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McDermott Will & Schulte and Private Capital: What It Means for Smaller Law Firms

Big shifts may be underway in how law firms are financed and structured, and that matters for buyers of smaller practices everywhere. The legal industry has long resisted private capital and non-lawyer ownership due to ethical restrictions that prevent outside parties from owning law firms directly. But recent developments at one of the largest U.S. firms could signal a change in the landscape. McDermott Will & Schulte, the new global powerhouse formed by the merger of McDermott Will & Emery and Schulte Roth & Zabel, is publicly exploring the possibility of selling a stake to outside investors under a managed services structure—a novel approach that separates lawyer ownership from back-office services so investors can participate without violating ownership rules. This exploratory discussion is preliminary, but even the possibility is significant for the future of law firm investment. Why This Matters: Breaking the Traditional Ownership Model In most U.S. jurisdictions, ethics rules require that law firms remain owned by licensed lawyers. Non-lawyer investment that touches legal fees is prohibited by ABA Rule 5.4, making direct private equity stakes in law firms difficult or impossible under standard structures. While some stats like Arizona have loosened their rules for non-lawyer ownership, it will take a while to see if this trend spreads to other jurisdictions. The managed services organization (MSO) approach under consideration for McDermott’s deal would create two businesses: a lawyer-owned entity that provides legal services and a separate MSO that handles back-office functions. Investors could take a financial stake in the MSO and share in revenues tied to administrative services paid for by the law firm. If it happens, such a transaction could be a watershed moment not just for Big Law, but for firms of all sizes that are navigating succession, acquisition, and growth amid evolving capital options. What the McDermott Talks Signal for Buyers Even though the discussions are early and no deal is finalized, the conversation itself signals a few broader trends that buyers should pay attention to: Increasing openness to alternative capital solutions. Firms may be more willing to explore models beyond partner capital to fund growth, tech investment, and succession liquidity. Potential model validation. If a large law firm can structure investment deals without ethical conflict, it could accelerate similar conversations across the industry. Pressure on smaller firms. Buyers and sellers at the mid-market level may find themselves competing with better-capitalized platforms or having to demonstrate why independent practice is still attractive. Private Capital, MSOs, and the Legal Market: A Primer Private capital refers to investments from non-public sources such as private equity firms, family offices, or strategic investors. In many industries, private capital fuels expansion, technology upgrades, acquisitions, and professionalization. In law, that standard model has been constrained by professional regulations. An MSO (Managed Services Organization) is a structure used in other professional fields (like healthcare and accounting) to separate non-legal functions—billing, HR, technology, facilities—from legal practice. Investors can own part of an MSO and share in the revenues generated by the services it provides to the law firm, without directly owning or controlling legal work. While this structure still presents challenges, it’s one of the few models that can comply with regulatory prohibitions on non-lawyer ownership while bringing outside capital into the ecosystem. What Smaller Firm Buyers Can Take Away Whether you are acquiring a solo or small firm, merging a platform, or scaling a multi-office practice, several themes emerge from the McDermott situation that are relevant to your strategy. Private Capital Isn’t Just for Big Firms If MSO deals or similar structures gain traction at the largest firms, smaller practices could eventually adopt similar models, accessing capital to support growth, succession, technology investments, or lateral recruiting. These options may be especially relevant for firms that: Need liquidity for retiring partners Want to invest in tech or operations to remain competitive Seek strategic scale through acquisitions or mergers Buyers Should Know Their Financing Options Traditional acquisition financing has typically meant seller financing, partner capital, or bank debt. But a future with private capital alternatives could give buyers extra leverage or flexibility, particularly when seller expectations around price or timing are misaligned with buyer resources. Operational Strength Matters More Than Ever Capital is more likely to flow toward law firms with: Clean financials Documented systems and processes Diversified revenue streams Clear client retention strategies Buyers who can clearly articulate and improve operational efficiency post-acquisition are more attractive to investors and more likely to realize long-term value. Deal Structures in a Changing Capital Environment Even without widespread private equity accessibility, firms are experimenting with structures that balance capital needs with regulatory restrictions. Buyers should familiarize themselves with ways deals can be structured, including: Seller financing: The seller carries part of the purchase price, tying payment to future performance. Earn-outs: A portion of price is paid based on revenue retention or client continuity post-close. Phased transitions: Sellers stay on in advisory roles during client and staff transition periods. MSO-linked capital: Back-office revenues are monetized through separate entities that accept outside investment. Each structure has advantages and risks, and each depends on the specific circumstances of the firms involved. Looking Ahead: What This Could Mean for the Market If McDermott or another large firm successfully structures outside investment, it could catalyze broader acceptance of alternative capital strategies across the legal industry, from large firms down through mid-market and boutique practices. Over time, that could lead to: More capital availability for acquisitions and growth Greater professionalization of operations Wider acceptance of hybrid ownership models A more dynamic market for law firm mergers and acquisitions For buyers willing to stay educated, strategic, and adaptable, this evolving landscape represents not just change, but opportunity. Contact  The Law Practice Exchange today to learn more about private equity and what a potential sale could mean for your law firm.

