Tag Archives: mergers

Law Firm Mergers: Why and How?

In March this year, I wrote an article citing the large number of mergers in the Australian and New Zealand market. Some of these mergers were quite public but most flew under the radar – or out of the gaze of the legal media.

Reasons for mergers are many and varied and often go beyond the usual financial benefits of economies of scale. Common rationale for mergers are:

Financial Pressures or Opportunity

Law firm performance and profitability is trending upward for the first time in a long while, regardless of firm size. What makes this somewhat newsworthy is not the financial buoyancy of the profession but how these profits have been made. The market for legal services is enduring price sensitivity (which likely won’t abate for a long time), and growth in fees is limited. What is driving the improvement in profit is that firms are right-sizing and operating with leaner structures. It is this low-growth environment, where organic growth is difficult, which makes the proposition of a merger an attractive option for many firms.

On the positive side, firms with an expansion mindset see acquiring a firm or practice group as the fastest and cheapest way to grow their business. They will usually have a support structure that can accommodate – both physically and managerially – an additional practice or two, which provides economies of scale.

At the other end, an acquisition or merger can provide a firm with a circuit breaker for some of their managerial challenges or deadlocks. This could be anything – ranging from succession, to disparity in contribution, or a hollowing out of market share.

Succession

It is often the case that a smaller firm that has been successful over a number of decades has a relatively small number of partners of about the same age. They have worked together for years, and they realise it is this collegiality and camaraderie that has been the ‘secret sauce’ for their success. With retirement on the horizon (and their personal financial positions well looked after) the idea of starting again with a new set of partners is not that appealing.

I have seen this happen with a number of firms where the development of internal successors has not been effective, and in some cases is not desirable in order to keep the equity tightly held. These practices are usually very profitable with a solid and transferable client base. In these instances rolling the firm into a larger organisation is a win-win for both parties. The larger acquiring firm picks up a solid parcel of fees and, as it has the managerial structure and support functions in place, is able to achieve economies of scale.

The smaller firm that is being tucked in achieves longevity with clients and a home for the staff. Depending on how it is managed, this may also be a one-off opportunity for the partners in the smaller firm to realise the value of their balance sheet (predominantly work-in-progress and debtors).

Client Demand and Geographical Reach

Single-city firms with a national client base are often faced with pressure (real or imagined) to have a footprint that matches that of the client. Opening a Greenfield office in another city brings with it a lot of risk, such as convincing a partner or team to relocate. A merger may provide a ready-made solution as well as some benefits of economies of scale.

Making Your Firm More Attractive

With any merger, a range of cultural considerations and other issues need to be taken into account and would form part of any due diligence. Making your practice more attractive to potential purchasers relies heavily on the ease of transferability, or integration, of the practice.

A history of high performance is key. Firms where the merger is successful are ones that have been operating effectively for a long period of time and are not seeking the merger as the panacea for their operational shortcomings. To get your practice into shape consider the following checklist:

Actions to Improve Profitability

Leverage / Staffing

  • Delegate anything that more junior people can do
  • Implement a robust internal training program
  • All junior lawyers to be ‘allocated’ to a partner who meets with them daily or weekly to discuss their file load and performance
  • Support-staff-to-fee-earner ratio of less than 0.7

Price

  • Ensure rates in the upper 25% of what would be considered ‘market rates’
  • Discuss fees regularly with clients and train all fee earners about how to do this

Time utilisation

  • Minimum performance levels – recorded 5.5 per day (most firms would thrive if all solicitors billed 5.0 hours per day)
  • Hold people accountable to minimum acceptable performance
  • Daily review for juniors; weekly review for seniors
  • Look at hours leverage (number of chargeable hours per fee-earner for each hour generated by an equity principal) – it should be greater than headcount leverage. This step: 1) measures the effectiveness of delegation, and 2) requires management to be more focused on the fees generated by employees than the personal billings of equity principals

Actions to improve Cash Flow

Managing Work in Progress

  • Record all time
  • Set maximum file limits for each fee earner
  • Regularly monitor activity (and non-activity) on each file
  • Bill fortnightly
  • Hold quarterly client-free billing days

