Managing Law Firms in Transition

Managing Law Firms in Transition

Rethinking Law Firm Succession-Five Reasons to Focus Differently

Posted in Law Firm Leadership, Law Firm Repositioning/Turnaround/Restructuring, Law Firm Succession, Law Firm Transition

Law firm succession is a top of mind issue for today’s law firms.  Making sure one generation of leadership can hand the reins off to the next generation is a key concern.  Of course, it is not just having the right people in place to develop and execute sound strategies, but it also requires transitioning to capable client relationship getters and managers.

A recent report highlights industry developments and suggests that finding the right successors at law firms is more important than ever.  Altman Weil’s 2018 Law Firms in Transition Survey sees law firms at a crossroads.  The data and analysis suggests that law firm gains since the Great Recession of 2008 are being countered by new challenges and challengers different than a collapsing economy.  Instead, client competition, alternative service providers, and a growing array of technology-based solutions undermine more than ever the position of the traditional law firm in the legal service market.  Smart law firms, ones that will thrive in the future, will aggressively respond.

So how does law firm succession fit in with this challenge? In essence, succession today is not just a matter of training and selecting the next leaders and business developers in the mold of the lions that built the firm into what it is.  Rather, similarity to the past may have less utility than previously thought.  The next law firm successors should possess forward-looking perspectives that rival the results-oriented thinking of clients, alternative service providers, and emerging technology platforms.  The next leader’s focus on the future is essential because:

Traditional Demand for Legal Services is Likely to Decline Over Time.  With clients bringing legal services in house, turning to alternative service providers, and technology-based solutions gaining traction each day, the assault on traditional law firm services is sure to increase.  Demand for traditional legal services is likely to fall. Creative solutions will be needed from the law firm leaders of tomorrow.

Legal Services Will be More Commoditized.  Industry trends suggest that legal services are becoming more commoditized.  The more that happens, the less clients will be willing to pay for those services.  Firm leaders will need to either move away from commoditized work or make it more value and result oriented.

Non-Traditional Competitors are More Innovative and Client Centered.  The competition is scary because it typically is more innovative, and client centered than traditional law firms.  Law firms that survive and thrive will be committed to innovation and client centered results, just as the non-traditional competitors are.  Any new leader must think like an innovator and drive results that focus on client satisfaction.

The Old Business Model Needs More Than Tweaking.  Since the Great Recession many successful firms have tweaked the law firm business model to enjoy modest gains.  Forward-looking leaders will think beyond short-term solutions but will think about new business models that drive client results and satisfaction.  The future will require more than tweaking, it will require new approaches.

The Next Downturn is Coming. Since the downturn of 2008 the legal services industry has operated in an improving financial world.   Even as the economy has expanded, the results for law firms have been only tepid.  The decent results have come without facing the burden of another financial downturn.  Forward thinking leaders will be prepared for the inevitable next downturn.

If your current succession plan has not taken on the new mindset, it needs to be changed so your next leader is not just like your traditional leaders, excellent he or she may be.  Similarly, if new leadership has been installed recently, and consensus for the coronation was premised on the successor’s “fit” within the firm’s traditions or historical approach, serious thought should be given to the idea that another change is needed.  A continuation of the status quo, or a moderate change from the status quo, may leave the firm behind in what promises to be an ultra-competitive and unforgiving future.

Leadership and Law Firm Success/Failure

Posted in Uncategorized

The most dangerous leadership myth is that leaders are born – that there is a genetic factor to leadership. This myth asserts that people simply either have certain charismatic qualities or not. That’s nonsense; in fact, the opposite is true. Leaders are made rather than born. – Warren G. Bennis

 

There is simply no single factor that has a greater impact on the success or failure of a business than the quality of its leadership. During this period of dramatic change in the legal services industry a well defined means of developing effective leadership is a must.

First, to debunk a myth – effective leaders are not born, they are made.  Much has been suggested about “natural born leaders” and there is no substance to the suggestion. This should be good news to members of law firms. With sufficient desire, dedication and effort, effective leaders are developed.

There are three primary steps to creating effective law firm leaders.

