Managing Law Firms in Transition

Managing Law Firms in Transition

Minimizing the Risk of an Unexpected Law Firm Closure-Five Steps Every Law Firm Should Take

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

As the calendar year comes to a close, there is a lot to do at most law firms. Activities like collecting bills, distributing profits and casting next year’s budget can occupy many a leadership team. The tasks at hand can be time consuming and all engrossing. Given the importance of these short-term issues, thinking about a firm’s long-term strategy often gets reserved for the next year.

The importance of thinking long-term and planning for the future, however, cannot be over-emphasized. It is especially true when it comes to succession planning. Too little attention to succession planning can prove fatal, as can happen at law firms that experience an exodus once year-end distributions are made.  When year-end is coupled with a spate of departures, a firm runs the risk that unplanned closure is in its future.

Unless closing is part of a well thought out plan, no firm wants to face a closing crisis. But if firms are not attentive to the topic of succession planning, an unplanned closing, especially as year-ends approach, is a distinct possibility. It is at year-end that a firm’s lawyers think about their future, the stability of their firm and the suitability of the platform that supports their practice. The answers to those questions tend to be disquieting if succession planning has been poor. For a firm that fails to prepare, the end of calendar year attrition can sap a firm of its future generations and can put it on a path to eventual closure.

To avoid that outcome, firm leadership should:

Address the Topic of Succession Planning Early. Law firm succession planning is the essence of long-term planning. Planning involves more than identifying potential leadership and client relationship successors. It also involves planning and executing on a process of making succession a part of the firm’s culture. It takes years of continual attention to do it well.

Involve Your Lawyers in Succession Planning. Succession planning requires “buy-in.” While existing leadership can assure that the planning process gets the attention it deserves, full-fledged engagement from a firm’s lawyers enhances the possibility of success.

Review your Plan and Update it Often. Succession plans, like most long-term planning efforts, are living documents. Every firm committed to creating an effective succession plan should frequently update it in the wake of new developments or even just with the passage of time. The elements of any succession plan aren’t static but always are evolving.

Enlist Clients in the Process. It is presumptuous to think that client relationship succession is a unilateral process controlled by the law firm. Clients have the ultimate say over whom they will use as counsel. Frequent communication with clients is essential to developing a strong succession plan. The firm will be informed better about how client succession can be effective and will avoid adverse surprises.

Build Confidence in the Future. A succession plan should not be a secret to keep. It should be used to instill confidence in a firm’s future. Share it with the firm’s next generation of leaders and solicit their input in the process. If the future looks good at a firm, it is less likely to suffer attrition from the next generations.   The future will look brighter and the fate that befalls firms that “age-out” becomes less likely.

As 2018 comes to a close, is your law firm well positioned with a clear and effective succession plan? If not, it is time to get started if an unplanned closure is to be avoided.

 

Is Your Law Firm At Risk?

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

Don’t waste your time trying to control the uncontrollable, or trying to solve the unsolvable, or think about what could have been. Instead, think about what you can control and solve the problem you can solve with the wisdom you have gained from both your victories and your defeats in the past.  – David Mahoney – Author

Now that the mid-term elections are behind us, we can all get refocused on making our law firms stronger. An excellent start is to conduct a quick self-assessment of the state of the firm.. Here are 5 areas that, if carefully examined, combine to provide an accurate preview of what the future has in store for your firm.

1. Turnover – has there been any unexpected turnover? If so, it is a sign of potential trouble. Law firm leaders should regularly (monthly) monitor turnover levels with a process that quickly identifies any material uptick. Rapid change is destabilizing, even when there is an excellent business explanation. When spotted, decisive action in one form or another is likely in order.  What does your turnover pattern look like over the past 36-months?

2. Dissatisfaction – is there any measurable dissatisfaction within your firm? If so, is it growing? Relative satisfaction is a key indicator of business risk. A growing number of law firms find significant management value in systematically monitoring the satisfaction of their lawyer and non-lawyer employee base. And with good reason,  growing dissatisfaction is an indicator of future tourble. Do you have growing dissatisfaction in your firm?

