Merger has continued to be a strategic choice for many law firms. Since 2009 the volume of transactions has continued to grow, with approximately 100 announced mergers last year.
Our expectation is that the number of law firms that choose merger as their go forward strategy will increase, dwarfed only by the number of firms that will simply entertain the idea. Given the probability that firms will at least consider merger, it seems prudent to think about what a good merger partner should look like.
To that end, here are 10 questions you should answer before having a conversation with another firm:
- What principal characteristics of your existing culture are most important to you. A lack of cultural compatibility is difficult, if not impossible to overcome, and one of the reasons so many combinations fail.
- In what rate tier do your clients exist. A lack of similarity in realized rates drives conflicts in staffing client files, compensation and a host of other critical law firm areas.
- What additional expertise (whether new to your firm or additional depth in existing areas) will allow your firm to make desired progress in targeted areas of growth.
- What are your key financial metrics. A good merger partner will have economic metrics that are similar to yours (of course unless your firm is failing). Metrics significantly different from yours — whether better or worse — will lead to painful pressure for one party or the other on rates, hours and retention.
- What aspects of your current compensation system do you most value. Merging with a firm with a significantly different approach to compensation will almost certainly result in a different relative treatment among your existing partners, possibly with unexpected negative consequences.
- What size of merger target best serves your firm’s goals? Questions like are you comfortable being a small outpost of a mega firm, or even small relative to your merger partner are good questions to think about. The greater the size disparity in a combination the less “say” the smaller firm will have in future decisions.
- Is your firm facing succession issues? If so in what specific way would you like to see a merger partner solve those issues?
- In addition to your existing footprint, what additional geographic presence would bring value to your firm, and why?
- What type of governance are you and your partners most comfortable with. Firms are governed in a range of ways, from very democratic to tremendous authority being vested in a few. It is important to know in advance what you are comfortable with and what is off-the-table in terms of governing options.
- What level risk do you think is reasonable? Risk in a law firm includes bank debt, partner turnover, unfunded pension plans, pending or threatened litigation and loss of key clients. Understanding your risk-tolerance is key to a successful merger.
The answers to these questions, and the impact the answers will have on your approach to a merger possibility will vary depending on whether you are acquiring or being acquired; but the greater the variance between how you feel with respect to these 10 issues, and the reality of the world you’re considering will be a predictor of the success of the combination.
If a strategic merger is in your future, smart leaders will engage in identifying the things that are most important to their partners; far too many mergers occur without defining in advance what a firm is seeking, and why.
If you are interested in additional materials we have published related to law firm mergers click here.