Managing Debtors

  • Discuss price in the initial interview. Be the first to raise the issue of fees. Draw matter trees
  • Bill clients the way they want to be billed – hourly rate, fixed fee, capped, etc.
  • Implement a ‘no surprises’ policy to ensure all clients are expecting an invoice and anticipate the amount of that invoice
  • Have the responsible fee earner phone delinquent clients after 30 days
  • Be open to payment plans

Client Management and Transition

  • Have a documented approach to seeking and receiving client feedback
  • Conduct end-of-matter reviews
  • Detailed client data base – ideally with a ranking
  • As many touch points between clients and firm as possible
  • With trusted repeat clients and referral sources, discuss your succession with them. They may be more willing to help than you imagined.

Discrepancies in gross fees and profitability between merger parties can be worked through to ensure the merger doesn’t fall apart. If you tick the boxes in the above checklist then you are putting your firm in a strong negotiating position for how things will operate post merger.

As I mentioned in March, the appetite for exploring opportunities is high. Almost everyone I call to discuss a merger or acquisition wants to find out more, so the fear of rejection (in the first instance) should be put to one side.

2018 – Australian and New Zealand Legal Profession Outlook

One of the benefits of writing an article at the end of the year is the opportunity to look over what has happened in the past 12 months and make some predictions of which trends will continue into the new year – hence the snappy title of this article.

2017 was a turnaround year in the Australian and New Zealand legal profession. Despite media predictions of doom and gloom, financially at least, most firms had their strongest year for a long time. There is no one-size-fits-all reason for this, but a number of factors are at play. On a macro level, the economies of both countries are improving, and on a micro basis, the tougher years have seen firms work hard on getting their personnel structure right, which has reduced unnecessary costs and the resultant fiscal drag.

Turning to 2018, these are my predictions regarding what the next 12 months will look like:

Improved profits

Good firms of all sizes will do well financially. Demand is increasing and so are the key drivers of profitability; namely, rates and hours.

In 2017 rack rates and realised rates for all categories of fee earner increased and the margin between rack rates and realised tightened. This was possibly helped by the ‘bigger bastard’ theory, where clients know (either through experience of osmosis) that other firms or a group of firms are charging a lot more. This applies to the total cost of matters, not just hourly rates

For the first time in about ten years, recorded hours have increased. I know mention of chargeable hours is anathema to many commentators, but it is still the predominant way of generating fees and is the best measure of utilisation within a firm.

With price and productivity increasing and a buoyant economy to operate in, 2018 should be a great year for good firms.

Personnel structure will continue to evolve

Leverage (the number of employed fee earners per equity principal) as a differentiator has almost disappeared. Clients are increasingly demanding senior lawyers do their work and they are prepared to pay for it. This coincides nicely with what senior lawyers want to do: after all, they trained to be lawyers not people managers.

I see the trend toward leaner teams continuing in 2018.  For practices which do the high-end complex legal work, these teams will be a cluster of experienced senior lawyers with very little leverage. For the more commoditised work, firms will make greater use of technology and contractors to ensure those people on the payroll are fully utilised. Gap-filling by contractors will reduce the need for firms to have a large ‘standing army’ to cope with the peaks in demand.

More merger activity

There is interest at both ends of the acquisition / merger spectrum to do a deal where possible. Firms with an expansion mindset see acquiring a firm or practice group as the fastest and cheapest way to grow their business. They will usually have a support structure that can accommodate – both physically and managerially – an additional practice or two which provides economies of scale.

At the other end, an acquisition or merger can provide a firm with a circuit breaker for some of their managerial challenges or deadlocks. This could be anything ranging from succession to disparity in contribution or a hollowing out of market share.

Cash payments for equity will become increasingly scarce

For firms of all size, a lockstep entry to equity is more common than dollars changing hands from the sale of equity between partners. Similarly a merger is more likely than a trade sale between firms. The opportunity for the partners in a firm being acquired is usually the likelihood of earning more in the merged entity, plus a one-off opportunity to realise the firm’s balance sheet.