3. Profitability – have your profits stagnated or worse yet are they falling? Profit pressures can quickly lead to stress for any business. I am not a believer in the Profits Per Partner (PPP) metric as a be-all-end-all; but if your law firm is paying progressively less for the same performance, it is at risk.

There are a numer indicators of declining profitability besides the exalted PPP metric. These include:

Falling productivity
Loss of a key client(s)
Increased aging of payables
Increased aging of receivables
Falling client billing
How is your firm’s profitability holding up?

4. Debt – has your firm increased its use of debt for operations?If so, it is a clear sign of stress.  Most law firms use some amount of debt, whether to smooth out collections cycles with a line of credit, or to finance growth and fixed asset purchases.  Any firm increasing its use of debt to cover basic operating obligation has embarked on a treacherous path.

5. Litigation- is your firm facing new exposure from client or employee claims of any type?  Claims against the firm can be enough to create serious problems for a law firm. Monitoring the frequency and size of claims against the firm is a must. If your firm has seen an uptick in claims activity, careful examination by leadership is essential.

The thing about organizational risk is that the sooner potential trouble is identified the greater the probability that a viable solution can be identified and implemented. The more serious the trouble, the greater the need for outside support which can bring an unbiased perspective.

Is your law firm at risk????

Five Law Firm Client Succession Strategies-Finding the Best Approach for Your Firm

Posted in Law Firm Leadership, Law Firm Merger, Law Firm Succession, Law Firm Transition

There are two primary succession challenges law firms face.  Leadership succession is one and is a vitally important step to assure a firm’s longevity.  A second kind of law firm succession involves the succession of client relationships as senior-lawyers wind-down or retire.

As hard as leadership succession can be, managing client relationship succession can be an even more formidable task.  In an era in which client loyalty is fleeting and personal skills can be as important as substantive ones, having a client continue with a firm past a rainmaker’s retirement may be difficult to achieve.  Because the economic repercussions can be serious if not done right, finding the right client succession strategy is more important than ever.

There are five major strategies for dealing with client succession.  Some firms will employ a combination of the five after determining that “one size does not fit all.”  Indeed, the right choice for any firm depends on its clients, talent, and situation.  From the menu of choices firms usually employ one or more of the following five strategies:

Develop and Nurture Existing Talent.  In a perfect world, a law firm’s client succession strategy involves developing its young(er) talent and nurturing it to take over client relationships as senior attorneys give way.  Considering today’s legal services market and law firm demographics, building an internally focused client relationship succession plan is harder said than done. Making it work requires identifying capable talent in the firm, training the talent, and “embedding” it into the client relationship.

Hire from the Outside to Develop and Nurture Acquired Talent.  Sometimes a firm does not have the needed talent to develop an internally constructed client relationship succession plan.  If adequate time exists, a firm can hire talent around which a succession plan can be built.  Hiring for the substantive and interpersonal skills positions the firm to develop and nurture the talent acquired.  This can be especially effective if retirement is years away–it protects the client relationship and can be less threatening to the senior lawyer.

Hire from the Outside to Retain Client Relationships.  More than a few firms find themselves without the luxury of time.  Due to a senior attorney’s impending retirement, the client succession strategy needs to hit the ground running.  Without sufficient talent to train or time to hire and train promising talent, a firm may consider hiring a seasoned lawyer that works in the area of the retiring lawyer.  The new hire must exhibit not only the substantive skills the client needs, but also the essential interpersonal skills.  Even better, hiring an attorney that already has a client relationship with the client the firm is seeking to retain is a win/win.

Hire from the Outside to Replace Client Relationships.  Sometimes a senior attorney’s client relationships are too dispersed or quirky to realistically find a single attorney to act as a new client relationship manager. In that case, the strategy may be to replace the volume of work and its revenue by hiring a lawyer that has a book of business that can replace what is soon to be lost.  While clients are not to be considered fungible, losing a group of clients on an attorney’s retirement can be ameliorated if replaced with new clients.  If keeping long-time clients simply is not in the cards, finding new clients controlled by a lateral prospect may be the best alternative.