  1. Identify interested lawyers.  Routinely engage members of the firm including junior associates to determine who has interest in functioning in a leadership capacity.
  2. Develop the capability. Once identified, find opportunities to develop their leadership experience and knowledge. Opportunities include:
    1. Assign leadership positions,
    2. Provide leadership assignments,
    3. Connect the leader to be with a mentor (inside or out of the firm) and
    4. Direct them to educational programs intended to develop knowledge and build a network of other emerging leaders.
  3. Obtain feedback. All effective leaders are consciously or unconsciously committed to learning. They strive to become better leaders. Nothing provides a stronger learning experience than lessons learned on the job. A formal system of routine feedback, from all applicable personnel, provides an opportunity for that learning.

Maintaining an appropriate sized group of emerging leaders is critical to law firm success. Prudent firms proactively develop that leadership capability.

What is your firm doing to prepare tomorrow’s leaders?

Law Firm Merger-A Way to Solve the Succession Dilemma

Posted in Law Firm Crisis, Law Firm Leadership, Law Firm Merger, Law Firm Succession, Law Firm Transition

For many law firms, succession to the next generation presents a formidable and daunting challenge.  Leadership may have been too busy to plan ahead for succession.  Turnover at the firm may have dealt a blow to the goal of grooming someone to step in as the next leader.  Sometimes the next generation’s business development abilities may not match the historical performance of the baby boomers now looking to kick back. And even if a thoroughly designed succession plan exists, the competitive legal market may now render it suspect or obsolete.

Unfortunately for law firms, in particular smaller ones, at some point succession can’t wait.  A solution is needed and the luxury of implementing a plan over the coming years is unrealistic.

Law firm merger can provide the perfect solution.  Although many reported mergers are explained as being done to further a larger law firm strategy, merger can serve many purposes.  As a succession tool, merger has proven effective when the option of turning the keys over to the next generation isn’t possible.  These “succession mergers” make sense for a number of reasons.

A firm facing succession often finds the following issues resolved by merger:

Leadership Vacuum.  For some firms, a future generation of leaders just never developed.  Law firm leadership at such firms face the uninviting prospect of turning the reins over to unqualified or uninspiring junior partners.  A merger into a firm with strong leadership can solve that problem.

Continuity.  Existing leadership may be concerned that a traditional succession plan (not involving merger) may not go well, and their firm may stumble and eventually wither away.  The problem with succession is that there are no “do-overs.”  Combining with a larger firm that enjoys a measure of stability may reduce numerous risks and promise continuity.  And that continuity may mean, at least in the mind of the firm’s founders, that the firm lives on.

Post-merger Opportunity.  Even if there is some confidence in the leadership readiness of the smaller firm’s lawyers, baby boomer leadership may believe that a new and larger firm will provide better opportunities for their people for whom fondness remains.    Leadership turning over the reins knowing that they have provided greater opportunities to their people may feel more content.

Good-bye Worry.  It is an overstatement to say that a merger removes worry for the former leaders of the absorbed firm.  But a well-negotiated merger with a strong firm certainly can provide some sense of security to law firm leaders that have fought the good fight for so long without an end in sight.  Leadership in the merged firm will take over the headaches that have long consumed boomer leadership ready to retire.

Benefits.  The merged firm may have a personnel benefit regime that is more generous for the absorbed law firm’s people, including former leadership, than the benefits currently extant at the smaller law firm.  And even if the benefits of both firms are generally similar, the merger still may make a lot of sense.  It is inescapable that a law firm that closes due to a lack of succession planning will not continue to provide its people with benefits they have come to expect.

Although a smaller firm’s leadership may be motivated to merge in order to solve its succession issues, it is not as if the acquiring firm does not benefit.  The existence of firms with succession issues presents to larger firms a market opportunity they may not otherwise have.  In addition to gaining access to skilled lawyers, new clients, and perhaps a new and desired market, the gains for the larger firm from market intelligence and credibility may exceed any that could be obtained by hiring a lateral or two to a de novo office.

These considerations already have been enough to propel some firms into merger.  What about your firm?

 

 

Merger and the Underperforming Law Firm

Posted in Law Firm Crisis, Law Firm Merger, Law Firm Repositioning/Turnaround/Restructuring, Law Firm Transition, Uncategorized

As firms consider their strategic position , a number of law firms are finding themselves underperforming relative to peer firms. For some, it is deja vu…for the second, third or fourth consecutive year.

