FT.com – no paywall – “…So, how exactly can you buy a law firm if you are not allowed to buy a law firm? The answer is that the law firm gets split into two parts: one entity, fully controlled by lawyers, that provides legal advice to clients, and a second, called a management services organisation, that houses technology and other back-office assets and all the non-lawyer staff. The MSO sells services back to the other side of the business in exchange for fees that are large enough to make the entity profitable, and it is the MSO that sells an ownership stake to private equity. That way, private equity does not fall foul of the American Bar Association’s Rule 5.4, which says non-lawyers cannot be in the business of law and firms cannot share fees with non-lawyers. “Investors are trying to fine-tune the structure and get a handle on what exactly constitutes legal work,” said Austin Maloney, a lawyer at Hunton Andrews Kurth, which advises private equity. “The goal is to perform as many services as possible in the MSO. No investor is going to sign up to this if they can’t get the right amount of juice out of it.” The MSO structure has been used by a handful of small US firms over the past 20 years, and concentrated in those specialising in personal injury cases, but interest has exploded in recent months. There appear to be several reasons. Private equity has swept through the US accounting sector in the past five years, leaving law the last frontier in professional services. Meanwhile, a handful of states, notably Arizona, have set aside Rule 5.4 to allow new ownership structures breeding an openness to experimental financial models. A Texas state bar committee ruling last year effectively gave their blessing to the MSO structure, as long as it leaves control over legal cases in lawyers’ hands and the financial payments to the MSO are not calculated as a share of legal fees.

Private equity and their advisers are beginning to get confident about extracting significant amounts of a law firm’s value by shifting more assets into the MSO, potentially expanding the number of firms that could make a deal add up. “A lot of the discussion and creativity comes up in the fee structure by which the firm pays the MSO,” said Lucian Pera, a professional ethics lawyer who says he advised on a law firm MSO as long ago as 2006 and has never been busier than now. In MSOs set up by personal injury law firms, for example, Pera said the rights to the name and likeness of the lead attorneys can be owned by the MSO and licensed back. Dealmakers might hire valuation experts to weigh in on what is a fair fee. As long as the rates are fixed or calculated on a per-lawyer basis, rather than linked to firm revenue, it will not fall foul of Rule 5.4’s ban on fee-sharing, he said. “We value everything step by step and charge it back to the law firm at a market rate,” said Seth Deutsch, founder of Samson Partners, an advisory firm that has published a “how to” guide for law firm founders wanting to sell their business and has helped structure MSO deals…”