Merger.  Depending on the size of the succession challenge and firm, solving it with a merger may be the best approach.  The substantive skills and client relationship personality of the merger partner may fill the needs normally addressed by the other client relationship succession strategies.  More than one succession plan merger has been affected by going to a competitor that has many of the same client relationships. Indeed, merger has proven to be a popular and effective client relationship succession strategy.

Client relationship succession is one of the more difficult challenges law firm leaders face.  Finding the right strategy to meet the challenge depends on factors unique to each firm.  What strategy fits your firm best?

Succession Planning – Before It Is Too Late

Posted in Law Firm Leadership, Law Firm Succession, Law Firm Transition

A few law firms have had the benefit of organic preparation for succession. Their natural tendencies led to grooming the next generation for the transition of client relationships and management responsibilities. A small percentage of firms have actually executed carefully prepared formal succession plans.

But, the overwhelming majority of law firms are not prepared for or even preparing for succession.

Admittedly, succession planning isn’t for everyone. If your law firm doesn’t have interest in long-term, multi-generational, viability then this post isn’t really for you. In fact, you would be far from alone, 70% of all law firms don’t make it beyond the first generation — some intentionally; but far too many by default.
The consequences associated with failing to prepare for succession range from severely limited options to firm closure.

As a matter of record the profession does not have a great track record when it comes to planning even for the near-term — much less, preparing a well thought out roadmap for dealing with critical issues or navigating transitional challenges. Surveys consistently indicate that a small percentage of law firms have anything that approximates a documented succession plan in place.
The only viable conclusion is that succession simply isn’t very important to many.
Too harsh? Think about it. Virtually everyone reading this post will readily agree that in life we rarely accomplish anything we did not set out to accomplish.
Transitioning a law firm from one generation to the next is no exception.
It is arguable that there was a time in the legal profession when a reputation for excellence, or long-standing institutional clients, or even the fabric of a partnership was enough to somehow ensure, or at least facilitate succession. But I would suggest that day is gone. Clients drive a different conversation. The marketplace is definitively different. And law firms face transitional challenges on what can seem like an almost daily basis — not the least of which is that the young lawyers in your firm have their own set of goals and aspirations.
(In fact, the young lawyers in your firm have been talking about your firm’s succession plan…and evaluating their career options based on what they see.)
If you’re really serious about building a firm that moves from the founders to successive generations, it is time for you to appropriately address how you hope to make that happen.
Planning for transition isn’t easy… But most lawyers I know love to tackle difficult problems. Deciding it is an issue that warrants focus is the most difficult part of the challenge.
Once you’ve decided to focus, an effective plan will tackle some significant questions. Among them, compensation, client control (or more accurately, relationship management — the client is the one in control), talent assessment, and the mentoring and cultivation of future leaders.
But not one of these issues is insurmountable…if succession is truly a priority.
For those that care about successful transition, the time to start the process is now, before it is too late.

Law Firm Retirement Plan Tweaking – Four Additional Things to Think About

Posted in Law Firm Leadership, Law Firm Succession, Law Firm Transition

At a growing number of law firms, the Boomer generation is reaching the age when retirement among the ranks has partners leaving in increasing numbers. Numerous industry focused writings have noted an array issues faced by law firms experiencing retirements.

As partners retire, financial ramifications can be felt. The monetary payout associated with the retirement benefits is one. While some firm’s retirement plans are fully funded, many plans require a “topping off” of a guaranteed benefit and others, not being funded at all, must be satisfied out of yearly profits. Second, when senior lawyers retire the impact can be negative due to the loss of their productivity not so readily replaced. Third, retirements can require the return of capital to retiring partners. In a world in which partner capital contribution levels have grown, the capital to repay can be significant-certainly often greater than the capital being contributed by incoming partners.