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How to Buy a Law Firm: The Private Equity Guide to Successful Legal Practice Acquisitions

Private equity has discovered law firms. If you come from healthcare, accounting, or other professional services roll-ups, a lot of what you see in legal will look familiar: fragmented markets, succession issues, under-invested operations, technology gaps, and room to professionalize. But if you treat law firms like another HVAC platform or dental roll-up, you will burn deals, damage your brand, and miss the real opportunity. I’ve spent my career on both the quantitative and human sides of this world—economist at the Federal Reserve, lawyer, statistician, and then over a decade in attorney recruitment before moving into true-sale law firm transactions. At The Law Practice Exchange, I now live full-time in the world where private capital meets law firm ownership. Here’s what private equity needs to understand before wading into law firm deals in a serious way. Law firms are not HVAC businesses (and you can’t treat them like they are) Many private equity teams show up in legal with a playbook that worked fine in other service industries: squeeze diligence hard, negotiate aggressively, optimize purely around EBITDA, then assume the relationship will survive closing. That is almost guaranteed to backfire in law. Law firm deals are fundamentally relationship-driven. You’re not just buying a cash-flowing asset; you’re stepping into the life’s work of one or more professionals. These owners are often deeply embedded in their community and bar, sometimes for decades. Their personal reputation and identity are tightly bound to the firm’s name and client experience. If they don’t like you—and I mean that literally—the deal will either die in diligence or the post-close performance will crater. I’ve watched sophisticated investors “win” a term sheet and then lose the deal because their behavior in diligence made the seller feel disrespected, rushed, or treated like a spreadsheet line item. In other sectors, you can sometimes power through that. In law, you usually can’t. What sellers actually care about (hint: price is third) Across mom-and-pop firms and $50M+ PI platforms, I see the same three priorities over and over again and in the same order: Client care and quality of service “Will my clients get as good or better service after I sell?” Many of these owners have represented the same families or communities for years. They worry about that legacy more than the last turn of the multiple. Succession, role, and lifestyle post-close “What will my life look like after this?” How much law will I still be practicing? Will I still be running a firm, or can I focus on what I actually love (e.g., trial work) while someone else runs ops? Can I consult from St. Barts or the Italian Riviera and not be chained to an office? Price and structure Yes, economics matter. But in law firm transactions, price is almost never the first filter. A slightly lower headline price with a partner they trust often wins over a maxed-out multiple with someone they don’t. If your entire pitch is about financial engineering and “unlocking value,” you’re speaking to their third priority and ignoring the first two. That’s a miss. Understand the economics: goodwill, margins, and multiples The biggest mistake I see is importing expectations from other industries straight into law without adjustment. Revenue, EBITDA, and margins For personal injury (PI) firms in the $10–$20M revenue range, you should often see 40–50% margins if they’re well run. By contrast, a large insurance defense firm might run closer to 10% margin and still be considered healthy. So a $20M PI firm and a $20M defense firm can have radically different enterprise values, even before you look at growth or scalability. Multiples: this is a goodwill transfer, not a laundromat sale We routinely see valuations in a band from roughly 0.5× revenue up to about 1× revenue, sometimes more when there is clearly scalable infrastructure, strong brand, and a genuine platform play. But you will not get the same EBITDA multiples here that you’ve seen in HVAC, dental, or other “simple” service roll-ups. Why? Because law firm deals are high-risk goodwill transfers: You’re buying client relationships, referral networks, and personal reputations. If the transition is mishandled and the seller feels burned, that goodwill can evaporate very quickly. As the market matures and non-lawyer ownership structures normalize, I expect multiples to rise. We’re not there yet. Coming in expecting “industry-standard private equity multiples” from other sectors is a fast way to alienate sophisticated sellers. Be realistic about the size and shape of the market Everyone says they want the “$50M–$100M