Managing Law Firms in Transition

Managing Law Firms in Transition

Law Firm in Crisis-Five Things to Know and Remember

Posted in Law Firm Crisis, Law Firm Leadership, Law Firm Repositioning/Turnaround/Restructuring, Law Firm Transition, Law Firm Warning Signs

Law firm crisis can pop up at anytime during the year, but if it had a “season” it would be early on in the calendar. As I wrote in Like Divorce, Law Firm Crisis is More Likely as the New Year Starts, the beginning of each year is when key lawyers cut and run, disappointed partners complain loudly about a lousy year, optimism and morale plummet, pressure from the firm’s bank mounts, or a challenge to leadership consumes great attention. Crisis can take on other characteristics, as in many respects no two law firm crises are the alike.

When crisis occurs, it is absolutely vital that its presence be recognized immediately. Crisis can slide into disaster if leadership is slow to notice it and fails to take prompt action. If crisis is something your law firm is experiencing, there are five things to know and remember as crisis is tackled. They are:

Added Vulnerability Goes with Crisis. Whatever sparks the crisis in the first place may represent only the beginning. A child with a cold is susceptible to add illness-a law firm in crisis is vulnerable to added and unexpected problems. Because of this vulnerability, leadership must be aware that the other problems may arise and a game of “whack-a-mole” may ensure. There is no substitute to being aware and vigilant when crisis hits.

Control is Compromised. When a law firm is in distress, its ability to implement initiatives at a time of its choosing becomes limited. If a law firm is in crisis, leadership’s ability to control the firm’s destiny is compromised. Getting ahead of the crisis is critical because trouble at the firm will grow in severity the longer a solution is wanting. The risk of losing control grows with each passing day.

Time is Not on Your Side. Closely related to the potential loss of control is the issue of time. Any law firm leader that has faced crisis will tell you that solutions need to be found quickly. That does not mean that speed justifies “shooting from the hip,” but time is of the essence when solving crisis.

Getting it Right the First Time. In law firm crisis, there is little chance to experiment or launch trial balloons. Leadership’s solution to crisis needs to be right the first time. Don’t count on a do-over.

Rumors Can Undermine the Best Plans. When law firm leadership faces trouble, lawyers and staff not really “in-the-know” will think they are. They will sense that something is wrong and will talk about it, speculate and worry. Get ahead of the rumors by communicating clearly and precisely about the firm’s issues and your plan of action. Good communication skills can calm the troops and establish credibility. Keeping quiet or hunkering down in your bunker can kill your chance for success.Crisis at a law firm can be a watershed development that can threaten a firm’s future.

Crisis puts in motion at least five moving parts any law firm leader must know and remember. If your firm were in crisis, how would you handle them?

 

The Law Firm Sale and Succession Planning

Posted in Law Firm Transition

200px-For_Sale_by_Owner_Sign.svgIf you practice law, there is one eventuality that should be added to that familiar duo of Death and Taxes. No one talks much about it, but it warrants the same attention to detail. The subject? The end of your practice. 

As is the case with its two more familiar rivals for attention, ignoring it will not prove wise. 

The fact is that this change will probably be the most significant professional transition of your career — the transition of one’s practice to someone else. Transition drivers include:

  • Pursuit of another profession or passion;
  • Relocation to a new city
  • An unforeseen health circumstance; or the most likely,
  • Retirement

A critical part of practice (or firm) management is planning for the future. In its most productive form, strategic planning includes a deep-dive into both short-term and long-term possibilities. And this kind of planning can be the difference between a smooth and profitable transition, and one that resembles disaster.

There are, needless to say, a number of issues to consider. And as is the case with respect to your personal taxes or the distribution of a personal estate, expert counsel can help you avoid pitfalls. leverage every asset, and end up in successful transition.

Some of the most common issues include:

  • Defining personal objectives
  • Compliance with local bar rules
  • Practice valuation
  • Finding a buyer
  • Negotiating the transaction
  • Transitioning client relationships

In this post we’ll explore the first three issues; and we’ll tackle some ideas around the remaining three in the next post.

Defining Personal Objectives

This first and most important step sets the stage for the entire process. It outlines what constitutes success, and sets parameters that will facilitate decision-making. What must be accomplished, and in what time frame? Do you want to completely step away from the practice, or keep one foot in? Do you want the transition to be prompt, or take place over time? Those variables dictate your strategy.