Individually each one of these financial “hits” can be material. When considered together (as they often occur), they not only can strap a firm but also can upset the financial bargain the younger non-retiring partners have come to expect. To respond to that predicament, some firms are lessening the financial impact by reducing the overall financial benefit paid on retirement, extending the years for repayment of capital, extending the years of service necessary to vest in a retirement plan, and lowering the cap on annual retirement benefits paid by the firm in any given year. Because such modifications must be phased in over a number of years, however, the initial ameliorative effect can be modest.

Even a proactive financial solution to the increased retirements does not necessarily solve all problems. Other issues tied to cascading retirements can loom over a firm, including:

Modifications to the Plans Can Take Too Long to Assuage Younger Partners. Because most modifications to the bulging retirement obligations firms face are phased, the financial strain on the firm and potentially felt by the next generation is not avoided immediately. That can mean an inordinate portion of the firm’s positive financial performance (at least in the eyes of younger partners years away from retirement) is allocated to retirees.  Will the younger partners accept a phase-in and hang around?

Eagerness to Invest Capital at Firms is not a Given. As senior partners retire and start recovering their capital, younger partners are afforded the opportunity to invest capital in the firm. Sure, it often is the sin qua non of a nice compensation package, but what if highly productive attorneys eschew partnership in favor of a contractual arrangement that requires no capital contribution. It happens now and may happen more often in the future.

Longer Vesting Periods Will Create Other Issues. Engineering the retirement benefits with longer vesting periods and the like may work in a firm’s financial model, but it could create a caste system among generations of lawyers. Moreover, in a market that competes for high value laterals or transformative mergers, the handling of “years credit” towards retirement plan vesting can be thorny. Many law firms will find that the vesting issue for new additions can have destabilizing ramifications.

Demographics are Trending the Wrong Way.  To the extent demographic trends make Social Security a bad bet, the demographic trends at law firms could be worse. The pyramid is dead and buried and signals a shrinking law firm workforce that will be expected to shoulder tomorrow’s retirement obligations. The numbers reported by Julie Triedmanin her The American Lawyer article Pensions Pose an Increased Threat for Some Firms, were not encouraging for law firms. There is little reason to expect them to have improved.

Many of today’s law firms are taking sound steps to address the progression of partner retirements. They simply have to. But as helpful these steps are to the long-term bottom line, they also may contribute to or fail to address some long-term implications that won’t be felt for years.   As you engage in retirement plan tweaking, are you addressing these long-term issues?

 

Focusing on Long Term Stability

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

“Focusing is about saying No!”   Steve Jobs

 

I was reviewing an article regarding the 13th Annual America’s Best Corporate Law Firms study and was struck with how consistent the same names appear on this list — year in and year out. Even if you haven’t seen it, chances are you can name many of the firms that have a stranglehold on a position on this enviable list.

It begs the question for firms seeking to achieve a similar position — How did these firms secure their position?  And what will it take for your firm to capture a similar position?

The answer is simple……….. Focus

Firms that hold dominant market positions have found a way to align who they are and what they do on a daily basis with the market position to which they aspire.

Dominant law firms hire, spend, acquire, merge, and compensate based on one question: Does this investment align with our strategic focus?  If it does not, it eats away at the desired position…and weakens the law firm.

The path to dominance is easy to define in theory.  Identifying and navigating the right path for your firm is much more challenging in practice.  A thousand good ideas, disparate aspirations and diverse views combine in an assault against focused and disciplined decision-making.

Without unwavering focus on the desired market position, every good idea seems worthy of investment.  Any opportunity to expand can appear to support growth.  Every opportunity can seem to be a good one; however, at the end of the year you find yourself having made significant investments, but no closer to your firm’s desired market position.

And the discussion is not limited to aspirations of a position of market dominance. The principle applies to whatever your aspirations are. Without disciplined focus your odds of achieving what you would like to achieve are greatly diminished.

Here are the guideposts that lead to the aligned law firm…and will help you chart your firm’s course to stability, the profitability you desire, and yes — market dominance.