You don’t need anyone to tell you that this is not a great way to navigate in this increasingly volatile environment. A firm that has experienced successive years of underperformance needs to consider whether they are going to be able to turn things around. Any firm can have an off year; but when underperformance turns into a trend, it is time to consider some broader questions.

The firm facing continuing problems may plan to turn things around by:

-Trying harder
-Becoming more “strategic”
-Seeking outside assistance to identify and address basic issues
-Considering a change in leadership/management, or
-Entering the merger arena.

Merger is often an overlooked strategic option for firms. Assuming a firm can find the right cultural fit, a combination can be an effective answer to underperformance.

But it is not a silver bullet. Caution should prevail. There is no worse strategic option than joining forces with another underperforming firm.

We have witnessed this approach many times. And it is destined for failure.

While the leaders of some underperforming groups seems to gain comfort through affiliation with firms in a similar position, weakness added to weakness spells failure.

On the other hand, a firm considering merger as a way to compensate for underperformance must proceed strategically in order to realize success. In the ideal scenario, firms entertaining a combination would make up for each other’s weaknesses in the context of cultural compatibility.

Areas where we have seen firm’s effectively seek a merger partner to compensate for issues effecting performance include:

-Technical capabilities
-Geographic presence
-Bench depth and broader expertise
-Technology infrastructure
-Leadership/management

There are countless nuances associated with successfully executing a merger with another firm. But with laser focus on the right issues, appropriate assistance, and enough time, merger may be a great solution for the underperforming firm.

If your firm is underperforming, have you considered a merger as a solution?

For those interested in additional readings on the topic of law firm mergers please see here.

Achieving Stability and Longevity for Your Law Firm-Five Fundamentals

Posted in Law Firm Growth, Law Firm Leadership, Law Firm Succession, Law Firm Transition

Almost daily, lawyers come together and open new law firms.  High expectations accompany such births.  With owners committing to work hard, promising to exercise given and acquired skills, and counting on a little (but not too much) luck, the newly created institution teases with the prospect of success.

The positive vibes at inception may be tempered when reverberations from the occasional law firm closing resound.  But law firms can close for any number of reasons.  The ending of a firm by its owners may simply be desired, planned out, and then executed.  In other cases, a firm’s demise can result from factors never intended, frequently unanticipated, and often bemoaned.  Whatever the reason, a closing law firm’s record will be starkly different from the law firm that gets passed from one generation to the next.

With intentions among law firm founders not much different at the time of creation, what explains the dissimilar outcomes?  Why do some law firms last while others seem to blow away in the wind?  One word: focus.  A firm’s ability to enjoy stability and longevity, and avoid a premature end, frequently turns on leadership’s ability to focus on five key fundamentals.

Shared Aspirations.  Whether a firm is getting started, is seeking to grow, or is somewhere else on the continuum of law firm life, long-term success depends on shared aspirations among its owners.  Shared ideas about the values held dear and objectives sought creates a commonality of purpose.  When agreement about goals and the reasons to be practicing law together is shared, owners will be on the “same page” and stability and success becomes more likely.  For that reason, leadership should constantly assess the mood and outlook of its owners to test the continued uniformity of their aspirations.  When aspirations seem to be fracturing, leadership’s focus and corrective action is required.

Planning.  A focus on planning is essential.  Only through commitment to planning can the shared aspirations of a firm be realized.  But planning is not easy.  It requires time, discipline, and vision.  By focusing on planning, leadership can initiate strategies that help achieve articulated objectives.  Through planning the firm can adjust its blueprint for the future as needed and identify individual performance expectations for the firm’s attorneys.  A focused firm reviews its plans frequently, can assess the firm’s performance against the plan, and adjust its plan as it and the market evolves.

Leadership.  Almost all successful firms enjoy high quality leadership.  Leadership at law firms is a complex brew of ingredients including knowledge, personality, persuasiveness, vision, trust and support.  Effective leadership not only strives to earn the owners’ trust and respect but works hard to preserve it once gained.  Quality leadership pursues the firms articulated goals, follows through on promises and enlists others in the firm in meeting the firm’s objectives.  A firm’s focus on maintaining high quality leadership is essential.  But focusing on present leadership is not enough.  A firm committed to its future will work hard on identifying the firm’s future leaders and paving the way for their seamless succession.

