives
One of the most important variables in any MSO relationship is the source of capital behind it.

At one extreme are private equity–backed MSOs. These platforms often bring significant capital and operational expertise, but they also operate on defined timelines and return expectations. Growth targets, cost controls, and restructuring pressures can disrupt firm culture, compensation systems, and long-standing relationships. This does not mean PE-backed MSOs are inherently problematic, but it does mean incentives must be understood clearly.

At the other extreme are litigation finance companies or lightly capitalized MSOs that promise operational support but invest too little to materially improve infrastructure. In these cases, firms may give up flexibility or economics without receiving the scale, systems, or leadership they expected.

Neither extreme is automatically wrong. Both require scrutiny.

​

Equity Is Permanent
Many MSO discussions focus on upfront payouts, earn-outs, or retirement monetization. Those benefits are tangible and attractive. What receives less attention is the long-term cost of giving up economic participation.

Debt can be refinanced or repaid. Equity, once transferred, is not easily reclaimed. Firms should model not just immediate proceeds, but what those economics look like five, ten, or fifteen years into the future.

Short-term liquidity can mask long-term tradeoffs.

​

Minimum Term Commitments
Even standard MSOs that involve no equity transfer often require multi-year service agreements. These minimum commitments are not trivial.

A two or three year term with an underperforming MSO can feel far longer than expected. Termination rights, notice requirements, penalties, and automatic renewals should be examined carefully. Flexibility matters.

Firms should assume that conditions will change over time and structure agreements accordingly.

​

Governance and Control Drift
Many MSO risks do not appear at signing. They develop gradually.

Governance provisions that seem reasonable on day one can, over time, allow operational influence to creep into areas that affect hiring decisions, compensation systems, client relationships, or firm culture. Authority should remain clearly divided, with lawyers retaining control over legal work and professional judgment.

Substance matters more than labels.

​

Contractual Clauses That Deserve Scrutiny
Law firms should review MSO agreements with a skeptical eye. Clauses that commonly raise concern include restrictive termination provisions, non-compete clauses that limit future options, mandatory service expansions, and compensation formulas tied too closely to firm revenue or profitability.

If a provision feels one-sided, it usually is. Many terms in this market are negotiable precisely because Legal MSOs are still evolving.

​

The Right Advisors Are Essential
Firms should expect to engage two types of counsel.

First, an attorney experienced in MSO transactions. Because Legal MSOs are still new, this attorney will likely have experience with medical or other professional MSOs. That is appropriate and often unavoidable.

Second, a legal ethics attorney. Rule 5.4 and related professional responsibility rules are technical, jurisdiction-specific, and unforgiving. Ethics compliance should be designed into the structure from the outset, not reviewed after the deal is agreed.

Both perspectives are necessary.

​

If They Promise to Help You Scale, Find Out How They Plan to Accomplish That
Scaling a law firm requires more than capital and systems. It requires people, specifically laterals and partners with portable books of business. Most law firm partners do not have the time, expertise, or networks to recruit laterals at scale, and MSOs often assume that growth will happen organically once infrastructure is in place. That assumption is frequently wrong. Firms should ask direct questions about who is responsible for lateral recruiting, what experience they have recruiting partners for small to mid-sized firms, and what their actual track record looks like. Scaling without proven recruiting capability is theoretical. Without a credible plan for sourcing, vetting, and integrating revenue-generating partners, growth projections are unlikely to materialize regardless of capital investment.

​

Above All Else, Evaluate the People 
It doesn't matter how good a deal looks on paper, if your instincts tell you that there is something you don't trust about the people, don't do a deal. This is equally true if you trust them but you just don't feel like you would enjoy working with them. Finally, evaluate whether you feel they can deliver on their promise. Are they qualified? Do they have the right team? Do they have a track record with other MSO's? The people are the most important part of any deal. Make sure they are someone you would want to spend years working with - because if you do a deal, you will. 

​

Additional Risks to Be Aware Of
Firms should also be mindful of several common but often overlooked risks.

Overestimating operational impact. Not all MSOs deliver the level of professional management promised. Firms should understand who is actually running operations and what experience they bring.

Technology promises without execution. Vague commitments around AI, automation, or “platform efficiencies” often fail to materialize without clear budgets, timelines, and accountability.

Cultural misalignment. Operational change affects staff before it affects partners. Ignoring internal buy-in can undermine even well-funded MSO relationships.

Succession assumptions. MSOs do not automatically solve succession planning. Firms should confirm how leadership transition is actually supported in practice.

Exit illusions. Some structures make exit technically possible but economically impractical. Firms should model real-world exit scenarios, not theoretical ones.

Why Risk Awareness Matters
Legal MSOs are neither a panacea nor a threat by definition. They are tools. Outcomes depend on structure, incentives, and execution.

Firms that understand the risks, negotiate deliberately, and engage the right advisors are far more likely to realize the benefits without unintended consequences.