  • Identify the market position to which you and your partners aspire.  (You can guess…but this is most effectively accomplished through a series of interviews/discussions designed to identify your shared vision.)
  • Audit your expenses and define which move you closer to the position you desire.  (Whatever they are – office space, infrastructure, people — begin now to create an expense ledger that is devoid of the things that do not move you toward your desired market position.)
  • What is lacking…in terms of talent, location, support and infrastructure?  Build a plan that moves you from where you are today to where you need to be…and invest appropriately.
  • Consider each decision in this context – will this move us closer to the market position we’ve targeted?

Is your firm on its way to the top?

 

Four Important Phases in Achieving Law Firm Merger Success

Posted in Law Firm Growth, Law Firm Leadership, Law Firm Merger, Law Firm Transition

Law firm growth gets a lot of attention. Among the various approaches to law firm growth is the tactic of merger. Almost weekly we are treated to another announcement about two law firms fulfilling their desire to grow by combining. And although law firm mergers have been part of the landscape for years, the incidence of law firm growth through merger has become commonplace.

When law firms get involved in the merger game typically little is publicized until the merger is announced.  Even in the instances in which a law firm’s interest in a merger is leaked before the merger is a done deal, details about the merger mechanics are scant. The leaked news usually only stokes a rumor and a closed deal may or may not result.

For firms that have not done a merger the question often asked is “how does a merger come together?” While the genesis for each transaction is unique (as are the negotiations), virtually all mergers involve four distinct phases that are interrelated and build on each other. Performed well and a merger is positioned for success. Performed poorly and a merger’s prospects are suspect. The four key stages are:

Phase One-Embracing the Idea of Merger. The reasons behind a firm’s decision to pursue a merger can be many. Some firms need a rescue; others see a need for additional capabilities or have a desire to enter a new and critical market. A frequent reason to merge is one premised on the combination adding market share not easily gained through organic growth. As the Boomer generation reaches retirement, merger also can be a useful tactic to address leadership or succession issues.  Whatever the impetus, the decision to consider merger should be one premised on meeting a strategic initiative identified through thoughtful and critical analysis.

Phase Two-Deciding on the Right Criteria.  In Phase Two, it is essential that the criteria for a merger be clearly identified before seeking out a potential merger partner. Only once the criteria are established should a firm purse candidates-all the while remaining faithful to its criteria. Whether acting opportunistically or methodically, staying true to the criteria protects a firm from letting the thrill of the conquest dictate its tactics. It also provides the foundation for the discipline needed to walk away from a bad deal that momentum would have you close otherwise. Understood criteria and discipline prevent emotional or irrational decisions. They should not be compromised.

Phase Three-Selecting the Right Merger Partner. For firms approaching merger correctly, a thorough diligence process provides guidance on firm compatibility. In this phase, a firm should consider whether it and its prospect are compatible on matters of culture, finances, compensation systems, clients, and operations. An additional important factor is the fit of leadership styles and the potential for evolving to a leadership team that will be accepted by people in the unified firm. Ideas on succession and vision should be compared to further confirm the fit.

Phase Four-Blending Two Firms into One.  While it is essential that the integration and assimilation of the two firms be planned before the merger is finalized, also essential are an attention to detail and a dedication to bringing together disparate groups post-merger. Everything from forging a singular culture to creating systems, processes and procedures to gauge, motivate and reward the new firm’s valued behaviors.   Hard work post-closing is not only important to avoiding crisis during the honeymoon period, but it also is important to the care and feeding of the next generation of performers and leaders.

Doing the right merger and finding the right partner takes work. It does not come about by happenstance but requires an unyielding focus at critical points along the way. Has your merger experience shown you other important phases?

 

Managing Law Firm Strategic Initiatives

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

This post is inspired by a recent interaction with a former colleague that has done very well with her career. 15 years ago, she was an entry level law firm HR professional that was smart, had lots of energy and a passion for excellent work. She has advanced through a variety of positions in the law firm management arena and recently accepted a position which includes primary responsibility for developing and managing strategic initiatives. Following a call asking for my thoughts and perspectives related to the topic, I created the following discussion outline and am  sharing it.

