Merger mania continues in the legal sector. According to Altman Weil’s MergerLine, there have been more than 50 law firm mergers in the US so far this year; 2017 could well be a record year for law firm combinations.
The odds are high, whether your firm has been engaged in merger discussions in the past, it is likely to consider such discussions in the future. The purpose of this post is to increase the likelihood of success, should you decide to move forward with such discussions.
Most Mergers Fail
This is a harsh reality that rarely garners any attention once two firms embark on discussions of some type of combination.
Accept for a moment that corporate America is at least as competent as law firms in evaluating and structuring mergers. According to a McKinsey study, 70% of mergers fail to achieve intended synergies. Furthermore, numerous studies and reports indicate that far fewer than half of all law firm mergers deliver the expected value.
Why is this the case? The simple answer is incompatibility.
In this respect, a law firm merger is much like a marriage. The greater the degree of compatibility, the higher the probability the relationship will work for the long term.
While the “dating” process may be enjoyable enough — wining, dining with all parties putting their best foot forward — when you begin talking merger, you’re talking about hitching your professional well-being to the productivity, stability, and commitment of another law firm. All courting pleasantries aside, it’s time to take real stock of the potential relationship.
Three Compatibility Tests
When assessing the likelihood of a merger’s long-term success, it’s wise to consider compatibility (or incompatibility) in the following three areas.
Every firm has (or should have) a clear perspective on the type of practice the partnership is striving to build. When considering the firm you are about to create via merger, this conversation might include:
- Types of clients
- By industry (technology, health care, manufacturing, etc.)
- By size (small business, individuals, national or global)
- By location (local to anywhere)
- Which side of the fence your firm will focus on
- Practice area(s)
- General or specialized
- One area of focus or full service
- Sophistication of practice
- Bet the company
- Essential, but not life or death disputes or deals
- High demand, but commoditized practices
A lack of harmony on financial issues is at the root of many failed mergers (and marriages). Areas that often are the basis for conflict include:
- Debt – philosophies range from “our firm doesn’t borrow any money from outside sources for any purpose” to “we don’t invest any of our own money in the firm if we can borrow it.”
- Capital levels – the amount of money contributed by the firm’s owners to decrease dependency on outside sources for cash flow.
- Draws and distributions – like debt, approaches vary from fixed draws with periodic distributions regardless of profits, to irregular distributions when profits are sufficient to pay all current and prospective bills.
- Spending levels — from “we must spend to grow” to “We spend as little as possible.”
Culture is often hard to define but it may be the most critical of the three issues. Some have defined culture as the “way” a firm does things. Regardless of how you define it, typical cultural issues that lead to disagreement include:
- Work expectations – successful firms clearly communicate what is expected of lawyers, ranging from “We just expect everyone to do their best”to “We have a specifically defined performance expectation applicable to each class of attorney.”
- Commitment to client service – some firms have a deep and visible commitment to client service. It is talked about and measured. Other firms have a general understanding that doing good work is essential, but benchmarks and conversations on the subject are not material to the business of a law firm.
- Compensation systems – Systems range from purely formulaic to ones in which all partners make exactly the same amount. Any system can be made to work if all partners embrace it.
- Treatment of people – Some law firms have such a strong commitment to how people in the organization are treated that they are regularly recognized as a “best place to work” in national publications. Other firms leave the issue of how others are treated to the discretion of individual lawyers.
We’ve touched on a few of the issues that should be considered. The time to evaluate your firm’s own position on these issues is before sitting down with a prospective merger partner. Considerations of this type that are put off until actual merger discussions simply do not receive appropriate attention while energy is directed to (and attention distracted by) the potential of the deal itself.
Mergers are not easy. The track record is not great. Meanwhile, a combination could well be the most important business deal you will ever be party to. As such, discussions of combining forces deserve the diligence, resources and attention you would bring to the most significant matter you’ll handle.
What is your firm’s position on practice, financial and cultural standards?
For additional reading related law firm mergers click here.