If you want to transition the practice over a period of years the literal sale of the practice is not an option; whereas a sale is an option in most states if you envision a complete separation from the practice.

Compliance With Bar Rules

The ABA provides for the sale of your practice as long as certain conditions are met.  In Rule 1.17 sets forth the following conditions:

a) The seller ceases to engage in the private practice of law, or in the area of practice that has been sold, [in the geographic area] [in the jurisdiction] (a jurisdiction may elect either version) in which the practice has been conducted;

(b) The entire practice, or the entire area of practice, is sold to one or more lawyers or law firms;

(c) The seller gives written notice to each of the seller’s clients regarding:

(1) the proposed sale;

(2) the client’s right to retain other counsel or to take possession of the file; and

(3) the fact that the client’s consent to the transfer of the client’s files will be presumed if the client does not take any action or does not otherwise object within ninety (90) days of receipt of the notice.

If a client cannot be given notice, the representation of that client may be transferred to the purchaser only upon entry of an order so authorizing by a court having jurisdiction. The seller may disclose to the court in camera information relating to the representation only to the extent necessary to obtain an order authorizing the transfer of a file.

(d) The fees charged clients shall not be increased by reason of the sale.

Please note that not all states (including Texas, where we are based) follow Rule 1.17. So check your local bar rules before moving forward.

Practice Valuation

Whether you literally sell your practice or transition it to a new owner through another means, the practice needs to be valued for fiscal reasons.

Fundamentally this is a matter of determining anything being transferred that is relevant to the generation of future profits. Portions of the practice relevant to valuation include:

  • Hard assets
    • Furniture
    • Equipment
    • Property
  • Soft assets
    • Cash
    • Receivables
    • Work in process
  • Business systems/intellectual property
  • Goodwill
    • Existing clients
    • Former clients
    •  Referral sources of firm
  • Liabilities
    • Actual
    • Contingent

Even though each of the above items can have a significant impact on the valuation of the practice, the most difficult and critical valuation issue is that associated with the goodwill. What future revenue stream is really being transferred based on this often difficult concept?

Transitioning out of practice is best accomplished when handled as a process — one that begins long before the eve of the desired transition.

Like Divorce, Law Firm Crisis is More Likely as the New Year Starts

Posted in Law Firm Crisis, Law Firm Transition, Law Firm Warning Signs

In his January Divorce Rush Dates Back to the Middle Ages, Frederik Pederson examines the annual spike in English divorces every January and traces the phenomenon back to the Middle Ages. His research into the records of medieval church courts is interesting and supports his thesis. Mr. Pederson’s article backs the view that whatever the century, the built-up strains in a marriage finally prompt action as January starts. Indeed, among some divorce lawyers in England, Mr. Pederson notes that the first Monday in January is known as Divorce Monday.

In some respects, law firms are like the institution of marriage. Many married couples reach their breaking point at year-end and flock to divorce lawyers as part of their Holiday hangover. January is a time when partners at law firms likewise are more likely to reach their breaking point. Financial pressures, the prospect of another year in a dead end relationship, infidelity (or disloyalty) and discord of personalities can describe equally the dynamics in a strained marriage and a teetering law firm. Feelings and frustrations that have been pent up for too long finally bubble to the surface and someone vital to the relationship says “no more.”

Of course, not all spouses that initiate divorce discussions or proceedings end their marriages. Counseling, a change of heart, or a promise to “do better” can buy more time or solve the discord. And in law firms, not every threat of departure, actual departure, financial disappointment or disagreement over a firm’s direction means a law firm is at its end. But just as the strains in a marriage arise from some pretty typical situations, crisis in a law firm at a year’s beginning often comes from common occurrences. Five scenarios described below are repeated every year and create law firms crisis.

Take Their Money-Take Their Leave. The year-end ritual of distributing profits, bonuses or otherwise sharing a firm’s financial performance is commonplace. Also common is the all-to-frequent event of departure after financial rewards are shared. Stretching the rewards out by making payments in installments can reduce a firm’s “grab and go” experience. But for many firms, the early New Year amounts to an extended “moving day.”

Where is the Rest of It? While some partners will bolt after getting their year-end money, some stay but respond to a firm’s disappointing distributions by expressing dissatisfaction loudly and repeatedly. Even if they have good reason to complain, constant grousing can undermine a firm even if remedial steps to improve performance are underway. When the talk in the halls is negative, crisis can follow.

