Last year marked the fourth consecutive year with more than 80 law firm mergers and acquisitions, according to Altman Weil Merger Line, a business management consulting firm that serves law firms exclusively. In a recent article, Altman Weil Merger Line reported there were already 51 law firm mergers and acquisitions announced in the U.S. in 2018, which is on track to be another record setting year.
While merger announcements may garner headlines, Altman Weil suggests that less attention is paid to the fact that as many as half of law firm mergers fail to meet expectations regarding financial performance and other metrics. If your firm is thinking about a merger or acquisition, you should examine these five crucial factors before pulling the trigger:
- Firm Cultures
Arguably, the most important factor in whether or not a merger will succeed is the combination of the firms' cultures. Typically, firms that integrate and succeed are those with similar traits, such as values, leadership styles and philosophies. Things to take into consideration are both firms' personalities, work-life balance, benefits and perks. This is especially true when larger firms acquire or merge-in smaller firms that have one leader who is the primary driver of its culture.
Of course, firm culture involves more than just establishing a working comfort level. It also includes matters such as perspectives on the practice of law, strategic goals, work ethics, employment arrangements, use of non-attorneys, and human resources practices and procedures (for example, recruiting, termination and performance evaluation). - Compensation
Structures
Your merged firm must determine and get widespread buy-in on a common firm-wide system. The system should provide for, among other things, partner compensation, retirement arrangements and pension plans, and productivity requirements.
Reaching an agreement on a single compensation format can be complicated if the firms' current systems are based on different motivators. For instance, if your firm emphasizes hours billed more than rainmaking, even everyday matters, such as one firm's attorneys being accustomed to receiving larger monthly draws than the others, may create issues. - Financial
Approaches
Compensation is not the only financial matter you will need to consider before proceeding with a merger. For example, consider comparing the two firms' approaches to borrowing and space utilization. Are risk appetites and billing rates similar?
Even if they are like-minded on those points, some firms can clash if they have significant disparities on certain metrics. When attorneys bring different expectations about profits per partner, revenue per attorney, capital and realization, they may not be able to reconcile their positions. - Clients and Conflicts of
Interest
How does your firm's client base compare with the other firm's? If they are too dissimilar, the merged organization may encounter arguments over rates, service and acceptable payment patterns.
You will also need to think about how your clients might react to a merger and start giving some thought to how best to sell the benefits to both firms' clients.
Conflicts of interest are potential stumbling blocks for mergers, too. Law firms can sometimes be naïve about the burdens and costs associated with resolving conflicts between their clients, especially when the conflicts involve major clients. Unfortunately, ethics rules related to confidentiality can prevent firms from identifying and addressing conflicts early on. - Exposure to
Risk
Law firms entertain the idea of mergers for a variety of reasons (see the SideBar: Good—and Bad— Reasons to Make the Merger Leap). One potentially bad scenario is merging with a distressed firm that is looking for a life preserver. These types of combinations can work, but they require thorough due diligence and ongoing oversight.
For example, you do not want to be responsible for substantial unfunded pension obligation's. The financial benefits of a merger also could be undermined by several factors, including:
- Pending legal claims against the other firm;
- Above average lawyer turnover;
- High-risk client matters;
- The loss of major clients (at either firm);
- Crippling debt;
- Aging receivables; and
- Uncollectible work in progress.
Other items on your list that merit consideration include financing and lease obligations related to redundant real estate, equipment or computer systems.
Proceed with caution
Law firm mergers can create profitable synergies and successes that neither firm could accomplish alone. Above all, it is vital that your firm first establish whether it is truly compatible with a proposed merger partner. Firms that cannot find common ground initially are likely to run into serious post-merger difficulties down the road.
Sidebar: Good — and bad — reasons to make the merger leap
Law firm mergers can be arduous undertakings for all involved. Before even exploring such an endeavor, take the time to evaluate whether your reasons are sound.
Generally speaking, mergers are worthwhile if they are pursued to:
- Expand into new practice or industry areas;
- Increase strength in an existing practice area if you cannot develop such experience and depth internally;
- Enter new geographic areas;
- Stabilize your financial position or invest in the future;
- Shore up succession planning for expected retirements of senior attorneys by lining up replacement talent; or
- Improve client relationships (by, for example, providing or enhancing capabilities or services that they need).
On the other hand, a merger for growth alone is not a good reason to merge with another firm. Mergers also are a bad option for solving profitability issues. Profitability problems usually stem from billable hours and realization more than overhead expenses. Additionally, law firm mergers tend to produce few economies of scale. In fact, they can actually hurt profitability. Finally, mergers will not eliminate problem partners or other personnel issues.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
