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Have you noticed that we seem to have become the generation of the superstore? In the Washington metropolitan area, we have epicenters for just about every corner of the marketplace. Home-improvement warehouses, books and music mega-stores, and grocery stores that offer lawn chairs and postage stamps suggest that one-stop shopping has become the retail norm. The success of such ventures reminds us that bigger may indeed be better in the minds of busy consumers. The legal industry is not immune to this trend of depot services. Law firms are not only growing in size by opening branches in cities around the globe, but they are also diversifying their specialties to appeal to a larger market. Frequently my clients ask if I believe that this new generation of conglomerates is really heralding the end of the boutique law firm. Do specialized firms risk becoming extinct by not yielding to the multiple offers for mergers? I really cannot predict the future any better than another financial adviser. But if you are perusing the list of the largest 100 firms in your area and feel a sense of pride in the fact that your firm’s name is not on the list, you are not alone. Many smaller firms are content with their role in the legal marketplace and are constantly turning down offers to join the ranks of mega-firms. Should financial pressures push your small firm into a reluctant marriage with a larger suitor, there are many factors to consider before accepting the proposal. What’s the big attraction for your firm to join the largest 100? For some, it’s the money. While there is no guarantee that you would automatically generate more income, that is certainly the popular view. Not only would you spread the burden of overhead, but also, presumably, your personal client book would grow. Ideally, your business would expand by cross-pollination of clients and diversification of services. And if you’re close to retirement, a merger could be your ticket to cashing out. EXPANDING CLIENT RELATIONSHIPS The most obvious financial benefit of a merger to your firm would be client sharing. The larger firm could use your services for their existing clients and, in turn, they would leverage your relationships to cross-sell services that you previously couldn’t provide. A small firm may find it difficult to provide a one-stop shop for all of a client’s needs, but as a new legal mega-store, you would be able to offer a wider range of services to an even greater number of “existing” customers, not to mention all of those potential new clients. That’s the theory. The problem is that your friend, the director of the tax department in that multinational pharmaceutical company that’s been sending you all of their IRA disputes, has never even met the corporate counsel who assigns all of the company’s intellectual property cases. There’s just no guarantee that your tax relationship will translate into patent work. Eric Fox of Washington, D.C.’s Ivins, Phillips & Barker, one of the few remaining independent tax-specialist firms, says, “To think that because we do the tax work, [a client] will ask us to do the SEC work doesn’t normally happen.” Jay Jaffe, president of Jaffe Associates, a global business development firm specializing in law firms, sees the relationship aspect of client management as the key to successful cross-selling. In order for it to work, he recommends taking a broader view of the client’s total relationship instead of focusing on a series of unconnected matters. “Relationship management may be easier for small firms,” Jaffe claims, “because the relationship isn’t as complex.” In fact, Frank Rothwell of D.C.’s Rothwell, Figg, Ernst & Manbeck attributes his strong client relationships to his firm’s size. “Small firms are dealing with smaller firms,” says Rothwell. He maintains that because of his small firm’s client mix, he is most often working with the president of the company, which he prefers, as opposed to the corporate counsel. In most cases, it is the president who will determine who gets the company’s outsourced business. So when considering a merger to increase your revenue through client sharing, be sure to evaluate the firm’s ability to manage client relationships effectively. If the firm hasn’t demonstrated the ability to expand its existing relationships, the financial gain you may expect from joining a “superstore” may not be as promising as you imagine. I recommend that you compare the financial benefits of merging with the benefits of remaining a boutique that truly is a “specialty” firm that can be marketed as such. SURVIVING THE UPS AND DOWNS There is no doubt that smaller law firms in niches that are susceptible to economic turmoil may have to tighten their purse strings if (and I really mean when) the economy slows. Yes, technology will pave the path to the future. In the here and now, though, the recent slowdown of sprouting dot-coms has left some small niche players feeling the pinch. Larger firms offering a variety of services to multiple sectors may have an easier time navigating their course through the rough weather of a recession. Firms that handle energy, food and drug, or tax practices in addition to technology have not suffered the slowdown that many of their boutique technology counterparts are experiencing today. If your niche practice is drying up because of the natural ebb and flow of the market, then a merger may provide an attractive alternate route to financial security. On the other hand, if your niche firm sees plenty of work on the horizon, becoming even more specialized is a viable option to merging with the big guys — and it may even be more profitable. Technology isn’t the only sector susceptible to national forces. For example, as some tax firms have noted, a national sales-based tax or a Steve Forbes-style flat tax would bring the business of many small tax firms to a screeching halt. While any countrywide fiscal change may alter the professional landscape, it is one more factor to consider when a larger, more diversified firm comes knocking on your door. CUTTING OVERHEAD Business Management 101 teaches us the draining effect of overhead. Life 101 teaches us that the less money you spend on activities that do not directly generate income, the larger your new sunroom can be. Of course, the overhead savings that are realized by a merger are greater for a seven-lawyer firm than for a 35-lawyer firm, but the fact remains that a direct financial benefit can be an inviting dish when served on the merger platter. But wait. You may not want to merge your practice just yet. The need for cost containment is becoming less critical, thanks to technology. Computers and sophisticated search tools have reduced the need to allocate costly space to law libraries filled with thick tomes, while online employee benefits programs and management have diminished the need for in-house human resource specialists. And let’s not forget the effect that voice-recognition software will soon have on your firm’s requirements for typists. CASHING OUT Here indeed is the most alluring carrot dangling in front of some merger candidates. Some small-firm equity partners are finding that they do not have successors in place to continue the firm’s legacy and, more practically, contribute to their annuities or severance benefits. A larger base of rainmakers, with a dominance of future leaders, seems as good a reason as any to consider merging. But be aware that younger partners who have been focusing on a future leadership role in your firm may not welcome a merger that drastically alters their hopes for the future. As firms get larger and vie for work from larger companies, conflicts of interest and the inherent liability that accompanies such conflicts will undoubtedly arise. Bob Dormer of Washington, D.C.’s Hyman, Phelps & McNamara exclaims, “We run into the conflicts enough on our own.” He and other IP partners worry that a merger might well disrupt relationships they have had for decades. Attorneys in other areas of law are far less concerned with conflicts. Fox’s tax practice at D.C.’s Ivins, Phillips & Barker rarely puts two clients against each other. Though he does sometimes have clients on two sides of a tax issue, most of his clients are sitting across the table from the IRS. Let’s face it. Many small firms take justifiable pride in their achievements and reputation. Most successful small firms become experts in their specialty and believe that “We’re the best at what we do.” While feelings of satisfaction and pride won’t buy you a view of the 10th green at Avenel, there is something to be said for the kinds of intangibles that improve your overall outlook. So if your firm is not among the well-known names on The Am Law 100or other lists of biggest or highest-grossing firms, you may in fact have the culture, lifestyle, and control you’ve always wanted. And keep in mind Frank Rothwell’s proverb: “If you need 100 horses to pull a wagon, maybe you should be in a large firm. I have yet to see a wagon that needs 100 horses.” Barry Glassman is a certified financial planner and first vice president with Cassaday & Co. in McLean. He specializes in assisting attorneys with individual financial planning and law firms with evaluating and implementing firmwide retirement plans. He can be reached at [email protected]

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