Lawyers are trained to read contracts, statutes, court opinions, and complicated regulatory provisions. We can spend hours examining a single paragraph in an agreement, arguing about what a particular word means or whether a provision creates an obligation that someone didn’t anticipate.
But ask a room full of accomplished trial lawyers to explain the financial structure of a modern management services organization, and I suspect the conversation would become considerably less confident.
That concerns me, particularly as accounting firms, private equity investors, and management companies take a growing interest in the legal profession. These organizations understand how businesses make money, how expenses can be allocated among related entities, how debt can be used to finance expansion, and how contractual relationships can create economic leverage without transferring formal ownership.
Lawyers need to understand those things too. Not because every outside investment or management arrangement is inherently questionable, but because the financial structure of a law firm can have a direct bearing on the independence of the lawyers working there.
And that independence is not something we should be willing to negotiate away.
For years, the legal profession has approached this issue largely through the question of ownership. Who owns the law firm? Are the owners licensed attorneys? Does a nonlawyer have an equity interest in the practice? Those are important questions, particularly in states such as New Jersey, where the rules governing professional independence place significant restrictions on nonlawyer ownership and fee sharing.
But ownership doesn’t necessarily tell us who exercises economic influence over a business.
Consider a law firm that is entirely owned by licensed attorneys. On paper, the structure appears conventional. The lawyers control the professional entity, retain responsibility for representing clients, and make the legal decisions.
Now suppose a separate management services organization, or MSO, provides virtually everything the firm needs to operate. It employs much of the administrative staff, leases the office space, owns the technology systems, manages advertising, oversees intake, provides accounting services, and handles the firm’s financial reporting. The law firm pays the MSO under a long-term management agreement.
The lawyers still own the law firm.
But how much practical independence do they retain if the management company controls nearly everything required to keep the doors open?
That is the question I believe the profession needs to examine much more seriously.
There is nothing inherently improper about outsourcing administrative services. Law firms have always paid accountants, landlords, marketing agencies, consultants, and technology companies. Many firms would benefit enormously from more sophisticated management, particularly when it comes to financial planning, staffing, cybersecurity, and operational efficiency.
The concern arises when the arrangement becomes so financially intertwined that it is difficult to distinguish legitimate compensation for business services from economic participation in the practice of law.
New Jersey’s Rule of Professional Conduct 5.4 generally prohibits lawyers from sharing legal fees with nonlawyers, subject to specific exceptions. It also protects the lawyer’s independent professional judgment against outside control. These restrictions serve an important purpose. Lawyers are supposed to make decisions based on their professional responsibilities and the interests of their clients, not the financial objectives of someone who has invested in the business.
The challenge is that modern financial structures don’t necessarily announce themselves as fee-sharing arrangements.
Nobody has to produce an agreement stating that an investor will receive 20% of every legal fee. Instead, a management company might charge a substantial monthly fee for administrative services. The amount might be fixed, adjusted periodically, tied to specified expenses, or calculated using some measure of the firm’s financial performance.
These distinctions matter enormously.
Suppose a law firm generates $20 million in annual revenue and pays an affiliated management company $4 million for staffing, technology, marketing, and administrative services. That payment, standing alone, doesn’t tell us whether the arrangement is reasonable or ethically permissible. We need to know what services are actually being delivered, what those services cost, how the fee was determined, and whether the relationship reflects legitimate commercial terms.
Now suppose the payment automatically increases whenever the law firm’s revenue increases, even when the cost of providing services remains essentially unchanged.
That raises a different set of questions.
Is the management company being compensated for the work it performs, or is it participating economically in the law firm’s legal fees? Does the formula create incentives that could interfere with professional judgment? Is the arrangement consistent with the rules of the jurisdiction where the lawyers practice?
Importantly, gross revenue is not some magical category that automatically avoids the prohibition on sharing legal fees. Changing the calculation from a percentage of individual case recoveries to a percentage of firm revenue doesn’t, by itself, resolve the underlying ethical concern. The actual structure, economic substance, and applicable law matter.