Like most of the economy, sale of law firm equity is becoming a buyer’s market.

Genuine innovation remains on the horizon

Conferences will continue to be built around innovation, artificial intelligence and a general theme of ‘the machines are coming, so get on board now’. There is no doubt there is plenty of movement in this area but there are also limitations, least of which is widespread client acceptance. So the conference industry is safe for a few years yet.

As I write this in December, I am wishing you all the best for the Christmas break, and looking forward to what will be a prosperous 2018.

Managing and Growing a Law Firm: Part 2 of 3

In this series of three articles, I highlight the legal scene in Asia, the changes to the legal industry, and the different resources available to law firms for expansion. In my first article, I shared my thoughts about managing and growing a law firm. In Part 2 of this series, I share thoughts on the global legal industry and its challenges.

At a micro level, the estimated USD600 billion global legal industry is very much in transition, with many different disruptors entering the legal markets.

Major Challenges Faced by Law Firms

#1 Disruptors

In my view, the biggest challenge to the profession comes from disruptors offering quality alternative legal services, such as contract lawyers, at a reduced cost. To counter this, firms like Allen & Overy have set up alternative businesses such as Peerpoint, offering similar services to compete with these disruptors. There is also much evidence of this type of defensive strategy being adopted by other global firms to counter the threat of disruptors. To drive down costs and still provide quality services, some of the larger global firms are also moving some of their process-driven commoditised products to centres of excellence. Examples of firms taking this approach include Allen & Overy, Baker McKenzie and Herbert Smith Freehills, with significant paralegal bases in Belfast.

#2 Big Four accounting firms

The Big Four accounting firms also pose a major threat. Their core strategy is to complement their compliance and transactional businesses with a quality legal function. This multi-disciplinary offering creates a “one-stop shop” which is very attractive to clients. History tells us that when accountants attempted this strategy in the late 1990s, it failed. In my view, the reasons for that failure were that they were not fully committed to the strategy, and the world was less connected 20 years ago. I do believe that there is much more resolve now, and the accounting firms have much deeper pockets than they did in the 1990s. Furthermore, today – unlike the 1990s – we live in a global marketplace. With that said, I do not believe that the accountants’ core strategy in entering the legal space is to directly compete against quality global law firms. At least not yet! This initiative is being taken more to complement the existing core businesses of accountants, such as compliance (audit, tax, etc.) and transactional work (mergers and acquisitions, consulting tax structuring, etc.).

Banks and corporations are also repositioning themselves by creating sizeable in-house legal departments which focus on providing commoditised services internally at a lower cost. These services are the staple of many small- and medium-sized law firms, which are being slowly eroded. To put this threat in context, an internal legal department of 50 or 100 lawyers is, in effect, a medium-sized law firm.

Opportunities

While there are challenges, there are also opportunities. In a similar fashion to what the accounting industry went through in the 1980s, if and when regulations are relaxed over the next five to ten years I see more consolidation of law firms, more alliances, and continued global expansion – particularly into emerging markets, such as ASEAN, Africa, Latin America, and India. The traditional markets of USA, Europe, China, Japan will remain strong; however, I am of the view that these markets are over-lawyered and oversaturated and the competition for quality work and talent is fierce. Firms need to look at new markets to grow revenues. The one note of caution: Firms looking at a foray into emerging markets will require patience and deep pockets initially, as an acceptable return on investment from these markets will take time.

From a micro perspective, small and medium firms will have a part to play. Some firms may be experiencing a dip in revenues and profits, as much of the “commoditised” work that previously flowed to them from global firms or which clients found too expensive for large firms to discharge is now being captured by the disruptors in the industry – i.e., the alternative legal-services providers and, to an extent, in-house legal departments. The one sweet spot for firms in Asia and particularly south-east Asia would be to consider expansion into ASEAN markets and alliances with firms looking to enter these markets from the U.S., Europe and Australia. As a general rule, global firms are not as nimble and not always geared towards emerging markets; hence local firms are attractive to global firms looking to enter the ASEAN market.

