Three weeks ago in this series, Elliott Portnoy described the plaintiff-side MSO deal from the sponsor’s side of the table. The firms that close at higher multiples, he said, did their preparation a year before the first meeting. This interview is the view from the other chair. Frederick Shelton represents the law firm in these transactions, and he agrees with Portnoy on almost every step of the preparation. He disagrees about the calendar.
Shelton is Chief Executive Officer of Shelton & Steele, a national advisory firm that handles law firm mergers, acquisitions, and sales to legal management services organizations. He also writes on the legal industry. Last October, under the headline The Legal MSO: The Next Billion-Dollar Industry, he told American Lawyer readers that legal MSOs would become a billion-dollar industry. A year and one reported $700 million deal later, he has moved from forecasting the market to selling firms into it.
Portnoy’s clients put up the money. Shelton’s clients take it, and the buyer pays Shelton. Shelton & Steele spent 30 years in lawyer recruiting and law firm mergers, where it represented the partner or the practice group and the hiring firm paid the fee. It has carried that fee arrangement into MSO deals. The firm advocates for the seller, and the MSO pays it. The law firm pays nothing.
Shelton says the sponsors accept the arrangement for the same reason the Am Law firms did. “They just wanted qualified candidates and firms,” he wrote in an email. “It’s the same now with MSOs. They actually like having us on deals because we provide the teams of attorneys, accountants, etc., so that founders have the confidence to actually do the deals.”
A sponsor who gets a year of preparation gets cleaner numbers to underwrite and a firm that has already invested in the process. A seller who goes to market while buyers outnumber sellers gets the terms that scarcity brings. Each man is describing the calendar that suits his side of the table, and the owner reading both should price that in.
I sent him seven questions in writing. His central claim is that sponsors need deals now and qualified firms are scarce. A prepared firm, he says, should sell into that scarcity instead of waiting out a year-long readiness program. His firm turns down most of the MSOs it screens. He wants owners to reserve equity for the partners who will run the firm after the founders leave. He treats a multi-year earnout keyed to EBITDA as the structure most likely to turn a strong valuation into a weak check.
His answers run below, edited for clarity. The section headings are mine.
On the year sponsors ask for
Meldofsky: Sponsors tell owners to have their case data, services agreement and partners in place a year before a process. From the firm’s side, what does that year cost an owner, and which parts are worth doing before the firm knows whether it will sell at all?
Shelton: That advice is based on sound reasoning and experience with investors. Right now, some horrible deals are being walked into by partners who didn’t prepare properly and didn’t think they needed experienced advisors, attorneys and consultants.
However, some of the best deals that will ever be written are closing right now because the MSOs are hungry. They’re under a lot of pressure to get deals in the door, so we’re working on deal structures with very strong valuations, favorable terms and zero earnouts.
When a firm has partner alignment, strong growth and a compelling story, we can get them educated, prepared and ready to enter the market in less than a week. We spend hours educating founders about how these deals work and what to expect. We introduce them to deal and ethics counsel almost immediately. We almost always introduce the founding partners to fractional CFOs who clean up and normalize the financials and, particularly for plaintiff firms, help organize the operating data behind the numbers, including case inventory, attrition, average fees, acquisition costs and time to resolution.
Later in the process, we introduce Quality of Earnings specialists who independently test and validate that financial story so the founder walks into diligence with numbers that can withstand scrutiny by the MSO. We also bring in consultants to educate founders about the key performance indicators that actually drive the business, and to help them identify where better systems, technology or capital could improve profitability. Those are things a firm should be doing whether it ever pursues an MSO deal or not.
But they don’t all have to be completed before entering the market. Strong, understandable financials matter from the beginning. A formal Quality of Earnings analysis can come later in the process and does not need to be the price of admission just to start talking to MSOs.
While I understand why experienced sponsors would think in terms of a year, I disagree with the idea that every firm needs to wait, especially in a sizzling hot market. The MSOs are hungry right now. They need deals and they’re under pressure to get them. It’s about supply and demand. Right now, the demand is high for qualified law firms and the supply is low. The Charlesbank deal for Wood Smith was reported at an 18X multiple. While I doubt that number will survive, it demonstrates why being a nimble market adapter is important. This is especially true for our small to mid-sized firms.