This is precisely where financial literacy becomes indispensable.
A lawyer considering an MSO relationship should be able to examine the management agreement and understand not just the legal obligations it creates, but the economics behind them. How was the management fee calculated? What is the management company’s actual cost of providing the services? Are there related-party transactions? Who ultimately benefits financially from the payments? What happens when the firm grows, and who captures the increased value?
Those questions are especially important when the management company owns assets that the law firm depends upon.
Imagine that the MSO owns the firm’s office building and charges rent. That arrangement may be perfectly legitimate, but the lawyers should understand whether the rent is consistent with market rates and how future increases are determined. The same scrutiny should apply to technology licenses, equipment leases, staffing charges, and other expenses paid to affiliated entities.
An individual charge might appear entirely ordinary. The combined effect of several such arrangements could be quite different.
Debt creates another layer of complexity, particularly when private capital is involved.
If a management company receives a substantial investment to acquire infrastructure, expand operations, or support a network of affiliated law firms, the investors generally expect a financial return. There is nothing surprising about that. Investors invest to make money.
But lawyers should understand how that return is supposed to be generated.
Does the management company have significant debt obligations? Are its fees designed to cover interest payments or investor distributions? Are those obligations dependent on continued growth in the revenue generated by affiliated law firms? What happens if revenue declines or a firm decides to pursue expensive litigation that may take years to resolve?
For a personal injury practice, those questions are particularly relevant. Some cases require substantial investment in expert witnesses, investigation, medical analysis, and trial preparation. Others may take years to reach a resolution. A firm must be able to make appropriate decisions about those cases without pressure to prioritize short-term financial performance over the interests of its clients.
The influence of outside economics doesn’t always arrive in the form of a direct instruction.
Consider a management company that controls a law firm’s marketing and intake operations. The company may determine where advertising dollars are spent, which potential clients are targeted, how prospective matters are screened, and what performance metrics are used to evaluate success.
If the financial model rewards high case volume and rapid resolution, the entire operation may gradually begin to favor matters that fit those characteristics. Nobody necessarily tells the attorneys to avoid complex litigation. But when budgets, staffing, and operational priorities consistently favor a particular type of case, the firm’s practical choices may become narrower.
Similar concerns arise with staffing. A management company may believe that reducing personnel costs will improve operating margins. The lawyers may believe that a difficult caseload requires more experienced attorneys, additional paralegals, or greater investigative support.
Who decides?
If the lawyers retain genuine authority over the resources necessary to represent their clients, the arrangement may function appropriately. If those decisions effectively depend on approval from an outside business entity, professional independence becomes a much more complicated question.
This is why I would encourage any lawyer considering one of these relationships to look beyond the initial financial presentation.
The projected growth may be impressive. The marketing plan may be persuasive. The promise of professional management may be appealing, particularly to attorneys who would prefer to spend their days practicing law instead of worrying about payroll, technology systems, and office administration.
But the most important provisions may be the ones that receive the least attention during the sales process.
What happens if the relationship ends?
Suppose the lawyers decide after three years that the arrangement isn’t working. Can they terminate the management agreement without incurring an extraordinary financial penalty? Do they retain access to their client files and necessary data? Can they continue using the firm’s telephone numbers, websites, and technology systems? Who owns the intellectual property, marketing infrastructure, and other assets associated with the practice?
And if the MSO employs the administrative staff, what happens to those employees when the relationship ends?
A law firm might retain complete legal ownership of its professional entity while discovering that separating from its management company is financially or operationally devastating.
That is a form of leverage that deserves careful examination before any agreement is signed.
It also illustrates why lawyers should pay close attention to the difference between a transaction’s purchase price and its long-term financial consequences.
An outside organization may offer substantial upfront consideration in connection with the sale of legitimate nonlegal assets, the establishment of a management relationship, or another transaction involving the business infrastructure surrounding a law practice. Such a payment requires careful legal and ethical analysis, including what is being transferred and what obligations the law firm assumes in return.