Closing Thoughts on Countering The Challenges

It is my belief that many firms are still living in the past. They need to focus on the present and plan for the future. To survive and grow, these firms need to take a step back and take stock. In this fast-developing alternative-market environment, doing nothing is not an option, as profitability and even possibly survival is on the line for many firms. The first step is to perform a deep-dive review into their core businesses and determine if service lines are still profitable and if there still exists a decent pipeline of work. They should then strategically review what can be done internally and externally to capture more of the market, and consider an off-shore emerging markets strategy and / or a merger or alignment strategy with firms locally or internationally that is complementary to their core business.

The key to operating in today’s legal environment is to ensure a quality, value-based offering at all times, being nimble and innovative, and making an appropriate investment in experienced professionals to advise on, facilitate and drive this strategy.

Merger Fever in the Air

2018 is shaping up as the year of the merger. Somewhat understandably, the legal media only report the larger mergers and there have been three of them – one concluded and two announced – and as I write we are not even at the end of March.

Far greater numbers of smaller firms are entering into or examining some sort of merger. Over the past 12 months, I have been involved with a number of these mergers or sales, and this year I already have another two on my books. Some logical questions are:

  • What are the motivations for firms to seek mergers?
  • What is the reception of target merger partners?
  • What are the likely outcomes?

Motivations

Motivations for mergers will vary from firm to firm. On the positive side, firms with an expansion mindset see acquiring a firm or practice group as the fastest and cheapest way to grow their business. They will usually have a support structure that can accommodate – both physically and managerially – an additional practice or two, which provides economies of scale.

At the other end, an acquisition or merger can provide a firm with a circuit breaker for some of their managerial challengers or deadlocks. This could be anything – ranging from succession, to disparity in contribution, or a hollowing out of market share.

Those firms who see succession as a looming issue cite their lack of success in developing or retaining likely internal successors. The hope is that by joining with another practice, there will be a larger pool of talent that can service the clients as retirement of the partners looms, and that the newly merged firm (or one of the youngsters) will have the financial resources to purchase the equity of the retiring partners. There are a lot of moving parts in this scenario, and the likelihood of success is based on the idea that a larger merged firm will have the staffing and financial resources to effect an outcome.

The reception of targets

In my experience, all potential targets I approach are happy to talk. Nothing is lost from a discussion about what is possible, and humans are naturally curious – particularly if they think someone is interested in them. It is not that different from the school yard.

A meeting of the minds is the first step before any information is shared. The crucial question is ‘Do I want to be in business with this person’? More often than not the answer is ‘Yes’, or ‘I am not against being in business, as long as the deal stacks up’.

Likely outcomes

Assuming the threshold issue of cultural fit has been cleared, it then boils down to the financials. Many perfectly good mergers have floundered on the rocks once the due diligence is complete.

The right financial fit is important. I have been involved with a smaller firm that sought to be acquired by one of Australia’s national firms. There was a good fit in terms of complementary practice areas and experience of the partners. The deal fell apart because the smaller firm was profitable in its existing lean structure, but the modelling showed that when the gross fees were put into the structure of the larger firm, the profitability of the partners would be halved.

As attractive as the brand of the larger firm was to the smaller firm partners, the financial haircut was too much for them to swallow. Ultimately they ended up merging with a similarly-sized firm with an equally lean structure.

In most cases, discrepancies in profitability between merger parties will exist, but the merged entity should be able to deliver economies of scale (or cost savings by removing duplication), with the result that the financial might of the merged entity is greater than the sum of its parts.

There are of course many factors that need to be taken into consideration for a merger to be successful; a quick Internet search will provide you with any number of comprehensive due-diligence checklists if you don’t already have one. What I wanted to convey in this article is that the appetite for mergers – or at the very least exploring the opportunities – is high. Firms that are considering their options should explore the market without fear of rejection.

