Mergers of law firms garner a great deal of press and comment.  As noted by Debra Cassens Weiss, law firm mergers during 2013 have been numerous. Robert Denney’s Primer on Law Firm Mergers provides a useful guide about approaching law firm mergers.  Just last week, yet another merger was reported, this one involving the venerable firms of Taft Stettinius and Hollister and Shefsky and Froelich.

For mergers to succeed, however, there must be a good fit between the merging firms. In my Resolving Law Firm Transition By Merger—Important Compatibility Issues for Management’s Consideration, I identified five compatibility areas for law firms to consider when approaching merger. Last week’s Law Firm Merger Diligence—Are the Cultures Compatible[?] provided greater depth about the importance of cultural compatibility, a topic of extreme importance when attempting to bring two firms together.

A second vitally important area in which compatibility must be understood relates to the financial fit between two firms. Getting a handle on financial compatibility is in some ways easier than dealing with the more squishy cultural issues since financial metrics are, by their very nature, far more data driven. The comparison of the two firms data and the manipulation of that data in trying to project the two firms as combined can happen relatively quickly. Indeed, getting a handle on the financial metrics at the outset allows an early “go/no go” decision on further discussions.

Obviously, data is only as good as it is trustworthy. But even reliable data that allows for an accurate comparison of two firms cannot predict their future as one firm. Nonetheless, examining the financial metrics in the following six areas should give each firm’s merger committee a basis on which to envision a combined firm and the wisdom of pursuing a deal.

Firm-Wide Performance. Certain financial performance metrics reported by the American Lawyer have become accepted. Whether a firm ranks in the AmLaw 200, most firms accept Profits Per Partner, Revenue Per Lawyer, and Leverage as accepted measurements. Numbers can tell a lot, but looking behind the reported metrics is critically important since these data points are susceptible to manipulation.

Rates.  Sometimes combinations result in bringing together two firms with differing rate structures. When one firm’s higher rate structure is imposed on a merger partner with a lower rate structure, tension is inevitable.  Besides presenting an external client relation issue, internally dictating higher rates to attorneys that in the past have built their practices without that economic pressure can be a hard sell.

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 is as important as knowing how much capital is invested. Two firms with widely different capital profiles will find their combination ill fitting if this issue is not addressed.

Debt Levels. Debt can be the hobgoblin of law firms. Bringing two firms together with different debt levels and/or approaches to debt can be very hard to do. 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.

Productivity. Closely related to the Firm-Wide Performance test is the question of productivity. Combining two firms in which one produces significantly more (or less) promises future difficulty. Divergent productivity metrics raises questions about work ethic, practice or client compatibility and portends dashed expectations. And no matter how much one believes that “opposites can attract,” experience suggests that the hoped for “lift” fails in favor of a “dumbing down.”

Collection Practices. Law firm performance on billing its services and collecting its bills can vary widely. A firm with a good realization rate and minimal days receivable on its billed work achieves those marks because it has instilled a discipline in its lawyers and the firms’ clients have been conditioned to pay for services promptly. Trying to combine with a law firm that does not have the same discipline and a course of dealing with clients can be tough and frustrating for everyone.

How do you like to evaluate the financial compatibility between firms? If you have “tried and true” measurements, please let us know.