The immediate proceeds may be attractive. But if the transaction also commits the firm to years of substantial management fees, restrictive agreements, or limited operational flexibility, the real economics are considerably more complicated than the initial payment suggests.
An accountant or sophisticated financial adviser will naturally examine cash flow, recurring revenue, financing costs, valuation, and the long-term return on invested capital.
Lawyers should insist on understanding the same analysis.
There’s also an important distinction between a business arrangement that looks profitable and one that is sustainable. A management company may achieve strong short-term results by reducing overhead, consolidating administrative functions, or increasing advertising efficiency. Those improvements may benefit everyone involved.
But if the financial projections depend on aggressive growth, increasing fees, or assumptions about case volume that don’t materialize, the pressure created by those expectations can eventually affect the affiliated law firms.
That doesn’t mean financial pressure automatically produces unethical conduct. It means lawyers should understand the incentives and constraints embedded in the structure before those pressures arise.
I believe this also exposes a longstanding weakness in the culture of our profession.
Many attorneys still approach financial management as something separate from the practice of law. They expect accountants to handle the numbers, administrators to run the office, and business consultants to develop growth strategies. The attorneys focus on representing clients, which is understandably what they were trained to do.
That division of responsibility can work extremely well when the lawyers remain informed and retain meaningful oversight.
The danger is confusing delegation with abdication.
A law firm can outsource bookkeeping without surrendering responsibility for its finances. It can retain a marketing company without abandoning its obligations concerning advertising and solicitation. It can hire administrative professionals without giving them authority over legal judgment. And it can use sophisticated technology without forgetting its responsibilities to protect confidential client information.
The involvement of an MSO or an accounting organization doesn’t eliminate those obligations. In some respects, it makes understanding them more important.
I would also encourage law firm owners to obtain independent financial and legal advice before entering a complex affiliation. An attorney who would never advise a client to sign a major business agreement without understanding the risks shouldn’t approach a transaction involving his own firm any differently.
That means more than having someone review the language of the contract. It means examining the financial model, the ownership of assets, the payment formulas, the debt structure, the control provisions, and the practical consequences of termination.
It also means asking difficult questions about compensation. A management company should be able to explain what it provides and why it is being paid what it receives. If a complex formula cannot be explained in terms the lawyers understand, that alone is a reason to investigate further.
Perhaps the most important issue is one that accountants and investors already understand very well: financial relationships must be evaluated as a whole.
A management agreement may look conventional. So may a lease, technology license, staffing contract, financing arrangement, or marketing services agreement. But if all those agreements involve related entities, examining each one separately may miss the larger economic picture.
Who receives the money? Who bears the risk? Who controls the resources? Who benefits when the firm grows? And who has leverage when disagreements arise?
These questions may reveal far more about a law firm’s actual independence than its ownership documents alone.
I don’t believe the profession should reject better business practices simply because they come from outside organizations. Law firms can benefit from sophisticated accounting, more effective management, and access to expertise that individual practitioners may not possess. There is considerable room for improvement in how many practices operate, and lawyers shouldn’t be reluctant to acknowledge that.
But there is a difference between improving the business of law and allowing the economics of that business to interfere with the practice of law.
The distinction has to be maintained deliberately. It cannot depend entirely on assurances that the lawyers will remain independent while contracts and financial incentives make the opposite increasingly difficult.
Accounting firms and private investors already understand leverage, margins, recurring revenue, enterprise value, and return on capital. They know how contractual arrangements can shape a business without changing its formal ownership.
Lawyers who enter these arrangements need to understand those concepts just as thoroughly.
Protecting professional independence requires more than knowing what the ethics rules prohibit. It requires understanding whether the financial structure of the firm allows those obligations to be honored in practice.
The lawyers may own the firm. But if someone else controls the money, the infrastructure, and the ability to walk away, ownership may tell only part of the story.
Michael J. Epstein, a Harvard Law School graduate, is a trial lawyer and managing partner of The Epstein Law Firm, P.A., a law firm based in New Jersey.
