History is littered with failed law firms. Dewey, Howrey, Thelen and most recently, the Canadian law firm Heenan Blaikie, succumbed for various reasons. In the case of most of these failed law firms, the decision to cease as a going concern was largely reactive as they fell apart at the seams. While no troubled law firm management team wants to prematurely give up on pursuing a go forward strategy, too few struggling law firms objectively assess “thumbs up/thumbs down” when the time is right. More often law firm management fights for survival until the “run on the bank” forces the decision to close. If circumstances force a firm’s closure, as they did in the most recent spate of law firm failures, the financial repercussions for creditors and owners alike can be severe. As significant, an uncontrolled closing can adversely impact a firm’s people and its clients in profound ways.  And as we were reminded by the indictments handed down from Dewey, survival efforts can extend into an area where no one wants to go.  A closure, designed with foresight and executed while still in control, can prove far better for all parties concerned.

A pre-emptive decision to close, rather than wait for the unraveling of the firm, is rare. For any law firm that is troubled, asking the “closure” question early as opposed to later is critical. When, you may wonder, should this question be asked?

A preemptive decision to close should be explored when the following circumstances (or many of the following) exist:

The Thrill is Gone and Seems Unlikely to Come Back. The loss of dynamism within a firm is not always obvious, but it can manifest itself when departures or other reversals have continued for so long that the hill is too steep to climb. In most instances, when the decline has continued for a while, it is unlikely to be reversed quickly. Seldom is a “surge” strategy available. Bottom line, momentum has been lost and there is nothing on the horizon to suggest that it will be regained in the short run.

A Long-Term Restructure is Uncertain. A problem with law firm restructuring is that tangible success is needed in the short-term but usually not realistic except in the long-term. Valuable assets (lawyers) can be impatient and in the absence of immediate results, they look around to leave. Solidarity among the troops over an extended period is difficult to achieve and is uncertain.

Remaining People, Offices and/or Practice Groups Are Attractive. Even while a law firm slides into decline, many of its component parts can retain their market value. A troubled law firm proactively deciding to close can work with its attractive groups to place them in a way that minimizes financial loss and enhances the well being of the greatest number of its people.

Real Estate Market is Favorable. A huge lodestone around the neck of any troubled law firm is its real estate portfolio and its associated financial obligations. When the economy is robust and real estate dear, as it is in many markets today, unloading a firm’s real estate with little to no negative financial consequence is more likely. Next to “location, location, location” being a fundamental of real estate investing is the need to think “timing, timing, timing.” Unloading real estate at a time when values are up may be an opportunity that needs to be seized.

The Firm’s Owners Have Not Panicked. If a firm’s owners have not yet hit the panic buttons, it is more likely that a rational plan to “sell-off” people, practice groups and offices as “going concerns” can be discussed, planned and pursued. In some instances, whole offices can be transferred to another firm willing to assume real estate and operating leases. Even when that is not possible, developing a cohesive strategy with the owners to negotiate for new homes gives the firm a chance to not only avoid a Dewey-like unfinished business future, but also enhances the chance to enjoy a return of capital.

Deciding when to close a law firm is never easy.  To do so preemptively takes a great deal of courage, especially since the competitive nature of lawyers shuns any action that can be interpreted as “giving up.”  But in these times of challenge for law firms, it is an option that must be explored.  Would you consider a closure before you were forced to?