Communication.  An important ingredient in law firm stability and longevity is communication-it is the multi-dimensional key to connecting, understanding, and fostering inclusiveness.  In a time of client and lawyer mobility, good communication protects a firm from potential instability.  Both external and internal communication should be a part of a firm’s focus.  But communication is not simply a one-way exercise.  Focused leadership listens carefully to its clients, its people, and its industry to make informed decisions.  Understanding what clients are thinking, and what the rank and file is feeling, is critical to building a stable service model that can evolve over time.

Awareness.  A stable firm that has enjoyed a good run is one that understands its place in the law firm industry, can see trends emerging, and understands the challenges ahead.  In sum, a stable firm is dedicated to understanding the world around it and its place in that world.  That awareness will be displayed by a deep curiosity in the prospects for clients, progress in the industry, competitors’ actions, and professional service firm best practices.   A law firm that keeps its head on a swivel seizes opportunity, avoids surprises, and solidifies its foundation while other firms struggle.

Giving these five elements frequent attention is a sure way to improve your firm’s chance at stability and longevity.  In this day when the stakes are high, is there any reason to not give your firm that needed focus?

 

Merger and Operating Cost

Posted in Law Firm Growth, Law Firm Merger, Law Firm Repositioning/Turnaround/Restructuring, Law Firm Transition

If your law firm is considering a merger, it is a perfect time to evaluate the operating cost associated with the combined organizations.

Mergers are risky transactions. Having operating costs in line will decrease pressure on the new entity.

Although all costs should be evaluated, we will focus on three areas in this post. Two represent areas where you should be able to realize a reduction in expenses (space and people), and one is an area where you should plan for a budget increase (business development/advertising).

Office Space

The cost associated with housing a law firm is typically one of the two largest expenses for firms. There are, of course, two key drivers in this discussion — the amount of space, and the cost per square foot.

On the first count, in recent years firms have found ways to decrease the amount of space required. Some of the efficiencies offered by technology combined with less spacious partner offices are among the big factors here. Reports suggest that over the last decade or so benchmarks for space have dropped from 900 square feet per lawyer to closer to 600.

But what about the cost per square foot? Thanks to landlords, this one is out of our control — right? Or is it?

There continues to be what I suggest is a false perception that firms need to be located in the very areas where rates tend to be highest. The inclination remains to lease space in the heart of the central business district, or the hottest new area of town in the newest building.

While many law firm leaders tend to view the cost of premium space as the price of doing business, the increasing reality is that this space is of little to no relevance to virtually any client.

As you begin planning for the combination of your firm with another, look hard at how you can realize some space efficiencies as part of the transaction.

People

The second area of significant cost for law firms is the direct and indirect cost associated with attorneys, paralegals and staff. In virtually every law firm combination, there are redundancies in one or more of these areas.

As you plan for the integration of the two firms each of these human resource areas should be evaluated for redundancy, improved efficiency, and effective client service and support. When two firms become one, the goal is to end up with the strongest organization possible. This means reassuring the best and weeding out the weakest.

Keep your eye on two periods, the “time of transition”, and the long term. Personnel needs are greatest during the transition period.

People decisions are difficult, and critically important. An open and honest approach to assessing the needs of the new firm will serve you well.

Leveraging the transaction

An area that you should consider making additional investment is market awareness. The quickest way to leverage the value of a merger is to ensure that existing, former and prospective clients know of the new capabilities resulting from the transaction.

This awareness comes about through a well-planned communication initiative. The project starts with the development of a clear and concise message, which reflects the enhanced value created by the merger.

The delivery of the message will vary by situation; but generally your plan should include, face-to-face meetings with key clients, direct mail, electronic communiques, and announcements in relevant professional publications.

Have you engaged in a thorough review of the cost structures as you plan for your merger? Do you have a well designed communication plan to let the relevant sectors of the marketplace in on the increased value you now represent?