As Productivity Trends Down, So Too Does Optimism and Morale. Most people want to be part of something that is exciting, vibrant and improving. Stagnation is bad enough but when productivity trends down optimism and morale can fall as well. A firm facing a downward productivity trend is in trouble.

Banking Bad. Firms that rely on banking lines of credit can experience year-end results that adversely affect its banking relationships. Covenants can be broken creating the uncomfortable meeting with the bank. Even if covenant compliance is not an issue, the prospects for the coming year may project a need for increased borrowing, potential for covenant stress or the need for future additional availability. Finally, recent financial performance may cause your bank to try to exit the relationship. A strained banking relationship places a firm in crisis.

Palace Coup. The jungle drums may sound after a bad year. Unfortunately, existing leadership can be deaf to the cacophony of sound heard by everyone else. More importantly, if the natives are restless it means that leadership and the rank and file are not on the same page. Crisis can ensue.

When the intensity of year-end lightens and the law firm books are closed, there is time to reflect. There also is time to look at the hard data that measures a law firm’s performance. Like in the case of unhappy spouses, at law firms it can be the time for a Perfect Storm. This January, are you ready to respond to the potential for crisis?

 

Will Your Law Firm Improve in 2015?

Posted in Law Firm Growth, Law Firm Repositioning/Turnaround/Restructuring, Law Firm Transition, Uncategorized

Focus

As we enter the New Year, chances are good you’re dealing with a predictable slate of demands on your time: setting compensation and budgets; managing details associated with the latest departure;  and interviewing this week’s lateral prospect. All important activities, and worthy of serious attention; but none of these is likely to make the firm fundamentally stronger, and better positioned to compete.

May I suggest something to spend a little time on that does stand a chance of making a real difference? Something that has a shot at making your firm better and stronger?

Spend some time really wrestling with this question: What one thing if accomplished this year will leave us a healthier, happier firm — better positioned to compete in 2016?

My wife recently read The ONE Thing: The Surprisingly Simple Truth Behind Extraordinary Results, by Keller and Papasan. The premise of the book is that we all face a tremendous number of distractions and demands on our time, most of which make no difference in our lives.

But if we take the time necessary to determine the most important thing to accomplish today, this week or this year, we can make a difference that really matters.

This isn’t a particularly complex concept; but it is one that far too few law firms (or individuals for that matter) seriously consider…much less, actually execute.

If you are in a law firm that doesn’t have a strong culture of planning, start by gathering the senior members of your firm for a discussion about the “one thing.” The dynamics will surprise you. Agree that you won’t be distracted…that you won’t attempt to solve every issue…but you’ll focus on one thing.

Agreeing on the “one thing” is more than half of the battle; but you will still have to execute. Things are more likely to really happen with some accountability built into action items. I recommend a regularly scheduled monthly meeting with your partners during which progress towards the “one thing” is discussed.

With these simple tools,you and your partners can take a giant step toward being in a different place when you take stock of 2015, and plan for next year.

What do you think?

 

 

 

Year End At the Law Firm-When the Best Laid Plans Can Go Astray

Posted in Law Firm Crisis, Law Firm Leadership, Law Firm Transition

As law firms work their year-end activities, there is much to do. Collecting bills, awarding bonuses, budgeting for the coming year, promotions, evaluations, and in some cases, compensation setting, are among the things on law firm agendas. Focused firms also begin, continue or complete identifying their strategic imperatives for 2015 so that the New Year has the direction needed for success. If well done, all of these activities and initiatives can be traced back to planning exercises in which common firm goals coalesce in the well-managed firm.

We all know, however, that the running of any business, especially a law firm, involves dealing with challenges that arise without notice or warning. Trying to plan for the unexpected is a little oxymoronic. Despite the apparent futility of preparing for the unknown, smart year-end planning anticipates the potential for adverse developments and the need to adjust.

With that in mind, here are five things any law firm should keep in mind when closing out a year and preparing for the upcoming one.

Plans Should Allow for Flexibility. A plan that is too rigid can fall off the tracks when the unexpected happens. Because the unexpected should be expected, every plan for the coming year should provide for some flexibility. With a flexible plan management is more likely able to adjust and respond decisively without abandoning the firm’s long-term strategy.

Stay Calm. When something unwanted and unexpected happens, all eyes will be on management to assess its reaction. If management panics, the rank and file will panic. Don’t let that happen. Show your leadership by being calm in the face of adversity.