revenue anchor platform” to start. Those firms exist—but there aren’t many of them, especially in PI. The reality of what we see in the market: A lot of attractive targets are in the $5M–$30M revenue range. There are some firms above $50M and a handful near or above $100M, but if your thesis only works at that top end, your funnel will be very thin. At The Law Practice Exchange, we currently represent firms from roughly $5M to $100M in value, with a heavy concentration in that $10M–$30M band. Many of those have enough infrastructure—intake, case management, basic ops—to serve as a legitimate anchor if your operating model is strong. If your minimum size is too rigid, you’ll skip over some of the most coachable, growth-oriented firms in the market. Don’t wait for “perfect” financials (you’ll be waiting a long time) Another pattern that kills deals: private equity buyers expecting quality of earnings-style, audit-ready financials as a starting point. Most high-performing law firms simply don’t have that. It’s not because they’re sloppy or hiding anything. They’re privately held, they’ve never had to present their financials to institutional capital, and their accountants are often tuned for tax efficiency, not transaction readiness. If you insist on QoE-grade packages before you’ll even take a call, you’ll lose most credible sellers before you start. For a better approach, get on the phone early and use high-level financials to decide if it’s worth moving forward. Then work with the firm (and intermediaries like us) to build

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How Private Equity Buyers Can Invest in the Right Law Firm

The legal services market has increasingly attracted private equity attention in recent years, and for good reason. Law firms represent stable, recurring revenue businesses with strong client relationships and predictable cash flows. However, investing in law firms presents unique challenges that differ significantly from other professional services acquisitions. Unlike traditional businesses, law firms operate under strict ethical rules, face jurisdictional restrictions on ownership structures, and depend heavily on professional relationships that can be difficult to transfer. For private equity buyers looking to enter the legal services market, success hinges on understanding these nuances and identifying firms with the right characteristics for sustainable growth and returns. This guide outlines the critical factors private equity investors should evaluate when considering law firm investments and how to identify opportunities that align with your investment thesis. Understanding Regulatory Landscapes and Ownership Structures Before diving into specific investment criteria, private equity buyers must navigate the complex regulatory environment governing law firm ownership. In the United States, most jurisdictions prohibit non-lawyer ownership of traditional law firms under Rule 5.4 of the Model Rules of Professional Conduct. However, several states—including Arizona, Utah, and others exploring regulatory reform—have created alternative business structures that permit non-lawyer investment. Successful private equity investors in the legal space typically pursue one of several strategies: Alternative Business Structures (ABS): Investing in firms operating in jurisdictions that permit non-lawyer ownership Ancillary Services Models: Acquiring the non-legal services components while attorneys retain ownership of the legal practice Management Services Organizations (MSOs): Providing administrative, marketing, and operational services while lawyers maintain professional independence Consolidation Platforms: Building networks of affiliated practices under a common operational framework Understanding which model aligns with your investment strategy and risk tolerance is essential before evaluating specific opportunities. Each structure carries different levels of control, compliance obligations, and growth potential. Identifying Law Firms with Scalable Business Models for Private Equity Buyers Not all law firms are suitable for private equity investment. The most attractive targets demonstrate business characteristics that transcend individual attorney relationships and can scale through operational improvements, technology implementation, or strategic growth initiatives. When evaluating potential law firm investments, private equity buyers should prioritize practices with these scalability indicators: Process-Driven Practice Areas Firms focused on high-volume, repeatable legal work offer greater scalability than those dependent on bespoke, relationship-intensive services. Practice areas such as personal injury, immigration, estate planning, family law, and consumer bankruptcy typically feature standardizable