The post Accounting Firms Are Learning The Legal Business. Lawyers Need To Learn The Accounting. appeared first on Above the Law.
Lawyers are trained to read contracts, statutes, court opinions, and complicated regulatory provisions. We can spend hours examining a single paragraph in an agreement, arguing about what a particular word means or whether a provision creates an obligation that someone didn’t anticipate.
But ask a room full of accomplished trial lawyers to explain the financial structure of a modern management services organization, and I suspect the conversation would become considerably less confident.
That concerns me, particularly as accounting firms, private equity investors, and management companies take a growing interest in the legal profession. These organizations understand how businesses make money, how expenses can be allocated among related entities, how debt can be used to finance expansion, and how contractual relationships can create economic leverage without transferring formal ownership.
Lawyers need to understand those things too. Not because every outside investment or management arrangement is inherently questionable, but because the financial structure of a law firm can have a direct bearing on the independence of the lawyers working there.
And that independence is not something we should be willing to negotiate away.
For years, the legal profession has approached this issue largely through the question of ownership. Who owns the law firm? Are the owners licensed attorneys? Does a nonlawyer have an equity interest in the practice? Those are important questions, particularly in states such as New Jersey, where the rules governing professional independence place significant restrictions on nonlawyer ownership and fee sharing.
But ownership doesn’t necessarily tell us who exercises economic influence over a business.
Consider a law firm that is entirely owned by licensed attorneys. On paper, the structure appears conventional. The lawyers control the professional entity, retain responsibility for representing clients, and make the legal decisions.
Now suppose a separate management services organization, or MSO, provides virtually everything the firm needs to operate. It employs much of the administrative staff, leases the office space, owns the technology systems, manages advertising, oversees intake, provides accounting services, and handles the firm’s financial reporting. The law firm pays the MSO under a long-term management agreement.
The lawyers still own the law firm.
But how much practical independence do they retain if the management company controls nearly everything required to keep the doors open?
That is the question I believe the profession needs to examine much more seriously.
There is nothing inherently improper about outsourcing administrative services. Law firms have always paid accountants, landlords, marketing agencies, consultants, and technology companies. Many firms would benefit enormously from more sophisticated management, particularly when it comes to financial planning, staffing, cybersecurity, and operational efficiency.
The concern arises when the arrangement becomes so financially intertwined that it is difficult to distinguish legitimate compensation for business services from economic participation in the practice of law.
New Jersey’s Rule of Professional Conduct 5.4 generally prohibits lawyers from sharing legal fees with nonlawyers, subject to specific exceptions. It also protects the lawyer’s independent professional judgment against outside control. These restrictions serve an important purpose. Lawyers are supposed to make decisions based on their professional responsibilities and the interests of their clients, not the financial objectives of someone who has invested in the business.
The challenge is that modern financial structures don’t necessarily announce themselves as fee-sharing arrangements.
Nobody has to produce an agreement stating that an investor will receive 20% of every legal fee. Instead, a management company might charge a substantial monthly fee for administrative services. The amount might be fixed, adjusted periodically, tied to specified expenses, or calculated using some measure of the firm’s financial performance.
These distinctions matter enormously.
Suppose a law firm generates $20 million in annual revenue and pays an affiliated management company $4 million for staffing, technology, marketing, and administrative services. That payment, standing alone, doesn’t tell us whether the arrangement is reasonable or ethically permissible. We need to know what services are actually being delivered, what those services cost, how the fee was determined, and whether the relationship reflects legitimate commercial terms.
Now suppose the payment automatically increases whenever the law firm’s revenue increases, even when the cost of providing services remains essentially unchanged.
That raises a different set of questions.
Is the management company being compensated for the work it performs, or is it participating economically in the law firm’s legal fees? Does the formula create incentives that could interfere with professional judgment? Is the arrangement consistent with the rules of the jurisdiction where the lawyers practice?
Importantly, gross revenue is not some magical category that automatically avoids the prohibition on sharing legal fees. Changing the calculation from a percentage of individual case recoveries to a percentage of firm revenue doesn’t, by itself, resolve the underlying ethical concern. The actual structure, economic substance, and applicable law matter.
