What Private Equity Actually Owns - And What it Cannot

Private Equity and Law Firms

The Law Firm MSO Playbook

Article 2

What Private Equity Actually Owns — And What it Cannot

An attractive valuation is easy to quote. Identifying what the MSO can actually own is the harder, and the more consequential question. This is the second article in Messerli Kramer’s series, “Private Equity and Law Firms: The Law Firm MSO Playbook.”

Our first article considered whether a law-firm MSO can constitute a genuine investable business. This article takes the next step: defining the transaction perimeter before the parties let price dictate what the investor is supposed to be buying.

A private equity sponsor has expressed interest in a law firm and presented an attractive preliminary valuation. The partners understandably focus on the number, but the investors are focused on the more consequential question: Which assets, personnel, systems, contracts, and payment rights can actually be transferred to an investor-owned company?

While the answer drives both value and the legal architecture of the deal, it is usually less obvious than either side initially assumes. The law firm may own the technology, employ every lawyer and staff member, lease each office, sign the vendor agreements, hold the client engagements, and collect all revenue.

Some of those components may support the administrative platform; however, others may be inseparable from the professional practice. Still others may be available to the MSO only through a license, service, access, or transition arrangement. Before anyone negotiates price, the parties must define what private equity is actually buying.

One asset can carry several different rights

Consider a technology platform developed by the firm. The MSO might acquire the underlying software and license it to the law firm, and the law firm would use it to deliver legal services. Client files, conflicts information, privileged communications, billing records, and attorney work product processed through the platform does not become MSO property because the MSO owns the technology. That distinction is easy to lose in a purchase-price schedule, and costly to recover after closing.

Different rights can therefore attach to the same asset. The MSO may own the platform, the law firm may hold contractual access, and the client or professional entity may retain rights in the information and work product processed through it. The transaction must state those rights with precision.

The website and intake infrastructure present the same challenge. The MSO may operate the technology and manage marketing analytics. The law firm remains responsible for attorney advertising, conflicts, professional evaluation of potential matters, and formation of the attorney-client relationship. Ownership of the website is not authority over the professional decisions occurring through it.

Personnel arrangements also divide the rights and responsibilities. An employee can work for the MSO but remain subject to lawyer direction when handling confidential client information or assisting with a professional function. The entity issuing the paycheck does not control every aspect of that employee’s work.

Broad assignment provisions covering “all technology,” “all marketing assets,” or “all administrative personnel” can create apparent clarity while failing to describe how the business really operates, and this is the gap where post-closing disputes, and professional-responsibility exposures often begin.

Goodwill is the hardest asset to allocate

Goodwill can be the largest component of a proposed valuation and one of the hardest assets to allocate. The critical distinction is between enterprise goodwill, which is value attributable to the MSO’s systems, technology, workflows, vendor relationships, and operational infrastructure, and professional (and often also to referred to as personal) goodwill, which is value attributable to individual lawyers, their client relationships, and their reputations. That distinction has significant implications for purchase-price allocation under Section 1060 and for the professional-responsibility analysis.

Enterprise goodwill can remain valuable despite changes among individual lawyers. An MSO that has built a scalable administrative platform, invested in proprietary technology, and developed repeatable operational processes may possess transferable value independent of any particular practice or practitioner.

Professional goodwill is different. Clients may retain a firm because of specific lawyers, specialized expertise, trust, or an existing relationship. Clients remain free to choose counsel, and lawyer departures may cause those relationships to move.

In health care, dental, and other professional-practice MSO transactions, personal goodwill is routinely contributed to the MSO or its parent entity, typically supported by a covenant not to compete. Tax authorities and courts look to that covenant as evidence that the goodwill has been effectively transferred rather than merely made available while the professional remains. In the law-firm context, however, most jurisdictions prohibit or substantially restrict noncompete agreements among lawyers under Model Rule 5.6 and its state equivalents. See, e.g., ABA Formal Op. 06-444; Ill. State Bar Ass’n Op. 23-05 (in-house counsel noncompete violates Rule 5.6). That prohibition removes the mechanism other professional-practice MSOs rely on to substantiate the transfer and creates a structuring challenge with no established safe harbor.

Alternative arrangements may exist. Carefully drafted non-solicitation provisions, exclusivity commitments, name-image-and-likeness rights, service obligations, and other contractual structures may provide some evidentiary support for the transfer. Whether any combination is sufficient to support the intended tax treatment and capital-account allocation requires careful analysis of both the professional-conduct rules and the applicable tax authorities. The question is not whether personal goodwill has value because it plainly does, but whether the parties can create a structure that treats it as effectively transferred property when the conventional mechanism is unavailable.