Yes, preparation matters, but so does first mover advantage. We help firms prepare quickly so they can capitalize on this high demand, low supply market.
On the management fee
Meldofsky: The management fee is where the ethics rules and the sponsor’s return meet. When you negotiate that fee for a firm, what are you protecting the owner against, and which fee structures cause trouble in later years?
Shelton: The safer standards are properly structured fair market value, cost plus and flat fee arrangements. What we don’t want is something that even remotely resembles fee sharing. That’s why we introduce founders to expert legal MSO attorneys who focus on exactly this issue. They can prevent a management fee from turning into fee sharing in disguise.
On what a sponsor actually brings
Meldofsky: Sponsors say they bring operating expertise in marketing, intake and finance. Where have you seen that promise hold up in a plaintiff firm, and where has a firm ended up paying a management fee for services it already ran well?
Shelton: The best MSOs don’t walk in assuming everything needs to be fixed. They first look for what a firm is already doing well. For example, one of our founders brought in business by speaking at conventions. Now that she doesn’t have to deal with all the administrative burdens, the MSO is sending her to double the number of conventions and paying for her to have better placement. That law firm just had its three most profitable months in 30 years of practice.
Once the MSO operators infuse resources and capital into what works, they look for what could be improved, or what they call “levers.” Maybe that’s AI handling client intake in twelve languages, 24/7. It could be automating much of the medical records process, increasing marketing spend or moving beyond traditional SEO toward better results from AI searches. They’ll also look to add profitable attorneys or even acquire firms.
Where it goes wrong is when some finance bro in a Patagonia vest arrives with a predetermined playbook to “professionalize” a successful law firm. We’ve turned down about 60 of the 70-plus MSOs we’ve interviewed, because we believe that an attorney who has built a successful law firm probably knows what they’re doing.
On the lawyers with no equity
Meldofsky: Owners usually roll equity into the MSO. Associates and non-equity partners usually get nothing. Who speaks for the lawyers with no equity in the negotiation, and what should an owner build into the structure for the people who will still be there after the owner exits?
Shelton: I love this question because I have an article coming out on this subject soon. One of the biggest mistakes we see is spending enormous amounts of time negotiating on behalf of the founding partners and forgetting about the key people who helped get the firm where it is, or who will help do so in the future.
We’ve worked with clients on deals that carve out part of that back-end MSO equity for current and future partners and C-levels. That rewards the next generation and, yes, creates some pretty effective golden handcuffs.
Another concept to understand is that as the value of the equity in the legal MSO grows, slices can continue to be carved out for future personnel. Every founding partner should also ask about the possibility of annual equity grants, wherein the MSO awards the founding partners additional equity to minimize the dilution of the pool as more people join.
If the founding partners get rich at closing while everybody else gets nothing, they may have completed a great transaction that will result in the extinction of their firm in the long run.
On contingency-fee revenue and the earnout
Meldofsky: A sponsor underwrites a plaintiff firm on its case inventory. What do sponsors get wrong about contingency-fee revenue, and how does that mistake show up in the valuation or the earn-out?
Shelton: The biggest mistake MSOs make is treating contingency-fee revenue like predictable recurring revenue that should be constant. An MSO that doesn’t understand litigation, might assume that if the most recent twelve months hasn’t been that strong, the business has become less valuable. They might ignore a history of year-after-year double-digit growth, because they can’t think outside the private equity box. A plaintiff firm can have extraordinary case inventory and lower EBITDA simply because several large cases haven’t resolved yet. The value didn’t necessarily disappear. It’s just a timing issue.
If an MSO can’t understand that, the founders should question whether the MSO will be a good partner. This is why we always spend over an hour with each MSO asking about their experience in legal or legal-adjacent industries and vetting them to make sure they “get it” when it comes to the profession of law. This isn’t health care or accounting. It’s an entirely new breed. That’s why we’ve turned down so many of the MSOs we’ve interviewed. There are a lot of MSOs out there. There aren’t a lot of good ones.