Don’t Overreact. Any response to an adverse development should be proportional to the development itself. If some lawyers decide to leave for another firm, deal with it rationally and with a view to pursuing future firm success without the departed. Implementing procedures that treat the remaining attorneys as suspected rats on a sinking ship would create untold harm-not the least of which could be a loss of confidence in management.

Be Decisive and Quick. Twiddling of thumbs does not instill confidence nor does it resolve any problem created by the unexpected development. While the interests of speed should not come at the cost of sound judgment, finding a decisive solution quickly should be a paramount objective.

Communicate. Whatever the development or the firm’s response, communicating about the event, the facts, the solution and the planned execution is a vital part of putting the unforeseen hiccup behind you. The value of communication can never be underestimated. Remember, while management may have confidence in the response selected, the less informed professionals and staff will worry if not informed. Make sure a communication plan is developed and rolled out. It will pay dividends.

Poet Robert Burns often is credited with the well-known admonition “the best laid plans of mice and men often go astray.” Law firms and their leaders should heed Mr. Burn’s warning and expect the unexpected, especially as one year ends and another begins. Will your law firm be able to weather the unexpected?

 

Law Firm Growth and Basic Financial Modeling (Don’t Let Numbers Mislead)

Posted in Law Firm Growth, Law Firm Transition

Rise and falling

At times, numbers will mislead. Bigger doesn’t always mean more. More doesn’t always translate to better.

A recent new client engagement reminded me of how tricky numbers can be; and why it is important for law firm leaders to rely on basic financial modeling at critical junctures.

A firm’s revenue can be one of the most deceiving numbers of all. Often, as a law firm’s revenues begin to grow there is a tendency to commit additional capacity in support of the growth. Typically this means more space, attorneys, staff and other overhead.

When these commitments are made without modeling their long-term impact, the numbers reflecting that revenue growth may be leading a firm down a destructive path.

The recent engagement noted above is a perfect example. After investing in what the firm interpreted as opportunity, they realized that the bottom line (net profit) has not grown much, if at all.

The result is unnecessary pressure on owner’s compensation, and in the worst case, this pressure evolves into a threat to firm survival.

Prudent growth includes forecasting the economic impact associated with long-term commitments — to people, space and other forms of overhead.

If we look only at revenue numbers, growth can lead to a series of decisions that result in a decline in profit.

Effective modeling tells a more complete story, including the inevitable fluctuation in future revenue.

A firm may still decide to invest in the opportunities that generated the initial growth in revenue; but it will be a decision that comes with realistic expectations.

Does your firm routinely utilize financial modeling when planning for growth?

 

 

 

Big Bonuses and Robots-Today and the Future

Posted in Law Firm Leadership, Law Firm Repositioning/Turnaround/Restructuring, Law Firm Transition

As 2014 draws to a close, there have been more than a few reports of generous associate bonuses at some well-known firms. In an industry that has had its share of challenging economic news since the Great Recession, news of these bonuses is a welcome change. While the increased bonuses are positive, especially for the receiving associates and the law firms able to spread such largesse, it would be wrong to conclude that they signal a return to the go-go years of yore.

Indeed, just as we read about the bonuses, we were treated to a prediction that robots and artificial intelligence ultimately will replace the iconic hard working associate. Not surprisingly, the report sparked a great deal of interest (here, here and here).  For the futurists, the demand for efficiency will stimulate a remaking of the legal profession, particularly for law firms, in the next fifteen years. Jomati Consultants predicts that the 2030 law firm will have fewer associates. In this view of the future, senior lawyers will deliver legal services by interpreting data and analyses largely generated by non-humans. If true, large associate bonuses likely are not a topic of year-end reporting in 2030.

Is there any need to reconcile accounts of today’s large associate bonuses with the forecast that associates will be replaced by evolving tools like artificial intelligence? No, but there are a few take-aways.

Predictions Aside, Greater Efficiency Will Be Required in the Future. The march towards delivering legal services more quickly and less expensively continues. Client expectations assure that. While nobody knows whether an army of R2D2’s someday will replace eager associates, clients and competitors will demand greater efficiency than available today.

Large Associate Bonuses Do Not Impress Clients. As much as it is interesting to hear about this year’s large associate bonuses, only the receiving associates and their firms enjoy having that news to tell. Most clients could care less, unless they think that they are indirectly paying for the bonuses through the high rates charged. Then they care, but in a negative way.

