Law Practice Management Asked and Answered Blog

Category: Mergers

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Mar 12, 2015


Law Firm Merger Preliminaries

Question:

Our firm is a 17 attorney firm in Dayton, Ohio. Several of our founding partners are retiring and we have been contemplating exploring a merger with another law firm but are not sure where to start. I would appreciate your ideas.

Response:

Start by determining your merger objectives. Why do you want to merge? What do you hope to achieve? Is merger compatible with your strategic plan? What size of firm are you considering?

Once you are sure that merger exploration – in general – makes sense – you should insure that your house is in order. In other words – can anything be done to enhance the value and/or marketability of your firm? For example:

  1. Do you have a business or strategic plan? If not – how will you convince a potential merger partner that you have a plan for the future and know where you are going? Maybe now is a good time to work on that plan. 
  2. Work on and clean up your financials. Improve the financial performance of your practice. Eliminate deadwood. Write-off uncollectable A/R and WIP. 
  3. Avoid entering into long term commitments that might make your firm undesirable to another firm. (new long term leases, risky client matters/cases, loans, admission of new partners, unfunded partner buyouts/retirements, etc. 
  4. Enhance firm image where you can. 
  5. Develop a first class firm profile.

Next, develop a merger marketing plan and begin working the plan. Try to generate enough leads that you can explore merger with several firms rather than engaging in "random merger talks" which often result in isolated merger offers with you having no framework for comparison.

Use an outside consulting firm if you need help organizing, identifying candidates, and managing the process.

Once you have merger candidates identified – the real work begins.

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John W. Olmstead, MBA, Ph.D, CMC

 

May 27, 2014


Law Firm Merger – Merger of a Solo with a Two Attorney Firm

Question:

I am a solo in Bloomington, Illinois. I have just completed my third year in solo practice. I have one full time secretary, a paralegal, and I office share with a group of attorneys. My overload is low and my margin is 61%. I have been approached by a two attorney (2 partners) firm regarding merging with their firm. One of the partners is relatively new (joined the firm 3 years ago) and the other is the firm founder and is planning on retiring in the next year. On average the other firm's revenue per attorney and partner earnings is on par or even less than mine. Their overhead is much higher. The two partners have been operating on a handshake with no succession/transition plan for the senior partner and no understanding of retirement financial arrangements (buy-out). While I have some concerns and fears about merging I believe that merger would provide me access to mentoring, additional resources and staff, and ability to improve my competencies and handle larger more complex cases. I would appreciate your thoughts.

Response:

I would be concerned that you have been approached to help with the buy-out of the senior partner. In essence this may be a large unfunded liability that you and the other partner will be saddled with for a number of years. It sounds like, based upon past performance of the other firm, that if there is a substantial buy-out of the senior partner you could end up making less for several years. Other than your rent there will be marginal cost savings as a result of the merger. Improvement in your earnings will be dependent whether you and the other partner can in fact generate larger cases, larger revenues, and increased leverage. 

If I were you I would ask the firm to work out the details concerning the senior partner's retirement as to timeline, the mechanics, the cost/funding of the buy-out, and put same in writing. Once this is accomplished factor this into the rest of your due diligence and analysis.

If the firm is unable to get their arms around the retirement of the senior partner issue I would stay clear.

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John W. Olmstead, MBA, Ph.D, CMC

 

Feb 18, 2014


Law Firm Merger – Should We Merge

Question:

Our firm is a 16 attorney insurance defense firm in Central Illinois. We have 8 partners and 8 associates. We are in second generation, have inherited our existing clients from the original founders, and currently have no rainmakers. We need to bring some rainmakers into our partner ranks and have been discussing the possibility of merger. I would appreciate your thoughts.

Response:

While mergers can be a valid option making them work is often another matter. Research indicates that one third to one half of all mergers fail to meet expectations due to cultural misalignment and personnel problems. Don't try to use a merger or acquisition as a life raft, for the wrong reasons and as your sole strategy. Successful mergers are based upon a sound integrated business strategy that creates synergy and a combined firm that produces greater client value than either firm can produced alone.

There can be a whole list of reasons for failure including poor financial performance, attorney defections, loss of key clients, and leadership and management issues. However, it has been our experience that most failures have been the result of poor cultural fit. The merging firms – after they have moved past conflict checks and excitement about new client potential – jump immediately to an examination of practice economics and the financials. They fail to perform proper due diligence on the people. It is critical that firms insure that cultural due diligence is a key component of the merger assessment process. Philosophies, personalities, and life styles should be generally compatible. The partners should like each other and the deal should make sense.

The question is not the what (merge) but the who (people).