This is precisely where financial literacy becomes indispensable.
A lawyer considering an MSO relationship should be able to examine the management agreement and understand not just the legal obligations it creates, but the economics behind them. How was the management fee calculated? What is the management company’s actual cost of providing the services? Are there related-party transactions? Who ultimately benefits financially from the payments? What happens when the firm grows, and who captures the increased value?
Those questions are especially important when the management company owns assets that the law firm depends upon.
Imagine that the MSO owns the firm’s office building and charges rent. That arrangement may be perfectly legitimate, but the lawyers should understand whether the rent is consistent with market rates and how future increases are determined. The same scrutiny should apply to technology licenses, equipment leases, staffing charges, and other expenses paid to affiliated entities.
An individual charge might appear entirely ordinary. The combined effect of several such arrangements could be quite different.
Debt creates another layer of complexity, particularly when private capital is involved.
If a management company receives a substantial investment to acquire infrastructure, expand operations, or support a network of affiliated law firms, the investors generally expect a financial return. There is nothing surprising about that. Investors invest to make money.
But lawyers should understand how that return is supposed to be generated.
Does the management company have significant debt obligations? Are its fees designed to cover interest payments or investor distributions? Are those obligations dependent on continued growth in the revenue generated by affiliated law firms? What happens if revenue declines or a firm decides to pursue expensive litigation that may take years to resolve?
For a personal injury practice, those questions are particularly relevant. Some cases require substantial investment in expert witnesses, investigation, medical analysis, and trial preparation. Others may take years to reach a resolution. A firm must be able to make appropriate decisions about those cases without pressure to prioritize short-term financial performance over the interests of its clients.
The influence of outside economics doesn’t always arrive in the form of a direct instruction.
Consider a management company that controls a law firm’s marketing and intake operations. The company may determine where advertising dollars are spent, which potential clients are targeted, how prospective matters are screened, and what performance metrics are used to evaluate success.
If the financial model rewards high case volume and rapid resolution, the entire operation may gradually begin to favor matters that fit those characteristics. Nobody necessarily tells the attorneys to avoid complex litigation. But when budgets, staffing, and operational priorities consistently favor a particular type of case, the firm’s practical choices may become narrower.
Similar concerns arise with staffing. A management company may believe that reducing personnel costs will improve operating margins. The lawyers may believe that a difficult caseload requires more experienced attorneys, additional paralegals, or greater investigative support.
Who decides?
If the lawyers retain genuine authority over the resources necessary to represent their clients, the arrangement may function appropriately. If those decisions effectively depend on approval from an outside business entity, professional independence becomes a much more complicated question.
This is why I would encourage any lawyer considering one of these relationships to look beyond the initial financial presentation.
The projected growth may be impressive. The marketing plan may be persuasive. The promise of professional management may be appealing, particularly to attorneys who would prefer to spend their days practicing law instead of worrying about payroll, technology systems, and office administration.
But the most important provisions may be the ones that receive the least attention during the sales process.
What happens if the relationship ends?
Suppose the lawyers decide after three years that the arrangement isn’t working. Can they terminate the management agreement without incurring an extraordinary financial penalty? Do they retain access to their client files and necessary data? Can they continue using the firm’s telephone numbers, websites, and technology systems? Who owns the intellectual property, marketing infrastructure, and other assets associated with the practice?
And if the MSO employs the administrative staff, what happens to those employees when the relationship ends?
A law firm might retain complete legal ownership of its professional entity while discovering that separating from its management company is financially or operationally devastating.
That is a form of leverage that deserves careful examination before any agreement is signed.
It also illustrates why lawyers should pay close attention to the difference between a transaction’s purchase price and its long-term financial consequences.
An outside organization may offer substantial upfront consideration in connection with the sale of legitimate nonlegal assets, the establishment of a management relationship, or another transaction involving the business infrastructure surrounding a law practice. Such a payment requires careful legal and ethical analysis, including what is being transferred and what obligations the law firm assumes in return.