processes that can be systematized and expanded. These practices benefit from technology implementation, workflow optimization, and team-based service delivery models that reduce dependence on individual attorneys. Diversified Revenue Streams The right law firm investment demonstrates revenue diversification across multiple dimensions—client concentration, case types, referral sources, and geographic markets. Firms overly dependent on a handful of clients or a single referral relationship present significant risk. Look for practices with broad-based demand, multiple marketing channels, and client bases that can withstand individual relationship disruptions. Established Infrastructure and Systems Law firms that have already invested in operational infrastructure offer faster paths to returns. Evaluate whether target firms have implemented practice management software, documented workflows, trained support staff, and marketing systems. Firms still operating with paper files, manual processes, and minimal administrative support require substantial post-acquisition investment before generating improved returns. Financial Due Diligence: Beyond Traditional Metrics Financial analysis of law firm investments requires looking beyond standard EBITDA multiples and revenue growth rates. The unique economics of legal practices demand deeper investigation into revenue quality, realization rates, and the true sustainability of cash flows. Analyzing Revenue Quality and Predictability Not all law firm revenue is created equal. Contingency-based practices like personal injury firms have revenue recognized when cases settle, creating lumpier cash flows but also tangible case inventory that represents future value. Hourly billing practices generate more predictable monthly revenue but may depend heavily on specific attorney productivity. Flat-fee or subscription models offer the most predictable revenue but may face margin pressure. Examine the firm’s revenue composition carefully. What percentage comes from recurring clients versus one-time engagements? How dependent is revenue on the founding attorney versus associate attorneys or of-counsel relationships? What are the historical realization and collection rates? These metrics reveal revenue sustainability more accurately than gross revenue figures alone. Understanding True Profitability Many law firms, particularly smaller practices, don’t maintain financial statements that reflect true economic profit. Owner compensation may be artificially low or high, discretionary expenses might obscure underlying profitability, and capital expenditures may be deferred. Private equity buyers must normalize financial statements to understand actual operating performance and identify opportunities for margin improvement. Key areas to investigate include: Attorney compensation structures and market comparability Overhead allocation and opportunities for shared services Technology expenses and potential efficiency gains Marketing spend effectiveness and client acquisition costs Real estate obligations and opportunities for optimization Staff turnover and owner attorney succession planning Evaluating Cultural Fit and Management Transition as a Private Equity Buyer Perhaps the most overlooked aspect of law firm investments is cultural compatibility and leadership transition planning. Unlike many businesses where operational changes can be implemented quickly, law firms require careful management of professional relationships, ethical obligations, and attorney autonomy. Attorney Retention and Incentive Alignment The success of any law firm investment depends on retaining key attorneys post-acquisition. Private equity buyers must design compensation structures that align attorney incentives with firm growth while respecting professional independence. This might include earnouts tied to revenue maintenance, equity participation for key producers, or performance-based bonuses that reward both individual contribution and firm-wide success. Understanding each attorney’s motivations is critical. Some may be seeking retirement transition support, others might want growth capital to expand their practice, and still others may simply need operational relief. The right investment structure addresses these varying needs while protecting your capital investment. Operational Management Capabilities Many law firms lack professional management beyond the practicing attorneys themselves. Identifying or installing experienced legal industry operators who can implement best practices, drive efficiency improvements, and scale operations is often necessary for investment success. Evaluate whether the target firm has—or is open to—professional management, including dedicated roles for

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