Firms Should Strive to Understand How Artificial Intelligence Can Help. Artificial Intelligence’s use in the legal profession will continue to evolve. Robots by 2030? Maybe not. But the successful firms of the future will master AI instead of having it master them. Understanding AI and its latest trends will help a firm take advantage of this groundbreaking tool. “Being one” with AI can give a firm the edge it needs to compete more effectively.

Clients Will Want You to Embrace New Tools of Efficiency, Including Artificial Intelligence. Clients today ask their law firms about diversity, data protection and succession planning. Clients likewise will ask about the latest tools of efficiency, including AI. As AI gains industry acceptance, a large bill laden with associate hours may be tough for a client to stomach.

Get Ahead of the Game. AI and other tools of efficiency are inevitable in one-way or another. Getting ahead of the game will be a key to your success in the future. Don’t wait. Start now.

Hopefully, your firm was one that enjoyed such a successful 2014 that it awarded generous bonuses to deserving associates and staff. Congratulations if your success was the result of great team effort and hard work. But even if it was, do you think it is time to start thinking about your firm’s efficiencies for the coming years?

 

An Open Question About The Way We Choose Law Firm Leadership

Posted in Law Firm Leadership, Law Firm Transition, Uncategorized

iStock_000003363370Small

Law firms around the globe are busy wrapping up 2014, and planning for what they hope to be a stronger 2015. (There is an issue with the way we tend to approach year end, but that is is a conversation for another day.) Amid the flurry of collection activities, compensation and budget debates and meetings, a too often overlooked factor is the way in which we make decisions about law firm leadership.

It is no secret that one of the significant contributors, if not the number one factor in the success (or failure) of any enterprise is the quality of leadership. Yet, when it comes to an alarming number of law firms, the value of the specific experience required to build a highly functioning organization are vastly under-appreciated.

Today, around the world, law firms are addressing leadership issues — whether changes or initial appointments — by turning to the partner/shareholder that has successfully built a legal practice.  There are two issues with this approach.

  • Far too often, this is the first leadership experience for the individual; and,
  • You are either significantly limiting or robbing your partnership of a rainmaker’s efforts in an area where they have proven to excel.

Is There A Better Model?

One firm that I know of has taken a different approach. In 2012 Pepper Hamilton took the somewhat groundbreaking action of hiring a non-lawyer CEO to run the Philadelphia based law firm. Prior to holding the position at Pepper Hamilton, Scott Green, a Harvard MBA, had developed his management and leadership skills in positions with Deloitte & Touche, Goldman Sachs and Weil Gotshal before joining Wilmer Hale as their Executive Director.

Green is leaving Pepper Hamilton at the end of this year, coinciding with the expiration of his contract with the firm. I don’t have any idea how Green performed at Pepper, though reports indicate the firm successfully expanded geographically and became fiscally stronger during his stay.

The point of this discussion is not success or failure of one individual; rather, the creative approach taken by the lawyers at Pepper Hamilton to filling a position that they clearly value. Their action demonstrates an appreciation for the importance of business experience when it comes to the leadership of their firm.

One of the challenges our industry faces is the speed (or lack thereof) with which we adapt and change. It hasn’t been very many years since major firms hired and/or promoted their first minority partner…or their first female partner.

Green’s hiring is one of the first in what I believe will be a growing trend — spurred on by the market’s pressures for law firms to employ more efficient business practices.

There are countless analogies to our typical insistence on proven competencies. One of the most pointed is whether any of us would hire anyone but a well regarded and seasoned expert to perform heart surgery.

A law firm is a complex confederation of assets possessing the mobility to move on a moments notice. The industry is under enormous pressure from new and effective competitors. Clients are becoming more sophisticated consumers, and have access to the best metrics. Hence, their demands.

The law firms that survive, differentiate themselves from the pack, and thrive will be the few who buck the industry norm, and address the leadership question in a different way.

One model worth consideration revolves around a strong Board of Directors who bless future plans, sets limitations and ensures that the firm’s leadership adheres to values. Reporting to this Board of Directors is a CEO who may or may not have gone to law school, but does possess significant management training and leadership experience.

What are you thoughts?