I would suggest that you consider a lateral strategy as well as a merger strategy and let the WHO and right fit direct your thought process. Also insure that you have fully explored whether you have really developed the business development potential of the partners you have now.

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John W. Olmstead, MBA, Ph.D, CMC

 

Aug 06, 2013


Are We a Suitable Candidate for a Traditional Law Firm Merger?

Question:

Our firm is a 22 attorney firm located in Pittsburgh. While we represent both individuals and businesses our focus is on small business representation. During the past few years we have come upon hard times. We have lost several partners and a couple of business clients and we have a few partners coming up for retirement over the next few years. Several of our senior partners have suggested that we might be a merger candidate for a large law firm. What are your thoughts?

Response:

Don't count on a larger law firm coming to your rescue unless:

  1. You have a practice that is strategically important to the larger firm (all practice areas).
  2. You have an exceptional bench of superior lawyer talent with mixed age spread.
  3. Your firm has had exceptional financial performance and on a par with the larger firm.
  4. Your billing rates, methods, and practices are on a par with the larger firm.
  5. Your partner earnings are on a par with the larger firm.

Unless the above ingredients are in place the firm may not be a suitable candidate for merger or it might find that the larger firm cherry picks some of the key partners off one by one.

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John W. Olmstead, MBA, Ph.D, CMC

 

May 21, 2013


Law Firm Mergers: The Importance of a Timeline and Project Plan

Question:

Our firm is a 4 attorney firm in Columbus, Ohio. Three of our partners are in their 60s and contemplating their exit strategies. We have a very profitable high profile practice and have been approached by a couple of very large firms concerning possible merger. We believe that this would be our best exit strategy. What mistakes have you seen other firms similar to ours make that we should avoid?

Response:

Mistakes can run the  gambit – from choosing the wrong marriage partner – to getting into a deal that does not make business sense. A common problem that I have sees is the lack of a timeline and project plan resulting in project drift and lost time. I just got involved with a small firm that had been working with the managing partner and a small team from a much larger firm. After a few months of  financial and other document exchange, informal gatherings, etc., these individuals advised the partners in the small firm that they believed all looked good and led the partners in the small firm to believe that a deal with eminent. However, after one year had passed the small team in the larger firm presented the matter to the full partnership for a vote on the merger and the partnership voted against the merger.

Lessons Learned

  1. Don't assume that the managing partner or a small merger committee or team in a larger firm speaks for the firm or has the authority to approve a merger. Merger with another firm or extending partnership are usually decisions restricted to partnership vote in most firms.
  2. The partnership dynamics in larger firms will always be a variable and in larger firms a great deal of time is often required for this to play out.
  3. It is critical that you establish your timeline (goal date) and let it be known to the other firms that you are speaking with. Let them know that you are talking with other firms that will have to have a decision by a date certain.
  4. Outline a step-by-step task or project plan based on the goal date to focus your efforts, keep you on target, and reduce project drift.

Don't invest a year with only one firm only to find out that they are not interested.

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John W. Olmstead, MBA, Ph.D, CMC

 

Apr 02, 2013


Law Firm Merger – Where to Start When Merging/Acquiring a Smaller Firm

Question:

Our firm is a 26 attorney firm in Louisville, Kentucky. We are considering merging/acquiring a 12 attorney firm in the local area. This is virgin territory for us as we have not done this before. We would be interested in your thoughts as to where we should start and the process we should use to minimize the risk of making a mistake.

Response:

While mergers can be a valid option making them work is often another matter. Research indicates that one third to one half of all mergers fail to meet expectations due to cultural misalignment and personnel problems. Don’t try to use a merger or acquisition as a life raft, for the wrong reasons and as your sole strategy. Successful mergers are based upon a sound integrated business strategy that creates synergy and a combined firm that produces greater client value than either firm can produced alone.

There can be a whole list of reasons for failure including poor financial performance, attorney defections, loss of key clients, and leadership and management issues. However, it has been our experience that most failures have been the result of poor cultural fit. The merging firms – after they have moved past conflict checks and excitement about new client potential – jump immediately to an examination of practice economics and the financials. They fail to perform proper due diligence on the people. It is critical that firms insure that cultural due diligence is a key component of the merger assessment process. Philosophies, personalities, and life styles should be generally compatible. The partners should like each other and the deal should make sense.

The question is not the what (merge) but the who (people)

You should do all the due diligence that you can – start with the people – then move through the rest of the process.