The economic model may treat these sources of value as one integrated business, but the transaction cannot assume that all goodwill is freely transferable to the MSO. The goodwill allocation determines how the lawyer receives economic value in the MSO, how capital accounts are established, and whether the rollover produces the intended tax result. Getting it wrong can affect the purchase-price allocation under Section 1060, the availability of Section 197 amortization, and the professional-responsibility analysis. This is where valuation often outruns transferability.

Suppose an investor pays a multiple based on the law firm’s historical earnings. The projected return may depend on lawyers remaining, clients continuing to engage the professional entity, and the MSA directing sufficient revenue to the MSO. While much of that value may be commercially real, it is not necessarily the value the MSO owns independently so the model must distinguish dependence on continuing relationships from assets the MSO can transfer or monetize.

This does not mean private equity cannot value the relationship between the MSO and law firm. It means the assumptions supporting that value must be identified. A future buyer will want to know whether it is purchasing transferable enterprise goodwill, a durable services contract, an expectation of lawyer and client retention, or all of those together. Each component carries a different risk and warrants a different diligence question.

Brand, infrastructure, and data: the shared core

The firm’s name and brand can be central to both the professional practice and the investor’s growth thesis.

Private equity may view the brand as a platform asset capable of supporting expansion. The lawyers may view it as the public identity of the professional entity and a reflection of the lawyers responsible for the services offered under that name.  As those views are not interchangeable, a license can bridge those interests, but the license needs more than royalty terms. The arrangement must address control of public representations, attorney advertising, use after a change in MSO ownership, the effect of lawyer departures, quality protections, and whether the law firm can continue using its identity if the MSA ends. These are deal terms and cannot be seen as boilerplate for they determine whether the brand remains usable when the relationship is tested.

Technology demands the same discipline. The MSO may fund and own a case-management platform, AI application, intake system, or workflow technology. The law firm may become operationally dependent on those systems. Ownership must therefore be coordinated with access, data portability, business continuity, cybersecurity, professional supervision, and termination.

Finally, billing and collections occupy another shared space. The MSO may operate software, generate invoices, process payments, prepare reports, and provide routine collection assistance. Lawyers retain responsibility for fee arrangements, billing judgments, write-offs, disputed amounts, withdrawal for nonpayment, and client funds.

Rather than assigning an entire function to one entity, the arrangement should divide administration from authority, and that division must be consistent in the asset-transfer documents, MSA, operating procedures, and technology permissions.

Moving the workforce without losing professional capacity

A transaction often contemplates transferring much of the administrative workforce from the law firm to the MSO which provides the MSO operating substance and allows private equity to centralize and professionalize support functions.  However, the transfer can also create unanticipated consequences since many law-firm employees perform several roles. A billing employee may also assist with trust-account administration. An intake specialist may gather information that triggers confidentiality and conflicts issues. A legal administrator may manage staff while participating in decisions requiring lawyer oversight. These mixed functions are where a clean organizational chart stops reflecting the real workflow.

The parties must identify those mixed functions before moving the workforce. They must determine who supervises each activity, which entity bears compensation and benefits, what information the employee may access, and whether the law firm retains the right and practical ability to direct work implicating its professional duties.

There is no single correct allocation. Leaving too many people and systems in the law firm may deprive the MSO of the operating substance reflected in the purchase price, but moving too much infrastructure to the MSO may leave the professional entity incapable of functioning independently.  The transaction must be modeled under normal operations and under stress. If the MSA ended, could the law firm replace essential personnel and systems? If key lawyers departed, would the MSO still possess a platform capable of supporting another professional practice? Those answers affect both valuation and professional independence.

Projected legal revenue is not itself the asset

A sponsor may underwrite the transaction using projected law-firm revenue, matter volume, client retention, and expected expansion. Those projections can be necessary but they do not make future legal fees the asset private equity is buying. Projected revenue supports the model; it does not define the MSO’s ownership.

The MSO’s legal right to payment arises under the MSA. That payment right is a contract right, not an ownership interest in the law firm’s revenue stream; the distinction matters for characterizing the MSO’s assets for lender diligence, perfecting security interests under the UCC, and default provisions.  The economic basis for that payment must relate to services, assets, personnel, capital, technology, and business risks supplied by the MSO.

This distinction also impacts the purchase-price allocation, tax analysis, financing, and future diligence. If the investment model assumes that a stated portion of law-firm revenue will reach the MSO regardless of changes in services, the parties must examine the source of that payment right.

The issue becomes sharper where the law firm retains lawyers, client relationships, malpractice exposure, and professional obligations, but most incremental economic growth is transferred to the MSO. The structure may still be supportable, but the allocation must be explained by more than the investor’s required return. Valuation must follow the business being acquired, and it cannot be used to define that business after the fact.

