As firms in the legal midmarket pick their teams to face ever greater competition, more and more of them are opting to recruit the little guys.
Midsize law firms are absorbing small and solo practices, and the activity is not expected to stop soon. For the small firms, a larger suitor can bring at least some relief from the pressures of increasing costs and competition and decreasing demand industrywide. For the midsize firms, it’s a chance to increase market share or enter a new location with fewer challenges than a group lateral hire.
Pennsylvania and nearby legal markets have seen a number of examples recently.
Philadelphia-based Weber Gallagher Simpson Stapleton Fires & Newby opened a new office in New Castle, Delaware, last month by bringing on a solo attorney and his staff. Dilworth Paxson, also based in Philadelphia, acquired New Jersey’s Smith, Stratton, Wise, Heher & Brennan, which had 10 lawyers, staff and office space in three cities.
As of last week, Offit Kurman, which was founded in Baltimore and has a significant presence in Philadelphia, had acquired most of what remained of New York-based Eaton & Van Winkle, including 16 lawyers.
And late last year, two Pittsburgh-area small firms announced they would be absorbed. Fox Rothschild acquired Schneck & Harley Immigration Law Group, a two-lawyer immigration practice. And Houston Harbaugh merged with business litigation boutique Picadio Sneath Miller & Norton, effective Jan. 1.
Small firms abound in rural parts of the country, including in Pennsylvania, noted Tom Clay of Altman Weil, a legal business consultancy. But as the cities of Pittsburgh and Philadelphia grow, the areas surrounding them are becoming more urban as well, making it a difficult market for small law firms.
That’s when getting acquired by a larger firm becomes attractive, Clay said.
At the same time, small firms are running up against capital issues and technology expenses, he said.
“A lot of those firms were started by baby boomers who came out on their own and started a firm,” Clay said. “A lot of them are saying there’s no one behind me. … Or the younger people are saying it’s a different world, we need to be a larger firm.”
And that creates opportunities for midsize shops that are looking to differentiate themselves by strengthening key practices and building legal niche through acquisitions.
“I can’t tell you how many firms I’ve worked with throughout the country who really should merge,” said Boston-area consultant Jeff Coburn, who works with midsize law firms. “There’s a ton of firms that are in between five or 15 lawyers that are really good firms.”
The Due Diligence
It’s easier to absorb a small firm than to laterally hire a group of similar size, consultants said. Making a series of lateral hires through a recruiter gets expensive, Coburn said, but acquiring a small firm can bring in more lawyers, and their clients, at a lower cost.
Lateral hires are likely to experience a dip in revenue just after they move. But a small firm comes with its accounts receivable and work in progress, Clay said.
“If you do your due diligence, they’re going to pay for themselves from the get-go,” Clay said.
But taking advantage of those opportunities takes some effort, Clay said. Midsize firms that want to capitalize on absorbing smaller counterparts need to do some digging, he said, and figure out which small firms are representing clients in their same target market. That doesn’t necessarily require a headhunter, he said, but could be handled by a research paralegal or other firm staff.
“You need to figure out every law firm of between two and 15 lawyers that’s in your circle of where you want to look … and figure out who’s doing what, then do a demography chart,” Clay said. “A lot of law firms don’t want to take the time to do it, but that’s how you figure out where the business is, then go acquire the firm.”
It’s important that the larger firm is selective, Coburn said, and seeks an acquisition target that has a clear business structure. The firm to be absorbed, while smaller, should have a cohesive practice mix and culture.
“Some of these small firms literally are not firms. They’re individuals strung together by telephone wire,” Coburn said. “Firms that are really entities, where they have structure and they have rules of the game … those are real firms.”
From there, the hopeful acquirer will still have to woo the smaller firm with its own culture and strategy, Coburn said. Despite the challenges they face, small firms worth acquiring will be selective about joining a larger firm as well.
Acquisitive midsize firms “have to tell their story, and that’s not easy for a 50-lawyer firm,” Coburn said. “What’s unique about you? What are you going to tell someone from a 10-lawyer firm to get them to say ‘that’s interesting.’”