 

Law Firm Marriages

I’m spending time with many firms these days that seem to be really interested in “combining,” partnering up, or at least acquiring groups of great lateral partners. Apart from the conventional observation that these efforts to juice up growth “inorganically” often mask failed efforts to grow “organically” (i.e., acquiring new clients!), aspirations typically reflect some pretty undeveloped thinking about why another firm would want to combine with their firm.

Lawyers – that is to say, law firms – tend to be pretty narcissistic in their everyday thinking anyway. It’s not surprising that firms embarking on a “combination-quest” think only about what they are looking for in a target firm, and not the converse. Now that the commercial legal services market has changed more in the past ten years than it had in the previous 100 years, law firms in search of target firms or lateral groups need to re-think and freshen up their answer to the question, “Why should a law firm seriously consider combining with us?”

Firms capable of being a good fit have to see something in your firm they want and know they need. Don’t make it hard for them. Out of the gates, PLEASE express a genuine interest in their view of how they would like to – and, in fact, would – benefit from combining with the right firm. Conventional criteria still apply (geographic footprint, practice group mix, economics, etc.), but should be consulted within the “necessary but not sufficient” context. In today’s legal environment, other emerging screening criteria are starting to matter a lot more and inform the best decisions about courtship and ultimate marriage.

It’s the Music You’ll Make Tomorrow That Matters, Not the Music You’re Making Today

It is more important now than ever for serious firms to paint a detailed picture of where a combined enterprise is trying to go and how it is going to get there. The best “renderings” do a great job of isolating all of the gaps in the two firms today – both as independent firms and as combined firms. Bolting together two firms usually doesn’t instantaneously address these gaps. In short, it’s just as important to realize how far the combined firm will be from full potential as it is to realize what the ultimate potential looks like. You’ll be better positioned to sell a desirable firm on the opportunity you represent if you’re honest about the admitted difference between “desired state” and “present state.” Additionally, have a detailed plan – articulated with conviction – for addressing that gap over the next five to seven years.

They’re Buying Vision and Innovation as Much as Anything

You should put together a clear, detailed, and ambitious multi-year innovation agenda. The economy is active, and most law firms are chugging along at a solid economic clip; it’s very easy for firms to get complacent about their day-to-day operating performance and their future. However, if there’s one area in which many firms are exhibiting great self-awareness (and humility), it is relative to innovation. “Innovation-phobic” firms know when they’re not doing anything to help their clients experiment with new ways to consume, manage, and measure legal work. These firms feel exposed, and often can be very attracted to another combination firm that has come up with a thoughtful multi-year innovation agenda, and a roadmap to become that firm of tomorrow.

That Culture Thing

Everybody talks about culture and it connotes such a fuzzy measure of a firm’s composition – it’s easy to be cynical about whether culture matters at all. The truth is that for firms that are built for success today, culture is everything. Peter Drucker famously said that “culture eats strategy for breakfast!” The challenge of course is that culture means nothing if you can’t touch it, feel it, and define it. Law firms that are serious about finding the right combination partner firm should define all of the cultural attributes and features of their firm in objective, describable elements that can be measured.

Additionally, such firms must be able to identify what processes, structural incentives, managerial methods, and training regimes support and produce the objective elements that make up their firm’s culture. It’s one thing to say that we are collaborative, team-oriented, and care about the success of other partners; it’s quite another thing to point to a specific bonus structure and monitoring process that activates partners to, in fact, behave this way. At Edge, we use a tool called the Edge Cultural Assessment to develop an understanding of all objective elements of firm culture; with this tool, our understanding of culture is removed from the abstract and subjective and is translated into the measurable and concrete.

Write It Down

If you’re a true believer about why a target firm should be interested in combining with your firm, then you’ll need to articulate all of those reasons, linkages, and benefits with conviction. It’s hard to express conviction about your own combination criteria and process if you haven’t taken the time to write them down on paper for prospect firms to digest. Remember, both firms are potentially placing a very big bet on an unknowable future. The only insurance policy target firms have is your intentionality about the summit, and the mountain you’ll need to climb together. Bring them along – and, in so doing, seduce them – by expressing as much of your thinking on paper as possible.