1. Identify strategic initiatives
a. Strategic initiatives are those things that if accomplished will make the greatest difference in advancing the firm towards its destination. This obviously assumes the firm has done work to define its desired future.
b. Implement a vetting process that allows constructive debate as to what is and what is not a strategic initiative. Sponsorship by an influential partner alone should not be the defining mechanism.

2. Estimate cost of each initiative.
a. Prepare a budget for accomplishing each strategic initiative, allocating cost to the budget periods the costs are expected to be incurred.

3. Determine funds available for discretionary spending.
a. Law firms spend money in two broad areas – mandatory and discretionary spending. Mandatory spending includes items for which there is no choice in the near term, examples include taxes, rent, salaries and benefits to existing personnel and other contractual obligations. Discretionary spending is everything else, examples include marketing, CLE, business development, growth, seminars, contributions etc.

4. Allocate funds to strategic initiatives.
a. If funding requirements for all strategic initiatives exceed the discretionary funds available, choices have to be made. Ideally, funds would first be allocated to the initiatives perceived to have the greatest long-term value. Practically, other factors will influence the allocation of resources including the firm’s need to accommodate influential partners or other political realities. To the extent these non-strategic influences are minimized the stronger the firm’s future.

5. Assign responsibility for each strategic imitative with milestones and associated dates.
a. In order to achieve accountability, one person must be named as the person with responsibility for the initiative’s timely completion on budget. The assignment of responsibility should be made in a highly visible manner. Critically, in addition to a responsible person, each initiative should have clear milestones and dates associated with them against which progress can be monitored.

6. Monitor progress to milestones in a transparent fashion.
a. There is a high degree of correlation between initiative success and the visible accountability for progress towards initiative milestones. Regular monitoring and transparent reporting will drive ever-increasing levels performance.

7. Celebrate successes.
a. Success drives success. Finding opportunities to celebrate the completion of an initiative or possibly even milestones will drive more success. The recognition of the success and those involved in it reinforces strategic activity.

Identifying and effectively managing the most critical strategic initiatives can have a profound impact on a law firm’s success.

Merger Madness-Five Reasons Your Merger Can Go Wrong

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

It almost seems like a broken record to hear about the popularity of law firm mergers.  Legal industry publications report on the latest mergers and hot market trends.  Indeed, just recently The American Lawyerreviewed the merger opportunities that abound for mid-size firms in its Mid-size Firm Leaders Awash in Big Law Merger Offers.

Despite the popularity of mergers among many firm leaders today, positive outcomes are not assured.  Mergers can fail-depending on how success is measured, the failure rate can exceed 50%.  Even a “successful” merger can be a disaster for some of the parties indirectly involved, like certain partners.  The recent headline Biglaw Lawsuit Drama: Partners Allege Merger Deprived Them of Their Moneyin Above the Lawrepresents anecdotal proof that mergers can go wrong, at least for some of those participating.

Of course, a bad merger for one participant may be a good one for another.  And the list of exact ways a deal might turn out poorly can be long if not endless. Nonetheless, it is possible to identify five circumstances that can lead a firm or some of its owners into a bad deal.

Five paths to unacceptable to a shaky outcome are:

The Marriage Partner is Less Than Forthcoming.  No business transaction is immune from a bad actor on the other side.  Even if outright fraud is not present, an agressive counterparty can use non-disclosure, obfuscation, or confusing nomenclature to extract a deal that a clearer understanding would reject. There can be a wide range of savvy among parties to a deal and it is possible your firm’s opposite possesses greater sophistication.  For that reason, it is a good idea to enlist experienced help, especially if differing levels of experience creates an uneven playing field.

Leadership Leads You into the Abyss.  Your law firm or you can end up in a bad place if your leadership negotiating the deal is ill equipped or too invested in a deal consummation outcome.  Because not all law firm leaders are created equal, the default of the managing partner driving the deal does not guarantee a good outcome.  At a minimum, a firm jumping into the fray should get its best deal lawyers on point. Better yet, hire outside counsel and financial advisors.  But even the best professionals can’t thwart leaders that want the merger too badly. Steps to guard against leaders in love are worth considering.