 

Strategy of Merger: Four Steps for Success for Law Firm Leaders

Posted in Law Firm Growth, Law Firm Leadership, Law Firm Repositioning/Turnaround/Restructuring, Law Firm Transition
This blog post was originally posted, in late October, by Kevin McKeown at Above the Law and his blog Leadership Close Up.  Kevin has been a tremendous resource for us and has guided us greatly as we work at delivering meaningful content about the legal industry and the significant changes it faces. Legal Leaders Blog by SEAN LARKAN (iIllustration adapted from FT image, graphic artist unknown)These are challenging times for the nation’s 200k+ law firms. Just look at the pace of mergers. Combination announcements appear almost weekly. In fact, 2013 was a record year for law firm mergers. And, based on the first nine months of this year, 2014 will end with a similar number of transactions. Although the mega-mergers grab the headlines, a big number of transactions are between smaller firms or smaller firms being scooped up by larger concerns seeking to gain a foothold in new markets. Last month, The American Lawyer reported on this record merger pace citing deals closed in the hot southwest legal market. Two notables:
  • LeClairRyan’s merger with Houston’s Hays, McConn
  • Fox Rothschild’s combination with David Goodman in Dallas

In both mergers, Roger Hayse and Andy Jillson of Hayse LLC advised Hays McConn and David and Goodman in their respective transactions and helped shepherd those two firms through to successful deals. Why are Roger and Andy front and center in this robust merger market? For one, they have walked in your shoes. Here are two guys who led and helped build a strong regional firm that included the strategy of merger. So, how should small-to-medium size firms approach a merger strategy? What are the “rules of the road” for achieving a successful merger? What are the best ways to manage the inherent risks? 

Let’s hear from Roger and Andy:

…………………………………………………………………………………

Managing Law Firm Transitions blog by Hayse, LLC

Roger Hayse and Andy Jillson

Beginning in 2013, we observed an unprecedented string of law firm mergers – a remarkable fact in light of reports (here and here) of the risk and failure rates associated with law firm combinations. In his article A Myth that Motivates Mergers, noted legal industry thinker Steven Harper debunks the wisdom of the merger, splashing cold water on the notion that bigger is better.

For some firms finding themselves in distress, “any port in the storm” greatly influences leadership’s perspectives on merger. Ed Wesemann’s terrific White Knight is a must-read for any firm leader seeking counsel in an hour of trial.

The broiling merger market is added evidence of what we already know — the pressure on the leaders of small to mid-sized law firms is relentless. Even as the market recovers from recession, pressures from competition and from clients wanting more for less leaves leaders of mid-sized firms at the proverbial fork in the road. The future depends on the right choice, but many are unclear about the direction they and their firms should take.

FoxRothschild-150x32The last two years underscore the fact that for many of these firms the path chosen is to merge with a larger firm. To say this is a significant step is to understate the case. Post-closing, the smaller firm ceases to exist. In two of our recent merger engagements (LeClairRyan/Hays LeClair RyanMcConn; Fox Rothschild/David and Goodman), two smaller firms accepted this outcome, believing among other things that the future for their younger lawyers was served better by combining with a larger firm (kudos to leadership for this approach).

But in light of the uncertainty of success and the permanence of outcome, does it make sense for a small to medium sized firm to dance the merger dance, and waltz its way out of existence?

Despite the odds and the warnings of Mr. Harper, a merger can make sense — IF these four steps are carefully followed.

ONE–Clarify Who You Are and What You Want?

Start with the basics.

Establish Your Strategic Objectives. As in any high-consequence transaction, the process begins by establishing your strategic objectives. There are three solid strategic reasons a law firm might consider a merger:

  1. Valuable expertise and technical capabilities can be added to serve existing or targeted clientele better;
  2. Addresses succession planning, both in terms of firm leadership, and key clients; and,
  3. Yields financial stability.

You might add to this list; but one thing is almost certain — if the objectives are not clear from the beginning, pursuit of a merger will be haphazard and potentially ineffective, or worse yet, harmful.

Assess the risk. Pursuing merger can be unsettling to a firm’s personnel, including its key contributors. Uncertainty abounds and producers, non-producers, associates, and staff wonder whether a combined firm, from a personal standpoint, will be good or bad. Indeed, uncertainty can result in unanticipated departures that can tarnish a firm’s appearance and attractiveness.

Objectively Assess Your Attractiveness. Nothing can waste more time than being unrealistic about your firm’s attractiveness. Conversely, nothing will be more disappointing than to realize that your merger strategy undersold your value. To avoid missing the mark, hire an advisor experienced in law firm mergers that will provide an unbiased assessment of your place in the market.

TWO–How Do You Prepare for the Market?

If you have decided to move forward, it is time for spit and polish and a plan for marketing.

