I am a sole owner of four attorney, including myself, boutique litigation law firm in Chicago. I am fifty-two and looking for a long-term succession strategy for my firm. I have been approached by a large Chicago national firm involving merging my practice with their firm. We have had several meetings and they have provided me with an initial proposal. I have spent many years building my law firm, and, by merging with a large law firm it seems that I am not really receiving any value for goodwill. What are your thoughts?
It is normal to exchange equity in your firm for equity in a large firm and not receive any cash consideration in those situations where equity partnership is being offered. Some large firms have a goodwill factor which is included in the value of each capital share or unit. The payment of the goodwill factor is usually waived in a merger. However, if you are considering merging with a large law firm and you will not be receiving any cash consideration for your practice, you should give serious consideration to why you are merging. In other words, why work for 20 years and receive nothing for the goodwill or for the value of the client list and the development of excellent personnel? Perhaps you could be included in the firm’s retirement plan, which could be considered a payment for goodwill. Another approach might be for you to receive a certain percentage from your clients and referral source fee collections for say three years after you retire. Receiving cash consideration for goodwill in a merger occurs more often in mergers with smaller firms.
Bear in mind that in many mergers where small firms merger with large firms equity partnership is not being offered and non-equity partnership is being offered instead.
With all of this said there could be other considerations that could result from a merger with a large national law firm such as greater compensation, professional recognition, peer mentoring, size and type of cases, staff and other resources, etc. that could outweigh a cash consideration for goodwill.
John W. Olmstead, MBA, Ph.D, CMC
I am a partner in a small law firm in Northern Virginia. We are a four attorney firm with two equity partners and two associates. We are interested in acquiring a solo practitioner’s practice that is 60 years old and ready to retire. What are the issues that we should be concerned with before we spend a great deal of time on this matter?
I understand your concern and reason for asking for my thoughts. You must immediately determine the nature of the clientele that you would be acquiring and whether the seller is interested in remaining with the firm for a period of at least one year so your firm can become acclimated to the new clients. If the firm’s clientele are older, what would be the reaction if they were represented by younger attorneys? People chemistry is very important. It has often been said that clients hire the lawyer and not the firm. While this is not totally true – there is some truth in this statement. A successful client transition and retention is crucial.
If the sole practitioner is interested in selling out and leaving the area, then you may consider proceeding with the transaction with payments which would be based upon subsequent collections during a period of years after the acquisition. In other words, the more the seller participates during the first year to retain certain clients, the more the set we would receive.
The worst scenario is if the seller dies unexpectedly after signing the agreement. This recently happened one of our clients, and they had to spend a great deal of time and effort trying to retain clients that they had never had contact with.
You must also review the financial records to determine the profitability of the practice. Many sole practitioners do not keep adequate time records, don’t have automated practice management systems, and are not paperless. What is the shape of their client files and how well are they organized? Certain data is stored in their heads. In many cases, the hourly rates are low and could be raised during the first year to make the practice more profitable. However, this increase must be one that will be accepted by the client. The next question would be whether family members are involved in the practice, if they are, there may be problems in the future. The clients know the family, and if there are any remaining family members working in the firm, they may leave the your firm empty-handed. For example, if a paralegal who is a family member leaves the firm after the merger is consummated, several clients could follow the paralegal to their new place of employment. In such situations I have had client law firms that have had such persons execute non-compete agreements. In one situation the deal was aborted by the acquiring firm due to the paralegal not willing to sign a non-compete agreement. This was a situation where the paralegal in the firm actually had the client contact relationship. The owner’s contact with the client was limited. The paralegal had the relationship.
Finally, there should be other safety valves for the purchaser in acquisition of this nature. On a positive note, the situation could present a fine opportunity for growth. Just ensure that the buy sell and other legal agreements provide the appropriate safeguards.
The above issues such as non-compete and practice sale agreements should be addressed with your business attorney.
John W. Olmstead, MBA, Ph.D, CMC