Business Premise Does Not Compute (2+2=3).  A merger should be the tactic to implement a well thought out business strategy. Consequently, the post-merger business case for the combined firm must not only be compelling, but it must be assessed before agreeing to the merger. Two firms made stronger through merger is the objective.  If that outcome is not apparent during the merger discussions, isn’t it worthwhile to question going forward? A merger that is not additive may not be worth doing.

The Firms Were Never Meant for Each Other.  Even if the business case for combining the two firms is compelling, the firms must be compatible on multiple levels.  Compatibility metrics like financial performance, compensation systems, client similarity, culture and operations must be measured.  If too many of the metrics do not align, it is wise to forego the merger opportunity and look for the next one. “A lack of compatibility” has been the epitaph on many merger headstones.  A critical examination of the “things that bind” is essential.

Salt Water Fish in a Fresh Water Pond.  A merger that hits all the markers for the two institutions getting married may be unsuitable for certain individual lawyers. Mergers inevitably create attrition when lawyers are forced into a new home. As the exciting news of the combination is announced, and the sales job gets rolled out, lawyers will look beyond the company line and take stock from their personal point of view.  For that reason, firms selling their mergers should view the deal through their lawyers’ eyes to realistically project attrition. Too much unanticipated attrition can be highly detrimental on many levels.

Before embarking on a path to merger, many of these five pitfalls can make a deal go wrong.  Will you think about these risks before going forward?

 

What is Your Law Firm Worth?

Posted in Law Firm Merger, Law Firm Repositioning/Turnaround/Restructuring, Law Firm Succession, Law Firm Transition

What is your law firm worth?

This question is paramount when the owners of a firm consider the possibilities related to a merger, a succession plan involving existing firm members, or the outright sale of an established practice.

There are variations by state as to what can and cannot be sold as part of transitioning of ownership of a law practice; and even given the existence of suggested formulas for valuation, when it comes to estimating the value of a given practice, there are often more questions than answers. But in order for a transition to be successful for all involved, it is essential to have a solid idea of what a firm is worth.

To this end, in our experience, here is where the conversation should begin.

Two Broad Considerations

In the typical law firm transition there are two separate areas of value, each of which represents distinct characteristics:

  • Tangible assets – this is in many ways the easy part of the conversation. Examples include furniture, equipment, cash, investments, receivables, and work in process…; and then there is,
  • Good will — this amounts to the equity of the law firm’s name that will be transferred to the new owners, and often represents the significantly more difficult (and typically most valuable) piece of the valuation process.

In the simplest terms, good will is the value associated with the firm’s ability, to generate future income under the newly constituted ownership. That future income generating capability absolutely has economic value; in many cases it may represent the most significant piece of the valuation puzzle.

Think about it. If you could purchase an investment — say an annuity that would guarantee a payment of $2,500 per year for 10 years, what would you pay? $15,000, $18,000 maybe $20,000? The same principle is true in the purchase of a business. The projected future income has value in the context of a present-day transaction.

Unfortunately, the future profits associated with a law firm are not as certain as a guaranteed annuity. Although a firm’s reputation may be outstanding, and the historical revenues may have generated an impressive level of profitability, the continuation of those profits depend on clients choosing to continue to be served by the new firm following a transition in ownership.

Notwithstanding the above uncertainty there are means of estimating future gross revenue and net profit associated with a firm that yield an approximation of the firm’s potential value.  The use of revenue and profit multiples can provide a rough idea of value. That approximation requires further refinement in order to account for the risk associated with projections of future revenue associated with a particular practice.

For Your Consideration

What we are discussing here is what many in the marketplace refer to as the value of a law firm’s brand and the job of valuing that brand is clearly more art than science.  There are more challenges associated with valuing a law firm than most other business types. But these challenges should not get in the way of a focused effort to approximate the value of a firm before beginning a process that will result in a transition to new owners.

What efforts have been made to estimate your firm’s value?

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