Law firm mergers happen-a lot.  While the mega mergers get the publicity, many mergers stay under the radar because they involve smaller firms being absorbed by larger firms. Whether for reasons of market dynamics, succession, or battling for growth, some smaller firms simply conclude that life will be better as part of a bigger shop.

A good merger requires basic compatibility, often around areas such as culture, financial metrics, operations, clients, and compensation.  If most of these things seem generally in sync, merger may be a good idea as long as there can be a meeting of the minds.  Theoretically, arms-length negotiations ensue with either firm free to step away from the table at any time.  Despite this apparent equality in the mating dance, however, many smaller firms do not appreciate how disadvantaged they are when considering merger with a larger firm.

As compared to small firms, large law firms have certain inherent advantages-two of which are obvious.  First, the larger firm’s operations typically are more complex than the smaller firm’s way of doing business.  Of the two, the larger firm will be more capable of understanding its counterpart’s operations than vice versa.  Second, the larger firm usually will have greater experience in mergers and acquisitions, likely having completed others prior to the time it sits down for the instant deal.  Other advantages for the larger firm, not always realized immediately, can creep into the process as it goes along

Because of these disadvantages, a smaller firm should do more than ascertain general compatibility or work hard to negotiate a good financial deal.  Rather, it should approach merger discussions with a curiosity that helps it:

Understand the Terminology.  The older and larger a law firm, the more likely it will have a language of its own that describes basic concepts.  The terminology may seem unintelligible, it may seem a little familiar, or it may match perfectly with concepts at the smaller firm.  But don’t assume that familiar sounding terms have a familiar meaning. Unless all the nomenclature is understood, key components of any proposed transaction will be missed, and post-closing life may be disappointing.

Check References.A lot of firms seeking to merge or acquire other firms have been doing similar transactions for a while.  If so, dig deep into the firm’s track record of integration, post-merger success and failure.  Calls to former partners for references on the other firm is simply good diligence. You’d be surprised at how much you learn.

Understand the Firm Policies.  No one would contemplate a merger without digging into the other firm’s constituent documents.  Don’t stop there.  A lot of what gets done in a firm is contained in its policies.  Many law firms use policies extensively as management tools-those tools can make day-to-day life very different from the glorious stories told while courting.  Understand the policies-they will provide a glimpse into future.

Understand the Firm Strategic Plan.  Read the larger firm’s strategic plan to be sure its strategy and tactics are clear-but also read between the lines.   Understanding a firm’s overall strategy helps you determine whether your smaller firm fits within the larger firm’s plan.  For example, if the larger firm’s strategy seeks to eliminate low margin practices, some smaller firm practices may not fit well.  Worse yet, if your prospective merger partner doesn’t have a strategic plan or it is old, the quality of management has to be questioned.

Compare the Values of Ownership.  No doubt your suitor is pouring over your data in an attempt to determine whether a merger will be a net benefit or burden.  You should do the same and not assume that just because it is bigger it is financially stronger.  You should assess the value of your equity pre-merger and post-merger.  How a delta in comparative net equity, and other financial disparities, is resolved may be the difference in doing the deal or not.

For the smaller firm, getting merger right is very important because a second chance is seldom given.  With so much at stake, what other factors should smart firms consider?