“Law firm combinations” and “lateral partner recruitment” sound like easy ways to drive growth. However, seasoned law firm leaders know that it’s easy to make bad decisions, and very difficult to mature and execute good decisions in this realm. My advice is to know who you are well, do your homework, and sell the plans you’ve authored for future success so you can get credit for being intentional and ambitious. Don’t let your appreciation for the summit distract you from your respect for the mountain!

 

Mergers & Strategic Alliances – What Should Law Firms Expect out of Synergies in India? 

There is no doubt that law firm mergers are trending like never before. One may examine the reasons why. Is it a strategy to grow numbers in terms of turnover? Is it sending a message of larger technical expertise and bandwidth? Is it a part of strategy to outsmart competition? In this article, we talk about the driving force behind exploring options of mergers and strategic alliance by firms in India, and what law firms should expect out of synergizing.

Alliances have, historically, been one of the ways in which countries used to bond and come together to form a stouter force against other, rival countries. Following a somewhat similar approach, law firm mergers are being considered as a move that would make them stronger vis-à-vis other firms. The expectations are very simple – enhanced bandwidth, more partners contributing to the top line, addition to the array of practice areas offered to clients and advantages of established brands. We will examine these factors one by one.

One of the primary factors that encourage law firms to merge is the addition to practice areas that the firm would be able to offer to its clients as a result of merging with another firm of diverse practice areas. Also, between firms of similar practice areas, mergers are a prudent strategy to let the merged firm become known as a ‘stalwart’ in a boutique practice area. This is an especially growing trend in recent times owing to increased interest by clients in specialized or boutique law firms.

Another major factor drawing law firms to look for mergers is the advantages associated with an established brand. This is largely applicable for law firms with a smaller practice, looking to merge with a law firm with a larger practice. Subject to working out modalities with respect to name change (most likely, smaller firms drop their name or get their name in the subsequent order in a joint name), smaller firms tend to gain advantages from the robust client base and well-known brand of the larger law firm.

In larger countries like India, especially the ones that are diverse in terms of geographical expanse and language, customs, religions and local practices, law firm mergers are a popular way to make inroads to far-off locations. In order to be the ‘Go-To’ firm for their clients across all locations, law firms try to open offices in different cities, covering the entire landscape of the country. Now it may not always be possible for a firm to establish an office from scratch and invest capital in building an infrastructure and office. In such cases, law firms explore the options of entering into synergy with a firm/lawyer based out of particular location by various means – say by way of merger, brand merger or referral relationships. The aim is to enhance the service offerings from a particular geographical location with least investment in terms of time and capital to set up a practice.

Another trend that has been noticed in the recent past is the ‘Panic Button Merger’. There are times when the key stakeholders, say managing or founding partners, either lose interest in running the firm, or understand the limitation in their capability to take the firm to the next level of growth. In such a state, the merger comes to them as an option to overcome the panic-struck state and reform the firm under the expert hand of a firm that has been running more efficiently or under a more efficient leadership.

What to Expect from A Merger

Now that we have examined some of the factors that drive law firms to synergize and form alliances, we should also understand what the firms should truly expect from a synergy. The factors driving the need for synergies are like swimming on the surface. One needs to dive deeper and understand what lies beneath the synergy. Are the firms merging only to create a statement within the fraternity? Or is there a better offering to the clients? Is there a true acceptance of best practices from the synergy? Are the firms being one-up in terms of technical competency? These are some of the questions both of the synergizing entities should consider.

By merely opening an office in another city, the clients are not obliged to direct their mandates to the firm. They will obviously need to be convinced that there is a technically sound lawyer to advise them on the most correct legal course of action. Hence, the firm must look to merge with another firm or lawyers after being convinced of their technical expertise, talent, experience, legal acumen and quality of work done in the past. Due weightage must be given to the benefit in terms of talent that will be on-boarded with a synergy.