The immediate proceeds may be attractive. But if the transaction also commits the firm to years of substantial management fees, restrictive agreements, or limited operational flexibility, the real economics are considerably more complicated than the initial payment suggests.
An accountant or sophisticated financial adviser will naturally examine cash flow, recurring revenue, financing costs, valuation, and the long-term return on invested capital.
Lawyers should insist on understanding the same analysis.
There’s also an important distinction between a business arrangement that looks profitable and one that is sustainable. A management company may achieve strong short-term results by reducing overhead, consolidating administrative functions, or increasing advertising efficiency. Those improvements may benefit everyone involved.
But if the financial projections depend on aggressive growth, increasing fees, or assumptions about case volume that don’t materialize, the pressure created by those expectations can eventually affect the affiliated law firms.
That doesn’t mean financial pressure automatically produces unethical conduct. It means lawyers should understand the incentives and constraints embedded in the structure before those pressures arise.
I believe this also exposes a longstanding weakness in the culture of our profession.
Many attorneys still approach financial management as something separate from the practice of law. They expect accountants to handle the numbers, administrators to run the office, and business consultants to develop growth strategies. The attorneys focus on representing clients, which is understandably what they were trained to do.
That division of responsibility can work extremely well when the lawyers remain informed and retain meaningful oversight.
The danger is confusing delegation with abdication.
A law firm can outsource bookkeeping without surrendering responsibility for its finances. It can retain a marketing company without abandoning its obligations concerning advertising and solicitation. It can hire administrative professionals without giving them authority over legal judgment. And it can use sophisticated technology without forgetting its responsibilities to protect confidential client information.
The involvement of an MSO or an accounting organization doesn’t eliminate those obligations. In some respects, it makes understanding them more important.
I would also encourage law firm owners to obtain independent financial and legal advice before entering a complex affiliation. An attorney who would never advise a client to sign a major business agreement without understanding the risks shouldn’t approach a transaction involving his own firm any differently.
That means more than having someone review the language of the contract. It means examining the financial model, the ownership of assets, the payment formulas, the debt structure, the control provisions, and the practical consequences of termination.
It also means asking difficult questions about compensation. A management company should be able to explain what it provides and why it is being paid what it receives. If a complex formula cannot be explained in terms the lawyers understand, that alone is a reason to investigate further.
Perhaps the most important issue is one that accountants and investors already understand very well: financial relationships must be evaluated as a whole.
A management agreement may look conventional. So may a lease, technology license, staffing contract, financing arrangement, or marketing services agreement. But if all those agreements involve related entities, examining each one separately may miss the larger economic picture.
Who receives the money? Who bears the risk? Who controls the resources? Who benefits when the firm grows? And who has leverage when disagreements arise?
These questions may reveal far more about a law firm’s actual independence than its ownership documents alone.
I don’t believe the profession should reject better business practices simply because they come from outside organizations. Law firms can benefit from sophisticated accounting, more effective management, and access to expertise that individual practitioners may not possess. There is considerable room for improvement in how many practices operate, and lawyers shouldn’t be reluctant to acknowledge that.
But there is a difference between improving the business of law and allowing the economics of that business to interfere with the practice of law.
The distinction has to be maintained deliberately. It cannot depend entirely on assurances that the lawyers will remain independent while contracts and financial incentives make the opposite increasingly difficult.
Accounting firms and private investors already understand leverage, margins, recurring revenue, enterprise value, and return on capital. They know how contractual arrangements can shape a business without changing its formal ownership.
Lawyers who enter these arrangements need to understand those concepts just as thoroughly.
Protecting professional independence requires more than knowing what the ethics rules prohibit. It requires understanding whether the financial structure of the firm allows those obligations to be honored in practice.
The lawyers may own the firm. But if someone else controls the money, the infrastructure, and the ability to walk away, ownership may tell only part of the story.
Michael J. Epstein, a Harvard Law School graduate, is a trial lawyer and managing partner of The Epstein Law Firm, P.A., a law firm based in New Jersey.