Make Your Firm Look Good. Many times, a home sells more quickly and at a higher price if it is “staged” to look more attractive. The same can be true if proposing to enter the merger market. Deferred maintenance needs to be remedied, lingering problems need to be addressed and contingent liabilities need to be resolved or at least contained.

Develop a “Sale” Strategy. Law firms are best marketed discretely and without being on the market for too long. It is essential that your advisor develop a strategy that presents your firm to qualified candidates without shoving a “for sale by owner” sign in the front yard. An indiscriminate approach to marketing your law firm can be counter-productive and leave you “market worn.”

THREE–Preliminary Due Diligence: Are the Firms Generally Compatible?

Once you have completed your preparations and suitors come calling, the “fit” of a prospective merger partner can be assessed preliminarily by considering five areas of compatibility.

Culture. Culture is more than being comfortable with your new partners. Culture involves many things that you may take for granted but define a law firm’s DNA, including employment arrangements and practices with legal and non-legal personnel. Promotion practices, performance evaluations and decision-making processes say a lot.

Finances. Firms with a wide gulf in metrics like profit margin, revenue per lawyer, productivity per lawyer, capital, pension obligations, debt, space utilization and realization are not likely to mesh. Metrics that are more closely aligned nonetheless need to be scrutinized to avoid false positives based on apples being compared to oranges.

Clients. Clients make a firm. Besides the all-important question of legal conflicts, a firm needs to know the philosophical and strategic approach of its betrothed to business conflicts, client profiles and the proposed billing rates. These philosophies and strategies need to be studied.

Conflicts. The easiest indicator of a bad fit is if diligence reveals that each firm represents a party to litigation or other matter than creates an ethical conflict that cannot be waived. And even if a waiver is ethically possible, the manner in which one is pursued can demonstrate a lack of fit between firms.

Compensation. The setting and paying of compensation is tough in any circumstance. But trying to blend two systems in which one firm’s lawyer behavior is different than the other firm’s due to compensation system induced motivations is even tougher. Moreover, if one firm’s lawyers are used to being paid a larger draw every month than the other firm’s lawyers, something will have to give.

FOUR–Deeper Due Diligence: Is There a Deal to be Made?

Once past the compatibility test, it is time to move to the second and deeper level of diligence.

Assess Past Merger and Acquisition Success. Your prospective partner may have a track record of mergers and acquisitions. If so, dig deep into its record of integration, post-merger success and failure. Bingham McCutcheonmerged with Riordan & McKenzie in 2004 and by 2007 only 50 percent of the new additions from that firm remained. Get an explanation.

Delve Into the Firm Policies. No one would contemplate a merger without digging into the other firm’s constituent documents. But a lot of what gets done in a firm is contained in the firm’s policies that can make day-to-day life starkly different from the happy talk heard during the courting stage. Read them and understand them.

Understand the Firm’s Strategic Plan and Vision. If the firm has a strategic plan, read it to make sure the firm’s strategy and tactics are clear, but also read between the lines. Gaining a holistic understanding of a firm’s strategy and vision for the future can help determine if your firm fits within the larger firm’s plan. If your prospective merger partner doesn’t have a strategic plan or it is old, its commitment to management has to be questioned.

Get a Handle on Recent Financial Performance and Productivity. While your suitor pours over your financial data, you should return the favor to determine whether financially a merger will be a net benefit or burden. You should also assess the value of your equity pre-merger and post-merger and seek compensation if appropriate. Are productivity levels close? Plans to lift up a slower firm are tough to pull off.

Capital. The capital invested by one firm’s partners may be very different than the capital committed by partners of another law firm. How capital is calculated and returned on departure is as important as knowing how much capital is invested. Two firms with widely different capital profiles and policies could find their combination ill fitting.

Debt Levels and Collection Practices. Debt can be the hobgoblin of law firms. Bringing two firms together with different debt levels and/or approaches to debt can be difficult. In some instances, however, a small debt laden firm can be acquired by a bigger firm with low to no debt if the debt in the combined firm ends up being small compared to the strategic gain delivered. Debt levels can be positively or negatively impacted by collection practices. Are both firms similarly disciplined about collecting bills?

Concluding Thoughts

Hayse Blog

This blog is co-authored by Roger and Andy.

Law firm merger, as an answer to crisis, competition, or succession, is a viable alternative for some, but not all, small to medium sized law firms.