Succession agreements protect continuity and value

Private equity may not acquire the law firm, but the value of the MSO can still depend on continuity of the lawyer-owned professional entity. If a controlling lawyer retires, dies, becomes disabled, loses eligibility to own the professional entity, or leaves the platform, the investor will want to know who can acquire that lawyer’s interest, whether the successor will continue the relationship with the MSO, and whether the law firm will retain the leadership and professional capacity required to operate.

This issue is not unique to law firms. Medical-practice MSOs and dental service organizations commonly address the same continuity risk through stock-transfer restriction, succession, or continuity agreements. In a typical friendly-physician or friendly-dentist structure, the licensed professional owns the professional entity while the investor-owned MSO holds the nonclinical assets and provides management services. A succession agreement establishes the process through which the ownership interest may be transferred to another qualified licensed professional when a specified event occurs. Depending on the structure and applicable law, the agreement may restrict transfers to unapproved third parties and permit or require a transfer to a qualified successor identified through the contractually established process.

The law-firm MSO can use the same basic architecture. A succession or continuity agreement among the lawyer owners, coordinated with the MSA and the law firm’s governing documents, may identify eligible successor owners, establish transfer procedures following specified events, require advance designation of potential successors, and provide the MSO with defined rights in the succession process. Those protections are not merely administrative. A lawyer successor must remain the genuine owner of the law firm and retain the authority required by applicable law and professional-conduct rules.

However, the succession arrangement should not be viewed as an unusually burdensome obstacle to a law-firm MSO transaction. Medical and dental platforms routinely treat owner succession as part of the contractual infrastructure supporting continuity and value. The law-firm context requires the same practical planning, adapted to the professional-entity and lawyer-conduct rules of the relevant jurisdiction. The objective is not to eliminate the MSO’s ability to protect the continuity of its principal customer but to define that protection with enough precision that the agreement supports value without transferring professional ownership or authority to the MSO.

Reversibility tests the allocation

Transaction documents assume the relationship will continue. Testing the allocation under a separation scenario reveals whether it is coherent.

If the MSA terminates, can the law firm use or replace critical technology? Can it access and transfer client data? Can it retain or hire necessary employees? Can it continue using its established name, domain, telephone numbers, intake channels, and billing systems? What transition support will it receive, and for how long? These questions are not exit trivia; they test whether the law firm can continue to serve clients.

The investor faces the opposite problem. If the affiliated relationship ends, does the MSO retain useful systems, technology, employees, contractual rights, and operating expertise, or does its value largely disappear?

An MSO can remain highly dependent on its principal law-firm customer without becoming a sham or invalid business. Many legitimate companies have substantial customer concentration, but the dependence must be recognized in the valuation and addressed in the MSA. Likewise, if the law firm relies heavily on its service provider that can provide many operating efficiencies; however, It cannot make the lawyers incapable of satisfying their professional obligations if the service provider fails.

Reversibility is therefore more than a termination issue. It tests whether the original allocation of assets, people, rights, and responsibilities makes sense for each business, and whether each can function when the relationship is under stress.

Define the perimeter before the price

Before signing an LOI, the parties must have a working understanding of what the MSO will own, what it will license, the personnel it will employ, the liabilities it will bear, the services it will provide, and the assets and responsibilities that remain with the law firm. They must identify the elements of value dependent on continuing cooperation, lawyer retention, client choice, third-party consent, or contractual access.

As mentioned, the dependencies are not necessarily disqualifying but are viewed as part of what the buyer is underwriting. The transaction perimeter is not merely a diligence schedule. It is the legal and commercial foundation for MSO value. If the purchase price assumes ownership of value the investor cannot acquire, more detailed drafting will not solve the problem.

Next in the series

Next in the series is “The Leverage Problem—Build the MSO Before Private Equity Calls.” A buyer cannot diligence or value an operating platform that exists only on paper. The next article explains how firms can build the evidence, governance, financial separation, and partner alignment that preserve leverage before a buyer sets the terms.

Contact Messerli Kramer

An MSO’s value is only as defensible as the assets, people, contracts, and payment rights the investor can actually acquire. Messerli Kramer helps firms and sponsors define that perimeter before an attractive valuation conceals a transferability problem or turns a drafting issue into a closing obstacle. Early analysis is the prudent way to distinguish enterprise value the MSO can own from value that depends on lawyer judgment, client choice, or continuing cooperation.

Contact Michael Britten to discuss.

This article is intended for general informational purposes and does not constitute legal or tax advice. Applicable ownership, fee-sharing, professional-responsibility, and tax requirements vary by jurisdiction and depend on the specific facts and structure. Reading this article does not create an attorney-client relationship.