 

 

Law Firm Merger Checklist Item-Culture

Posted in Law Firm Leadership, Law Firm Merger, Law Firm Repositioning/Turnaround/Restructuring, Law Firm Transition

The spring of 2018 has produced a spate of large law firm mergers.  Despite this noticeable activity, the interest in mergers is not something new-over 600 mergers and acquisitions have closed since 2007.  Based on the tactic’s popularity among firm leaders seeking a competitive edge, we can expect more mergers in the future.

For law firm combinations to make sense, however, a lot of things need to fall into place.  Financial considerations are hugely important to any combination.  Not surprisingly, firm leadership tends to focus on financial issues to assure that any deal proves accretive.

Factors that assess the compatibility of two firms also receives a lot of attention.  Client, practice, and strategic compatibility must be considered to avoid painful and ill-fitting combinations.  Yet when it comes to thinking about compatibility, the most important compatibility test is whether the cultures of the two firms mesh.

For the firm thinking that “merger” may be in its future, the importance of culture can’t be discounted.  But what does “culture” mean?”  “Culture” can be a lofty word that requires specifics to be more than aspirational.   Based on our experience, getting past platitudes and understanding the cultural fit between two law firms is aided by examining six areas of day-to-day law firm life:

Law as a Business.  Today, most firms acknowledge the importance of operating as a business but beyond that unanimity there can be widely divergent views about what that means.  A firm’s unyielding dedication to business principles may be tough to swallow for another firm that has been slowly moving from a “law as a profession” philosophy to a more business-like approach.  Understanding where the two firms stand on the business/profession continuum is important.

Financial Objectives.  For some lawyers and their firms, making as much money as possible is the only important driver.  Another firm may value a comfortable living while enjoying an equally satisfying quality of life.  Forging a union between two firms at distant ends of the spectrum could be intolerable for both parties.  The financial objectives of firms can say a lot about their cultures.  Comparing those objectives is important in finding the right match.

Compensation System Driven Behavior.  One firm’s approach to compensation can be very different from the next firm.  The incongruity of two compensation systems obviously may suggest a poor fit.  But the bad fit can go beyond the technical process of evaluating and rewarding performance.  Compensation systems inevitably encourage behavior.  Bringing together two groups of lawyers whose behavior is widely different can compound an already formidable integration challenge.  Understanding how lawyers from different firms behave is one key to determining whether cultures align.

Non-monetary Values.  All firms make decisions respecting the non-monetary values they find important. There is no right or wrong answer to whether a firm should be civic oriented and/or committed to bar activities.  The law firm industry has more than enough room for firms of varied persuasions.  That said, two firms at opposite ends of the non-monetary value spectrum might prefer to remain apart.

Valuing People.  How a firm’s people (professional and non-professional) are treated says a lot about a firm.  Organizations often thrive when their work-forces enjoy their place of work.  Lawyers or other personnel at a “people place” may find life at a more cutthroat shop demeaning or otherwise unfulfilling.  Conversely, personnel used to a strict bottom-line mentality may feel unchallenged in a softer environment.  In any merger, the human resources equation must be solved.

Collaboration.  The teaming atmosphere at one firm can be dramatically different from a place where being collaborative is neither expected nor rewarded.  If a merger will bring together lawyers not on the same page about the concept of teamwork, inefficiencies and resentment will mount to the detriment of the merged firm.  A culture of collaboration will not likely fit well in a culture where Lone Rangers are lauded.

In any merger, the importance of a cultural fit cannot be shrugged off.  If two firms thinking about combining are different in many of these six areas of day-to-day life, the two cultures may not be aligned.  If merger is being considered and many of these day-to-day characteristics don’t match well, would it be wise to go forward?

Do More Than 83% of Law Firm Mergers Fail?

Posted in Law Firm Growth, Law Firm Merger, Law Firm Repositioning/Turnaround/Restructuring

This Forbes article references a KPMG study which indicated that 83% of mergers fail to yield a favorable return to stockholders while a separate A. T. Kearney study determined that mergers overall yield a negative return to owners. The KPMG study indicated that nearly 70% of business combinations are negative to neutral in terms of value created.

These studies look at business combinations in general and may not have included any law firms. But, if you were to guess, do you believe law firm leaders have a better track record in creating net positive value through mergers than career business professionals?

I would guess not.

With the torrid pace of law firm mergers, the question is what will it take to improve the probability of success for law firms.