Danger lurks for the law firm whose leadership pursues merger without methodically understanding whether merger fulfills a strategic imperative. Even if a compelling case for merger can be made, only careful execution can optimize the prospects for a successful merger. Following these four steps can be the difference between a merger that works and one that doesn’t.

For a small to medium sized law firm contemplating merger, can there be anything more important?

Distressed Law Firm Acquisitions-The Times May Be Perfect (Part Two)

Posted in Law Firm Crisis, Law Firm Liquidation, Law Firm Repositioning/Turnaround/Restructuring, Law Firm Transition

As reviewed in Part One last week, the example of the Morgan Lewis/Bingham McCutchen mass lateral transaction may serve to stimulate the pursuit of distressed firms by healthy firms. Although distressed law firm transactions are nothing new, the model of that deal plus two new legal developments may foster greater distressed law firm activity.

The first development was long awaited-the New York Court of Appeals’ decision on whether the “Unfinished Business Doctrine” is recognized under New York law. Answering with a resounding “no,” in Geron v. Seyfarth Shaw LLP the Court of Appeals directly paved the way for law firms to poach away a struggling law firm’s best lawyers and business generators. Whereas prior to Geron a raiding law firm risked having to share the unfinished business profit, now all the value in the transferred business belongs solely to the acquiring firm. While the decision is strictly limited to the application of New York law, it and a similar outcome under California law in Heller Ehrmann LLP v. Davis, Wright, Tremaine, LLP could influence other jurisdictions into largely gutting the Unfinished Business Doctrine and its associated risk to acquisitive firms.

The second development, coming from the United States Bankruptcy Court of the Southern District of New York in In re Dewey & LeBoeuf, LLP, et al., greatly increases the risk for the owners of failed New York law firms. In Dewey, the Bankruptcy Court determined that in constructive fraudulent conveyance litigation and certain New York partnership law litigation brought against former owners, no reasonably equivalent value or fair consideration defenses are available. In essence, the ruling may leave former owners strictly liable for all pre-bankruptcy funds received while the firm was insolvent or undercapitalized. Like in Geron, the Dewey decision is limited to New York law, but its influence in non-New York jurisdictions could be far reaching.

In a distressed acquisition world in which there is less risk to healthy law firms and greater risk to the owners of unhealthy ones, five reasons make it a perfect time for distressed law firm transactions.

The Healthy Law Firm’s Litigation Risk is Greatly Reduced. Without a fear of the Unfinished Business Doctrine, an acquisitive firm can scour the ranks of a struggling law firm and know that even if the target firm fails, having to share any profits with the failed firm’s bankruptcy trustee is substantially reduced. Its downside risk can be slight.

A Piecemeal Acquisition Can Be Attractively Structured for the Healthy Firm. With the reduced litigation risk to the healthy firm, a healthy firm can select the filet of the distressed firm, plus add some logical complimentary parts without having to take on under-performers. It can even over-pay a little for what it really wants in order to make the deal happen.

A Piecemeal Acquisition Can Be Attractively Structured for the Distressed Firm. Even though the distressed firm may be disappointed with a piecemeal offer, working with the healthy firm to consummate a transaction may help it avoid bankruptcy. Many of its owners, especially those that are part of the traveling squad that goes over to the healthy firm, will draw comfort from knowing that the risk of bankruptcy has been reduced.

For the Distressed Firm’s Owners, Even Onerous Terms or Being Excluded From the Deal Can Still Be Better Than Bankruptcy. It is one thing to be looking for a new firm when your old one ceases to exist, but it is another thing to be searching for a new home while staring down the barrel of Dewey like liability. A deal that simply avoids bankruptcy may be palatable, even if barely so.

The Haves and the Have Not’s May See Eye-to-Eye on a Piecemeal Deal. Traditionally, when a large number of owners are not offered the chance to go to the healthy firm, it can be very difficult to gain the necessary votes to gain approval of the distressed transaction. Yet a struggling firm does not have unlimited time and failure can be looming. In the aftermath of Dewey, the interests of all the firm’s owners, whether included in the deal or not, may be to get a deal done that protects against bankruptcy. Despite having very different opportunities, unanimity about the lesser evil may provide the electoral support needed to get a piecemeal deal done.

We can only speculate about the respective motivations that resulted in the Morgan Lewis/Bingham McCutchen deal.  But with the recent outcomes in Geron and Dewey, there are a number of reasons to take a fresh look at distressed transactions.  Will these reasons be enough to impact your strategic thinking?

 

 

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