Considering that synergies are once-in-a-lifetime kind of events in the life of a law firm, the approach to exploring a synergy cannot be treated like a formality or ticking off a bucket list of desired advantages. It is definitely a serious exercise that calls for all the parties to contribute to the planning and examine all the strengths that can be synergized to raise the service offerings to the client. It calls for imbibing best practices followed by the other party without any ego and hitch of dilution of power. One cannot be driven by short-term advantages like gaining from a better brand or larger share of profits, etc. There are deeper concerns that should not be overlooked by the merging firms. Activities like culture test, practice planning, financial budgeting, marketing strategy etc. are too often ignored. After the merger, their effects are far-reaching, and sometimes irreversible.

To sum up, a truly synergized entity is one that is integrated in its aim, and its approach to achieve that aim to serve nothing but the best to the clients. Law firms should look for synergies with a view to creating better service avenues for clients and to get on board a team of quality professionals. The merging parties should be like-minded in their vision to build an entity that is managed efficiently, that swears by best professional and managerial practices, that offers its services at competitive prices, and that aspires to be a ‘one-stop shop’ for all legal requirements of their clients, serviced by a team of best legal professionals.

Due Diligence: What to look for under the hood

3 under hoodIn recent months I have been working with a number of firms going through the process of either merging firms or involved in a sale and purchase. That this activity has increased in recent years should not be a surprise as the ability for firms to grow organically to achieve economies of scale or fill excess capacity – be it office space or management structure – is far from certain. Many firms have weathered a turbulent couple of years and are at the point where they need to do something substantial, as chipping away at the edges has not yielded the desired results.

Purchase price or merger terms in a Heads of Agreement are usually relatively straightforward. Fortunately most firms have a realistic assessment of what they bring to the table and what they would be prepared to pay if they were purchasing their business. The biggest risk is that the parcel of fees in the acquired or merging firm are retained. This risk can be mitigated by the terms of the deal having sufficiently motivating financial handcuffs to retain partners for a period and encourage them to tend their client base appropriately.

What is often a little haphazard is the due-diligence process. Given that in all mergers or acquisitions the partners from the acquired firm will be coming across (I am yet to see a deal where the incumbent partners are not integral to getting the deal across the line), it is essential that both parties conduct their own due diligence as opposed to one party sitting meekly on the sidelines providing the information requested by the other party.

The following is a due-diligence checklist that I recommend all parties use as a starting point. You may well have more to add, but this would be my base level of what should be covered. Some of it can be done via meetings and some by reviewing documentation.

Areas to be reviewed
Information required
Strategic Considerations
• Capital expenditure – past 5 years and planned future expenditure
• Planned future acquisitions
• Business plan
• Meeting to discuss capital expenditure and planned future acquisitions
• Business Plan
Partnership
• Demographics of partnership
• Entry and exit of partners
• Performance management of partners
• Voting rights of partners
• Current partnership agreement
• Age, practice area, date joined firm of all equity and salaried partners
• Equity share of all equity partners
• Pathway to full equity partnership – admission criteria and process
• Partner performance criteria
• Partner drawings – past 2 financial years
• Management roles of partners
Financial considerations
• History of consistent earnings
• Inter-company transactions
• Extraordinary (or non-recurring) expenditure and income
• External funding
• External funding
• External funding
• Financial modeling - Profitability of merged entity
• Financial accounts for the past 2 years
• Cashflow – past 2 financial years and current year budgeted
• Terms and security for all loans, borrowings, and debt
• Taxation Depreciation Schedules for the past three financial years
• Monthly WIP and debtor balances by practice group for past 2 years
• Aged WIP, debtors and creditors list – current month
Management / Other
• Management structure – current and post merger
• Role of the board in running the business
• Committees of the board– eg: compensation
• Premises
• Professional indemnity claims
• Management organization chart
• Role of individuals in management – job description and experience
• Plan for integration (if required) of new firm management personnel
• Meeting and documentation to address questions on the operation of the board
• Lease details for all premises
• Details of any outstanding PI claims
Performance management
• Assessment of practice areas
• Structure of practice groups
• Integration of practice groups
• Income by practice area and office for past 2 years
• Originator reports – fees by responsible partner
• Organization chart for each practice group
• Hours, rates, write-offs by practice area – past 2 years
Expense allocation to practice areas
Personnel
• Work plans / budgets / performance criteria for fee earners
• Total FTE personnel by office – fee earners and non fee earners
• Restraints for all key personnel
• Internal and external training curriculum
• Details of bonus or incentive plans and who is covered
• Staff satisfaction surveys or exit interviews
Client base
• Spread of clients – fees generated by top 25 and 26 – 50
• Panels
• Client by rank for past 3 years
• Details of all panels – duration, other firms, fees from panel clients, rates, relationship partner(s)
• Departmental marketing plans
IT capability
• Ease of integration of practice management systems, databases, other IT
• New systems installed – past year
• Proposed new systems
• List of all IT systems used
• Lease commitments for all IT – amount, duration
• Meeting to address IT issues

