Finding a Firm's Worth, as Private Equity Eyes the Legal Field

Private Equity attorney Joshua Porte was interviewed for a Law360 article about how investors are approaching law firm valuations as private equity enters the legal market through management service organizations (MSOs). The MSO model allows outside investment in law firms, which must abide by strict ownership regulations, through splitting the practice of law from the business of law and thereby creating a separate entity in which investors can buy a stake. Because MSOs are a new phenomenon in the legal industry, it's up to today's investors to determine the best approach for valuing target firms.

Mr. Porte, who is part of a Holland & Knight team advising on multiple law firm MSO deals, explained how fees factor into the valuation process: A law firm pays an MSO a fee for its work, and under legal ethics principles, this fee must 1) be fixed and 2) reflect fair market value. That means investors can utilize market surveys to gauge what similar business and administrative services providers are charging to establish the fee. Mr. Porte added that the fee cannot be structured as a percentage of the law firm's revenue or profits and underscored that, implemented correctly, the MSO fee framework follows ethical rules and maintains separation between the two structures.

"The law firm will continue to operate as its own entity. It employs the lawyers, and the private equity sponsor will not be allowed to interfere with the legal operations and client relationships," he said. "It's a bifurcation between the legal and non-legal side."

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