Many more law firms — of all sizes and types — believe that their future organizational and financial security is linked to growth and diversification. They are seeking the lateral addition of experienced lawyers through the acquisition or merging of practices. These firms are seeking to anticipate trends of their clients and in legal practice.
The merging and acquiring of practices results from a variety of situations. They include more senior lawyers in firms blending their practices with small, medium-sized or larger law firms; large city law firms seeking to combine their respective talents and practices; expatriates from larger firms forming smaller boutique law firms; government attorneys moving back to private practice; and spinoffs from seemingly successful firms.
Small firms may merge or be acquired to meet the competition of larger firms (which reached their size by merger or acquisition). Sole proprietors may opt for the partnership or professional corporation form by merging the talents of younger lawyers into an established and growing practice.
Merging practices helps firms to meet competition, retain important or growing clients, build diversity of specialization, further economic objectives, improve client volume and base of service, and achieve a better balance of the expertise in their substantive practice areas (as the result of the departure of highly experienced attorneys).
Personal ambition on the part of partners may be a further motivating factor. The ability to attract or retain quality attorneys may be an added stimulus. The economics, technology and management capability effected through the merger or acquisition may be yet another advantage. In some cases, merger may be the only means by which the practice can survive.
Finding a merger or acquisition candidate, or responding to an offer, is often a difficult task. Even when the candidates appear attractive, the merger attempt or consummation may be a traumatic experience. Generally, the product of the union should have a multiplier effect, rather than just the sum of the efforts of the contributing members.
Many current and long-range benefits should be provided through the merger. Some of the greatest benefits should be the ability to multiply brainpower; the sharing of skills, networking contacts and experience; the accomplishing of objectives and review of performance; and continuing improvement.
But a great number of these firms that enlarged by merger or acquisition have found that larger size alone will not bring success. They have not succeeded as expected in personal or monetary fulfillment. These firms generally had not considered that more logical approaches could have been taken before embarking on this important step.
Those considering a firm merger or acquisition should keep in mind:
• Active leadership of one or more of the lawyers from each firm to guide the process.
• Full disclosure of pertinent financial information.
• Firm cultures.
• Communication and understanding of current policies in both firms, and the reasons why these policies exist.
• Statesmanship in sensitive matters such as firm name.
• Frequent meetings of the partners in early stages to disclose potential problems or issues that may haunt the merged firm.
• Equitable income-sharing policies and plans.
• Capital and asset/liability arrangements.
• Organizational structure and management of the business and substantive sides of the practice.
Approaching a Merger or Acquisition
Initially, firms will need to determine whether a merger or acquisition is necessary or will be beneficial. The firm may not be a good candidate without a “house cleaning.” Alternatively, it might benefit more from internal growth.
If the firm decides to grow as the result of pursuing external sources because the partners are unable to achieve their objectives themselves, there are three options: acquisition of a smaller practice, combination with a firm the same size or acquisition by another firm.
To combine complementary or supplementary practices or attorneys, sophistication in legal-merger economics, law firm management and a sensitivity to organizational needs and human resources are necessary. The merging parties need not be alike in all respects but broad commonality is essential in many of the cultural, economic and styles of practice and approaches for marketing their firm’s expertise and serving clients. On the other hand, an insoluble mixture will impress neither clients nor members of either firm, and the marriage can end in an early divorce.
There have been mergers where ambitious partners have lost enormously in income because growth in numbers and economics were the most important factors they considered.
It is well known that not all mergers are successful, but more could reach their potential if an appropriate analysis and phasing of all steps necessary for the merger were undertaken.
The feasibility of a merger can be determined at the outset in terms of current and potential economics and human compatibility. There is a need to analyze past, current and expected client history, legal strengths and weaknesses in substantive practice areas, expense and earnings patterns, assets and liabilities, capital requirements, aged unbilled time and accounts receivables, and the realizations of both firms.
Personal philosophies may differ about the management of the firm, the manner in which clients will be served — e.g., will our attorneys perform legal work in the most pragmatic way or will we seek to “turn over every rock to explore potential issues”? — human capabilities and personal work patterns. Do potential merger partners want to practice law and relate to each other as a “unified” firm or as a “confederation of attorneys”? Existing and contemplated agreements and income distribution programs, as well as commitments to aging, retired and the estates of deceased partners, should be considered. Space problems and commitments, organizational and overhead issues, and willingness to invest in technology and systems need to be considered.
After a feasibility study is developed, problems of firm name, consolidated partnership arrangements, governance and systems must be solved. Temporary agreements (letters of intent) can be written and time schedules should be set. The merged firm’s leadership in any move to bring forces together must determine as many solutions as possible in advance of the firm’s physical and financial merging and before its clients or other members of the bar and the public are notified. With these steps, unlikely candidates for merger or acquisition will fall by the wayside, but others should prove successful from a professional and economic point of view.
Moving into a merger is a logical and businesslike process that should not be accomplished too hurriedly, but like marriage, it sometimes results from a whirlwind courtship. Alternatively, it should not take too long to consummate or the opportunity to join with the other firm may “die on the vine.”
From our experience, we have developed the following checklist for those considering a new partnership formation (or professional corporation), or a merger or acquisition of existing organizations. The precise application of the questions and the sequence of events will vary with the situation.
• Organization: full-time lawyers — both partners and associates — to be included and their ages; part-time lawyers to be included and their ages; administrators, paralegals and the administrative support employees and their position titles; Martindale-Hubbell Law Directory and website biographies; current agreements — partnership, incorporation, employment, special agreements and retirement plan; lawyer management for administration and the substantive sides of the practice; and a listing of partners and associates by legal field.
• Gross income, schedule of partners, associates, paralegals and administrative managers and support personnel earnings, and overhead costs — for three-to-five years and year-to-date — assets and liabilities.
• Office space requirements, extent of automation and computerization, and compatibility.
• Fields of law contributing to the practice in the last fiscal year, and what percentage of total gross revenue: areas of specialization to be supplemented or established; main sources of clients and revenue from principal clients over the past three-to-five years and year-to-date; any important changes that would affect client volume favorably or unfavorably; and the impact of any apparent conflicts of business, e.g. client and business.
• Continuing retainer arrangements and contingent cases.
• Work habits: work habits per week, i.e., billable, nonbillable — for example, management, marketing, bar association and vacation — and total hours per week per lawyer devoted, on the average, to other business or employment.
• Time and billing: unbilled inventory, aged; accounts receivable, aged; costs advanced, aged; experience with written-down and written-off fees and costs; budgeted or average hourly rates, realized; time and billing system; and billing policies.
• Health problems or personal idiosyncrasies, preferences or dislikes worthy of mention.
Benefits of a Merger
A merger of well-established firms can be accomplished within three to six months. Some may be planned over a longer period and most find that many aspects of the merger take place gradually during the period designated.
The benefits of a well-conceived merger often can be apparent even before the physical merger is consummated. Again, for an increasing number of firms, this may be the only way to accomplish, rapidly or at all, their partners’ professional and financial goals and their desired continuity of existence.
Joel A. Rose is a certified management consultant and president of Joel A. Rose & Associates in Cherry Hill, N.J., which consults to the legal profession.