How MSOs and Outside Capital Could Solve Law Firm Succession

The Bottom Line

• Management service organizations handle administrative processes such as HR, IT, and billing for businesses.
• Law firms can now turn to MSOs both as a viable option for succession and as a way to deploy capital on improvements and upgrades.
• Even law firms that aren’t considering MSOs should note the shift, because their competitors may have outside investment.
  

For the first time, aging law firm owners have a succession option that doesn’t require internal buyers, competitor sales, or wind-downs: management services organizations. MSOs, a model borrowed from health care, let founders sell administrative infrastructure to outside investors while retaining legal ownership and client relationships.

Three developments over the last year have made MSOs the most viable succession solution for aging law firm owners in decades. Last June, Puerto Rico’s Supreme Court allowed up to 49% non-lawyer ownership of law firms, creating a low-barrier entry point for outside investment. In November, McDermott Will & Schulte confirmed it was exploring MSO structures, signaling mainstream acceptance at elite firms. And in February 2025, Arizona licensed KPMG Law US, making it the first Big Four accounting firm authorized to practice law in the US.

Taken together, these developments signal that MSOs are here to stay in the legal industry, and law firm owners should consider them as a valid exit or investment option.

MSOs aren’t perfect, and they’re not for everyone. But for well-run firms with no succession plan, they’re becoming one of the only viable exits in a market where 40% of law firm partners expect to retire in the next decade and most have no internal buyers.

The succession crisis is real and accelerating.Partners older than 60 control 25% or more of revenue at 63% of firms, yet traditional succession paths are narrowing. Internal buyouts require younger partners with capital and appetite for risk, which has become increasingly rare as associate debt loads climb and career paths fragment. Selling to competitors means handing over client relationships to rivals, which feels like betrayal to many founders. Winding down leaves money on the table and abandons clients.

What’s Changing

MSOs work by sidestepping ABA Rule 5.4’s prohibition on fee-splitting in most states. Investors don’t buy equity in the law firm itself. Instead, they acquire the MSO—a separate entity that handles HR, IT, billing, marketing, and facilities. The law firm pays for these services via fixed fees or cost-plus arrangements, avoiding prohibited fee-splitting underexisting ethics guidance. Lawyers retain control over legal decisions and client relationships. Investors gain operational leverage and recurring revenue.

Three regulatory shifts are creating momentum. Arizona has approved at least 136 alternative business structures since eliminating Rule 5.4 in 2020. KPMG’s law license approval validates institutional participation and signals that large, sophisticated players see viable pathways into legal services.

Puerto Rico’s approach is even more permissive. The jurisdiction allows up to 49% non-lawyer ownership with minimal oversight, just annual reporting. Combined with 4% corporate tax rates and 0% capital gains, the island could become, as Paul Napoli, chairman of the Trial Lawyers of Puerto Rico, noted, “the litigation finance hub of the country.” And Washington, DC, which has allowed limited non-lawyer ownership for three decades, proposed loosening restrictions further last June.

But the real opportunity isn’t at McDermott-sized firms, who have publicly embraced private capital to advance its technology, hiring, and operations. It’s at the 20-attorney personal injury practice whose founders are 68 with no buyers, or the boutique estate planning firm where the founding partners are ready to step back but can’t find internal successors willing to take on the debt.

Capital Access Revolution

The conversation around outside investment has focused too narrowly on private equity buyouts. What’s actually emerging is far more nuanced and potentially more valuable to most firms: minority investments that provide capital access without surrendering control.

Sophisticated investors are now offering to become minority stakeholders by putting in cash that gets repaid through profit distributions over time. For firms, this solves a critical problem: how to fund technology upgrades, expand into new markets, or hire specialized talent without requiring every partner to personally guarantee loans or dilute their equity through internal capital calls.

This isn’t theoretical. Firms are using minority investment capital to deploy AI-powered research tools, upgrade cybersecurity infrastructure, and build case management systems that smaller firms couldn’t otherwise afford. The investor gets a return tied to firm performance. The partners retain operational control and decision-making authority.

This model aligns with the original rationale behind Arizona’s regulatory reforms, which focused on increasing access to justice through innovation. The argument was straightforward: Law firms weren’t innovating because they lacked both capital and competitive pressure. Opening ownership to outside investors—especially technology companies—would drive innovation that benefits consumers.

We’re seeing exactly that play out, just not always in the ways regulators predicted. Technology companies aren’t buying law firms outright. Instead, they’re partnering with them, providing capital and infrastructure in exchange for equity stakes that don’t trigger Rule 5.4 concerns.

What Investors Want

The firms that will attract MSO capital, whether majority or minority stakes, share three traits that most succession-ready firms currently lack.

Operational maturity. Investors want clean financials, documented processes, and practice management systems, not firms held together by institutional knowledge and a founding partner’s Rolodex. The “rainmaker plus chaos” model that works while the founder is active collapses under due diligence.

