Law firm crisis typically brings financial pressure. Reduced demand, slow-paying clients, and now due obligations incurred in better times are but a few of the hallmarks of crisis. As bad as these things can be, the strain can intensify quickly when the firm’s lender expresses concern. Because a lender’s involvement can dictate the outcome, any impacted law firm leader should observe three fundamentals.
First, having a thorough knowledge of the loan documents is essential. Thinking you know your firm’s bank obligations from memory can be a serious error. A law firm leader (or professional advisor) must read and intimately understand all loan documents and associated firm/lender communications. Exacting details about representations, warranties, events of default, collateral granted, reporting obligations, lender diligence, potential holes to the lender under the loan (whether intrinsic in the loan structure or due to lender inattention) must become etched in leadership’s mind.
Second, understanding the loan is not enough. Context is very important. The loan package must be understood in the context of the firm’s past and anticipated business performance. A soon to be requested loan advance critically needed looks drastically different to a lender during times of loan compliance, looming default, or existing default. Relationship context is equally important. Knowing your firm’s and bank’s past history together is a vital component to any workout, as is your firm’s stature in the bank’s big picture and its portfolio of outstanding loans with others.
Third, credibility with your bank is a precious commodity-one that hopefully remains in supply. In crisis, a trusting banker can be a valuable asset. Conversely, a skeptical or distrusting banker can make life hard. So, when crisis hits, a law firm should realistically assess how it is perceived. If too much history has passed and the relationship is frayed, rebuilding trust by replacing leadership or hiring recognized professional assistance should be considered.
When crisis hits, lurking lenders can amp up its gravity. Adhering to these three fundamentals can make a difference.
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To read more on leading through law firm crisis, visit Managing Law Firm Transition.