Good luck!

Bigger vs Better: Should your firm merge?

First, see if it can answer “yes” to one essential question.

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So law firm mergers are back in the news again, to the continued fascination of the legal press. For every combination that’s completed and announced, you can count on several others bubbling under in conversations within executive committees and at luncheon gatherings of senior partners, so there likely will be more such deals announced throughout the balance of the year.

It’s not clear that “mergers” are the best word to describe many of these transactions. Some of them involve global behemoths swallowing up comparatively modest firms in desired regions, resembling not so much a business deal as an annexation of territory. Others are billed as marriages of equals, but with so many of these merged firms maintaining their own profit pools, they seem like marriages where the spouses have no joint bank account and keep separate residences.

The common thread among all these deals, however, is that the merging firms go to great lengths to publicize the impressive size of the new entity, the huge number of lawyers, offices, and jurisdictions it will boast. It’s the kind of tactic you could understand if, say, two ice-cream dealers merged and could now deliver 70 flavours in one location, rather than 30 and 40 in separate stores as before. More volume and greater selection are obvious customer benefits in that kind of market.

It’s more difficult to make out clear customer benefits from law firm mergers. There’s an unspoken assumption that more lawyers in more offices in more locations is self-evidently a good thing, a competitive advantage and a client service. And maybe there are tactical benefits to be gained, especially around marketing strength, talent acquisition, and the like.

Yet I can count on the fingers of no hands the number of corporate clients I’ve overheard wishing their law firms were bigger and farther-flung. To the contrary, many clients greet news of a merger with a certain exasperation, having to turn their minds to identifying and resolving potential conflicts, or to awaiting the inevitable rate increases from the new entity.

Any law firm that’s considering a merger or acquisition should ask itself one question — the same question, really, that it should raise whenever any foundational or strategic decision is in play: “Would this make our firm more effective?” It’s a powerful question, because it forces the firm to focus its attention on its fundamental business purpose.

The point of any business is to serve its customers. For a law firm, that translates into helping clients in its chosen markets achieve their goals by addressing their legal challenges and opportunities. A law firm should be considered successful only to the extent it helps clients achieve their law-related objectives. Would a merger allow the firm to accomplish this mission more effectively? And if so, how?

Effectiveness, remember, is defined from the perspective of the client, not the firm. Clients consider a firm effective if it anticipates and meets their legal needs in the context of their business realities, demonstrates real commitment to procedural improvements that increase quality while reducing cost, provides reliability and competitiveness around pricing, and keeps lines of communication buzzing and productive. Mergers, by themselves, aren’t going to move the needle very far on any of those criteria.

Mergers might very well deliver competitive advantages, although I’d love to see a study that contrasted those advantages with the costs of merger, which are manifold and substantial. But potential mergers ought to be scrutinized primarily with specific reference to how they will enhance the firm’s effectiveness in its chosen markets, rather than with vague assurances that “global clients want one-stop shopping.”

Size alone is no longer a significant differentiator for law firms. Increased profitability does not correlate strongly with increased size, nor does talent retention, realization rates, client satisfaction, or a host of other measurable criteria with which firms should be closely concerned. There is little evidence that becoming bigger means your firm becomes better. If you’re unsure about this, feel free to call up a few key clients and ask them what they think about your merger plans. Their responses should be illuminating.