For the last decade plus, merger has been a strategic choice for many law firms. The 2020 pandemic had a negative impact on the quantity of mergers but, many including our firm expect there to be a major uptick in 2021.
Given the probability that firms will at least be considering merger as part of their go forward plan, 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.