Scale potential. Investors target platforms they can grow. That means either roll-up opportunities in fragmented practice areas such as family law or estate planning, or margin expansion through better operations in established practices. A profitable solo practice with strong client relationships but no growth runway won’t attract capital.

Partner retention mechanisms. Because non-competes are largely unenforceable for lawyers, investors need confidence that key attorneys will stay post-transaction. MSO equity for rainmakers, borrowed from physician groups in healthcare, is emerging as one solution. Others include earnouts tied to client retention or consulting agreements that keep founders engaged during transitions.

The gap between “firms investors want” and “typical succession-ready firms” is wide. Owners who professionalize operations now gain optionality.

Real Tradeoffs

MSOs have tangible benefits; they provide liquidity without requiring a full exit. Founders can take money off the table while continuing to practice, which is impossible in most succession scenarios. They delegate administrative burdens, letting partners focus on legal work instead of HR disputes or server maintenance. And they provide access to modernization capital that transforms competitive positioning.

But the tradeoffs are real and often underestimated. MSOs control operational budgets , and t he line between business decisions and legal decisions blurs. As ethics expert John Roemer noted when discussing McDermott’s exploration, “in an MSO, you have accountants” making decisions about firm resources. That’s a fundamental shift for founders used to autonomy.

Cultural disruption is another underestimated risk. New systems, new software, new metrics, new reporting requirements—change management is real and painful. Partners who’ve built practices around personal relationships and intuition often struggle with data-driven decision-making and standardized processes.

Regulatory uncertainty remains significant. Only one Texas ethics opinion addresses MSOs directly. Most state bars haven’t weighed in. Scrutiny is coming, and structures that work today may face challenges tomorrow.

The biggest risk, though, is partner attrition. If key lawyers leave post-transaction, the MSO’s value drops. This is investors’ primary fear and the reason deal structures increasingly include retention equity, earnouts, and transition periods.

Competitive Wakeup Call

Even if you never intend to take outside investment, you need to care about this shift. MSO-backed competitors will have access to capital that traditional partnerships can’t match. They’ll deploy AI innovation, sophisticated intake and case management systems, and client relationship platforms that cost six or seven figures. They’ll hire dedicated marketing teams, cybersecurity experts, and HR professionals. They’ll scale faster and operate more efficiently.

This isn’t hypothetical competitive pressure. Well-capitalized firms are already winning cases and clients not because they’re better lawyers, but because they have better infrastructure. They respond faster, communicate more professionally, and deliver more consistent client experiences.

Traditional firms face a choice: Find alternative paths to innovation or accept that the competitive gap will widen. That might mean forming partnerships with legal tech companies, creating shared services arrangements with other firms, or simply prioritizing operational investment over partner distributions. But ignoring the shift because “we’d never take PE money” is a path to irrelevance.

The firms that will thrive aren’t necessarily those that take outside investment. They’re the ones that recognize capital access as a competitive advantage and find creative ways to close the gap, whether through outside investment or alternative approaches to funding innovation.

What’s Next

Expect regulatory bifurcation. Arizona, Puerto Rico, and Washington, DC, to continue loosening restrictions. New York, California, and Illinois will resist. MSOs will operate in gray areas or establish nexus in permissive jurisdictions. The ABA most recently reaffirmed its opposition to full non-lawyer ownership in 2022 through Resolution 402, so expect ethics challenges even as market activity accelerates.

Target expansion is inevitable. Private equity may pursue large plaintiff firms with repeatable models, specialized boutiques with strong brands, and roll-ups in fragmented practice areas. But minority investments will proliferate faster than buyouts, creating opportunities for mid-sized firms that want capital without surrendering control.

The doom-and-gloom narrative around private equity ownership doesn’t match the data. The United Kingdom has allowed non-lawyer ownership for over a decade.

Private equity hasn’t destroyed professional independence or client service. Instead, it’s funded innovation, expanded access in underserved markets, and provided succession solutions for aging solicitors. The US market likely will follow a similar trajectory.

For firm owners, the actionable advice is straightforward.

Professionalize now. Clean books, documented processes, practice management systems—operational maturity expands your options regardless of whether you pursue an MSO.

Know your endgame. What does success look like in three to five years? Liquidity for retirement? Operational relief? Growth capital? Legacy preservation? Clarity about goals determines whether MSOs fit.

Don’t conflate activity with inevitability. MSOs are one tool in a limited succession toolbox, not a panacea. They work best for well-run, founder-led firms with aging partners and no internal buyers. They’re a poor fit for firms with weak operations, uncertain client relationships, or partners ambivalent about change.

For the right firms at the right time, MSOs offer something rare in legal succession planning: a path to liquidity that doesn’t require winding down, selling to competitors, or betting on internal buyers who may never materialize. They just have to be ready when opportunity knocks.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Tom Lenfestey is an attorney, CPA, and CEO of the Law Practice Exchange, where he guides attorneys through continuation, exit, and strategic growth strategies.

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