Law firm news continues to include reports of record profits for some — small and large alike. But the news is far from all good. The reports of desperate struggles for survival are regular; and far too frequently, the headlines include news of the latest law firm closure.
In the midst of it all, law firm mergers — or the rumor of pending mergers — continue at a fever pace around the world. There are some spectacular exceptions; but the vast majority of the merger activity is between firm’s of significantly different sizes.
Today the opportunities that exist for the small to medium size law firm to significantly improve its market position through a strategic merger transaction have never been better.
But how do you know whether a merger is right for you?
If you are in a small to medium sized firm, there are a number of reasons to consider a merger as a strategic path forward. Here are three of the most common:
- Often, when senior members in a small/medium size firm are beginning to consider the conclusion of their career, other professionals in the firm as well as its clients may be best served by a strategic combination with another firm and its leadership.
- Client service. When the needs of your firm’s clients are best realized and supported by capabilities and resources that your firm is lacking (and is unable to practically develop in the near term), it is time to seek a combination that resolves this issue.
- Economic strength and stability. When your firm lacks the resources necessary to operate today and invest in tomorrow’s stability, it may be time to combine with a larger firm — one possessing a strong balance sheet, access to the capital necessary to fund a combination, as well as invest in the future.
Proceed with caution
In most cases, the smaller party to a combination has never been through a law firm merger, while the larger firm often has. Seeking the counsel of a professional who has advised on similar transactions is prudent. But in any event, here are four strategic issues related to fit that we strongly urge our clients to consider:
Do the two firms share the same perspective on the practice of law and how it should be conducted? A lack of cultural fit will result in a less satisfying career at best and a failed merger at worst.
The Client profile
It is understatement to say that there are significant differences in the profile of a law firm’s clientele. And the type of attorneys, support staff, and even infrastructure necessary to properly service clients vary as well. Be certain there is a significant degree of similarity in the profile of the two firm’s client base. Lack of compatibility in this area will lead to disputes related to rates, service and compensation
Although you surely want to associate with a firm that is as strong or stronger than yours financially, there needs to be a significant degree of compatibility related to borrowing philosophy, when and how partners are paid, partner pension plans, productivity and rates.
The last thing you want to do is become part of an organization whose future is at risk. A high degree of diligence is necessary to ensure that your firm doesn’t get permanently attached to the Titanic. Some of the areas of risk deserving evaluation include:
- Actual or potential claims against the firm
- Turnover of attorneys
- Contingent inventory and other old receivables
- Loss of key clients
There is no suggestion here that a firm should consider merger as a strategy just because the market is ripe. But, if your firm has considered such a move the timing may be very good.