If a partner senses that an MSO doesn’t understand all this, they may want to reconsider entering into a relationship with them. If another suitable MSO isn’t currently available for a particular practice area, sometimes the better option is simply to wait until profitability normalizes rather than accept a weak valuation.
It’s also one reason we strongly avoid multi-year EBITDA earnouts. I call them the bottom of the deal-structure food chain. A founder can do everything right, then lose millions because cases resolved in year three instead of year two. That’s how a $50 million valuation can end up turning into only $20 million of money actually received by the founding partners. If the sponsor understands plaintiff law, the structure should recognize that volatility rather than transferring all of the timing risk back to the founder.
On AB 2305
Meldofsky: California’s AB 2305 takes effect for contracts signed on or after January 1. It voids any term that lets a sponsor influence client selection, fees, settlement or strategy, and puts statutory damages on both the lawyer and the investor. Colorado and Illinois went further and reached the MSO fee itself. What in a standard services agreement no longer survives, and what should a firm owner now refuse to sign?
Shelton: This is exactly why deal structure and specialized ethics counsel matter. The trend is pretty clear. States are scrutinizing all things MSO nowadays, and they’re drawing hard lines around who controls the practice of law and what constitutes fee sharing.
Again, the tried and true structure is fair market value, cost plus or flat fees. The lawyers must retain control over clients, fees, cases, strategy and settlements. If these are in place, both the MSO and the firm are sound.
On Arizona’s ABS and the California firm
Meldofsky: Arizona lets a sponsor own a law firm outright through an Alternative Business Structure, while an MSO leaves the lawyers holding the practice and the sponsor holding the services company. California has cut off fee-sharing with out-of-state ABSs and put both models under AB 2305. For a plaintiff firm with California cases, which model is still open, and what does the owner keep under each that they give up under the other?
Shelton: For a California plaintiff firm, a properly structured MSO remains available. The lawyers continue to own the law firm and, importantly, control the practice of law.
Arizona’s ABS model is fundamentally different, because non-lawyers can have an economic interest or decision-making authority in the entity providing legal services. With an MSO, the investor owns the management company, not the law firm. That distinction matters enormously. An ABS permits much more direct investor ownership and integration. MSO structures seem better to us because there is no bar on referral fees. The ABS was innovative. The MSO is inevitable. The first deal we got across the finish line was in Arizona, and it was structured as an MSO.
I wrote an article predicting the rise of virtual lawyering a year before COVID hit. I wrote another one predicting AI was going to be the tech game-changer for the practice of law before ChatGPT was released. The American Lawyer quoted me predicting the rise of legal MSOs in May 2024. In July 2025, I wrote in Attorney at Law Magazine that legal MSOs were going to be the structural game-changer for the practice of law. Last October, I predicted in The American Lawyer that they would become a billion-dollar industry. I am more confident in the MSO prediction than I was about virtual lawyering or AI.
Frederick Shelton is Chief Executive Officer of Shelton & Steele, which advises law firms on mergers, acquisitions, and transactions with legal management services organizations. He can be reached at fs@sheltonsteele.com.
On the Wood Smith figure: in August 2026, PitchBook and the Financial Times reported Charlesbank Capital Partners in advanced talks over an MSO stake in Wood Smith Henning & Berman. The reported valuation was about $700 million. Neither party has announced a deal. The EBITDA multiples in circulation, from 15X to 18X, come from the reporting rather than from the parties.
Wood Smith is an insurance defense firm with hourly revenue, so its multiple measures the market’s appetite rather than a comparable for a contingency-fee practice. Shelton’s answer originally said Charlesbank had announced the multiple. The sentence was edited to say the multiple was reported, and he reviewed the change. — DM
Shelton answered seven questions in writing and reviewed this piece before publication. His answers are edited for clarity, and the section headings are the editor’s. His client examples, the count of MSOs his firm has screened, and the deal outcomes he describes come from Shelton. So does his account of how his firm is paid. None of it was independently verified. — DM
Disclosure: The author holds referral relationships with plaintiff-side firms in mass tort litigation, as described in the editorial standards. Shelton & Steele represents law firms in MSO transactions and is paid by the MSO. No client of Shelton’s, and no firm, sponsor, or pending transaction of the author’s, is discussed in this interview. No payment was exchanged in either direction.