Based on our experience, the two most critical factors in order to realize a merger’s highest value are:

  • choosing the right merger partner; and,
  • developing and executing a high-quality integration plan

Both topics are critical; however, the focus of this post is integration, and what is required for successful integration when firms combine.

Six keys to successful integration

  1. Leadership and decision-making

You should count on the fact that integration will give rise to some tough questions that only the leadership of the emerging entity can answer. So firm leadershipdecision making processes and the identification of “where the buck stops” — on both legal and administrative sides of the house — are orders of business that should be dealt with before integration begins.. Size and complexity of the combined firm will dictate specific positions; but don’t fool yourself — the management team should be identified and agreed upon early.

This process should include the clear designation of an individual or team charged with responsibility of a successful integration. Those decisions should be communicated to all personnel with contact information.

  1. Systems

Moving from two systems to one impacts almost everyone involved in the combination. Individuals who know the pieces involved should have a hand in the creation of a detailed plan. Typical platforms to be considered include:

  • Client intake, conflict checking and acceptance
  • Accounting
  • Human resources
  • Technology & security
  • Marketing, business development & competitive intelligence
  • Knowledge management

In some cases, the transition may take months. We know of one combination that saw a single firm operating with three separate accounting systems for more than a year. Whatever the reality, the plan and its timing should be communicated to all personnel with additional information as to who to contact regarding any transition process..

  1. Communication

Everyone talks about it; but there is no more important integration issue than timely, clear and concise communication. In short, merger related communication must start early, be frequent and continue until the two firms are effectively integrated. Separate communication plans should be developed for clients, the public and the various members of the firm.

Attempt to foster an environment in which everyone feels free to ask questions, express concerns, frustrations and criticisms and suggest solutions. Allow an environment of distrust to develop…permit issues to go unaddressed, and be prepared for a turbulent transition. Fear leads to poor integration and unwanted turnover.

  1. Culture, policy, standards and expectations

For two firms to become one they must operate with one playbook — one set of rules, values standards and expectations. Take the time to develop the playbook and deliver it as early in the process as possible.

Consistent with developing one culture, plan on frequent get-togethers during which individuals can grow to know, understand and trust one another. Create an environment in which wins and progress are a product of the new whole, and challenges are jointly addressed.

  1. Clients

Clients are (or should be) at the core of any operational decision a firm makes — including the rationale for a combination. Be certain that clients are advised of the value your transaction brings to them. Develop a plan to integrate members from both sides of the combination into as many client relationships as possible.

  1. Integration team 

The integration effort should include a formal and recognized integration team. It is wise to staff that team, to the greatest extent possible, with administrative personnel, minimizing disruption to client service and revenue generation.

The chair of the integration team should report frequently to the firm’s senior leadership regarding successes and challenges associated with the integration.

A quality integration plan will devote plenty of time and attention to these six basic areas — and will dramatically decrease the odds that your merger ends up being one of the poor statistics.

 

Four Important Elements to Getting Law Firm Merger Right

Posted in Law Firm Growth, Law Firm Merger, Law Firm Repositioning/Turnaround/Restructuring, Law Firm Succession, Law Firm Transition

Already 2018 has proven to be a time for law firm merger.  Since the beginning of the year we have been treated to a constant series of announcements about law firms combining. And although law firm mergers have been part of the landscape for years, the increase in law firm mergers shows its growing popularity as a tool of growth.

Generally, until the merger itself is announced little is publicized about a law firm’s merger activity. Even in the instances in which a law firm’s interest in a merger is leaked before the merger is a done deal, details about the merger mechanics are scant. The leaked news usually only stokes a rumor and a closed deal may or may not result.

For firms that have not done a merger the question often asked is “when thinking about merger, what is important?” While the genesis for each transaction is unique (as are the negotiations), virtually all mergers involve four important elements that are interrelated and build on each other. Addressed well and a merger is positioned for success. Performed poorly and a merger’s prospects are suspect. The four important elements are:

Pursuing Merger for Sound Strategic Reasons. The reasons behind a firm’s decision to pursue a merger can be many. Some firms need a rescue; others see a need for additional capabilities or have a desire to enter a new and critical market. A frequent reason to merge is one premised on the combination adding market share not easily gained through organic growth. As the Boomer generation reaches retirement, merger also can be a useful tactic to address leadership or succession issues. Whatever the impetus, the decision to consider merger should be one premised on meeting a strategic initiative identified through thoughtful and critical analysis.

Establishing Your Requirements. In thinking about merger, it is essential that the criteria for a merger be clearly identified before seeking out a potential merger partner. Only once the criteria are established should a firm purse candidates-all the while remaining faithful to its criteria. Whether acting opportunistically or methodically, staying true to the criteria protects a firm from letting the thrill of the conquest dictate its tactics. It also provides the foundation for the discipline needed to walk away from a bad deal that momentum would have you close otherwise. Understood criteria and discipline prevent emotional or irrational decisions. They should not be compromised.

Finding a Match that is Compatible. For firms approaching merger correctly, a thorough diligence process provides guidance on firm compatibility. In focusing on this element, a firm should consider whether it and its prospect are compatible on matters of culture, finances, compensation systems, clients and operations. Also key is the fit of leadership styles and the potential for evolving to a leadership team that will be accepted by people in the unified firm. Ideas on succession and vision should be compared to further confirm the fit.

Post-closing Focus. While it is essential that the integration and assimilation of the two firms be planned before the merger is finalized, also essential are an attention to detail and a dedication to bringing together disparate groups post-merger. Everything from forging a singular culture to creating systems, processes and procedures to gauge, motivate and reward the new firm’s valued behaviors.   Hard work post-closing is not only important to avoiding crisis during the honeymoon period, but it also is important to the care and feeding of the next generation of performers and leaders.

Doing the right merger and finding the right partner takes work. It does not come about by happenstance but requires an unyielding focus at critical points along the way. Has your merger experience shown you other important steps?

 

How Do You Define the Value of a Law Firm? Thoughts for the firm considering an ownership transition.

Posted in Law Firm Succession, Law Firm Transition

What is your law firm worth?

This question is paramount when the owners of a firm consider the possibilities related to a merger, a succession plan involving existing members, or the outright sale of an established practice.

There are variations by state as to what can and cannot be sold as part of transitioning of ownership of a law practice; and even given the existence of suggested formulas for valuation, when it comes to estimating the value of a given practice, there are often more questions than answers. But in order for a transition to be successful for all involved, it is essential to have a solid idea of what a firm is worth.

To this end, in our experience, here is where successful conversations begin.

Two Broad Considerations

In the typical law firm transition there are two separate areas, each of which represents distinct value:

  • Tangible assets – this is in many ways the easy part of the conversation. Examples include furniture, equipment, cash, investments, receivables, and work in process; and then there is,
  • Good will — this amounts to the equity of the law firm’s name that will be transferred to the new owners, and often represents the significantly more difficult piece of the valuation process.

In the simplest terms, good will is the value associated with the firm’s ability, to generate future income under the newly constituted ownership. That future income generating capability absolutely has economic value; in many cases it may represent the most significant piece of the valuation puzzle.

Think about it. If you could purchase an investment — say an annuity that would guarantee a payment of $2,500 per year for 10 years, what would you pay? $15,000, $18,000 maybe 20,000? The same principle is true in the purchase of a business. The projected future income has value in the context of a present-day transaction.

Unfortunately, the future profits associated with a law firm are not as certain as a guaranteed annuity. Although a firm’s reputation may be outstanding, and the historical revenues may have generated an impressive level of profitability, the continuation of those profits depend on clients choosing to continue to be served by the new firm following a transition in ownership.

Notwithstanding the above uncertainty there are means of estimating future gross revenue and net profit associated with a firm that yield an approximation of the firm’s potential value.  The use of revenue and profit multiples can provide a rough idea of value. That approximation requires further refinement in order to account for the risk associated with projections of future revenue associated with a particular practice.

For Your Consideration

What we are discussing here is what many in the marketplace refer to as the value of a law firm’s brand and the job of valuing that brand is clearly more art than science.  There are more challenges associated with valuing a law firm than most other business types. But these challenges should not get in the way of a focused effort to approximate the value of a firm before beginning a process that will result in a transition to new owners.

What efforts have been made to estimate your firm’s value?

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