Click here for our blog on mergers

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John W. Olmstead, MBA, Ph.D, CMC

Jun 13, 2012


Law Firm Merger – Challenges Implementing a Small Firm Merger

Question:  Three years ago our firm merged. The merger involved three solo attorneys and their staff merging into one firm. Now the firm consists of three partners and six staff members – a firm of nine people.  While the firm is doing well financially and we are on a growth track we are having issues involving conflict among the partners and staff. In some ways we are still operating as three law firms. Staff are not working well together and they refer to old firm and new firm. They are resistant to change and they have created personal fiefdoms. We merged to create one firm – not three – but we fear that we are still functioning as three law firms. Do you have any suggestions?

Response:

The people issue is often the major hurdle that law firms face when implementing a merger. In your situation you are now a firm of three lawyers and six staff members – nine people – a firm three times the size of the individual firms. You are now a law firm – not solo practitioners – and you must adjust you management and communication styles accordingly. Partners must begin to think in terms of firm-first rather than their individual practices or me-first. Roles need to be spelled out for the partners regarding management and leadership of the firm (structure and management plan). Roles and performance expectations should also be spelled out for the staff as well. While conflict can result from personality clashes and having the wrong people on the bus – often conflict results from unclear roles and expectations and poor communications. Fix these issues and you often will reduce the conflict. If you are not having frequently scheduled team meetings I suggest that you start having them. This will do a lot to improve communications.

You must also review your work processes and practices and consolidate as much as possible into a set of firm – rather than three firm's sets – of policies and procedures and everyone should conform to these rather than the practices of the past.

Consider:

  1. Partners sitting down, discussing whether they want a firm-first v.s. a me-first firm and what they need to do to set the tone – the example – for the firm.
  2. Partners clarifying how they want to manage and lead the firm – specific roles and responsibilities for management, etc.
  3. Job descriptions outlying roles and expectations for staff.
  4. Annual performance reviews for staff. Working together and teamwork should be one of the measures.
  5. Monthly team meetings with an agenda and minutes taken.

If the conflict is due to personality or behavioral issues – confront the behavior and if necessary put the individual off the bus.

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John W. Olmstead, MBA, Ph.D, CMC

 

Apr 18, 2012


Law Firm Succession: Using Affiliation As a Phase I Pilot Test

Question:

I am sole owner of a law firm in Chicago with an elder law practice. I have two paralegals and two legal assistants. Although I want to continue to practice as long as I can I am in my late 60s and am beginning to think about what to do with my practice. I have recently had several discussions with another sole owner that is interested in buying my practice. Since I want to practice as long as I can I am concerned about the timing of selling my practice due to the current ethical rules. I also want to insure that the other firm would be the right fit for my clients and staff. Do you have any thoughts or suggestions?

Response:

Making the right decision concerning the "Who" is usually more important than the "What" or the "How". Take your time to do the proper due diligence regarding the other firm. Get to know the owner as well as the employees of the other firm. Ascertain practice, client, and cultural compatibility. If you both determine that a a deal might make sense – then move to the "How". Even though you have done the best due diligence you can – you won't really know about the other firm until you try working together. So before you jump – consider taking a few baby steps first. You might start with an affiliation arrangement (Of Counsel) as a Phase I pilot test for six months. Under this arrangement you can both refer work to each other as well as have the other attorney work on some of your client matters at your office. Outline the details of the relationship in an affiliation (Of Counsel) agreement. After six months review the success of the arrangement and whether it makes sense to take the next step. If it does – a Phase II step might be to enter into a more formal practice continuation/transition arrangement with the other firm. Phase III would be either the eventual sale of your practice or merger with the other firm. Taking a phased approach allows you learn more about the other firm which will increase your odds of a successful transition and buys you time before actually selling your practice if that is the direction you should go.

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John W. Olmstead, MBA, Ph.D, CMC

Nov 16, 2011


Contemplating Merging with Another Law Firm

 

Question:

We are a 15 attorney estate planning firm just outside of New York City. Ten years ago we had 37 lawyers in the firm. We have had several defections due to internal management problems pertaining to structure and compensation. We have operated more as a group of solo practitioners than as a true law firm. Recently we have considered the option of merging with a larger firm. What are your thought regarding the pros and cons of doing this?

Response:

Research indicates that 1/3 to 1/2 of all mergers fail to meet expectations due to cultural misalignment and personnel problems. Don't try to use a merger or acquisition as a life raft, for the wrong reasons and as your sole strategy. Successful mergers are based upon a sound integrated business strategy that creates synergy and a combined firm that produces greater client value than either firm can produced alone. Right reasons for merging might include:

a. Improve the firm's competitive position. .Increase specialization – obtain additional expertise.
b. Expand into other geographic regions.
c. Add new practice areas.
d. Increase or decrease client base.
e. Improve and/or solidify client relationships.

I would start by thinking about your reasons for wanting to merge and your objectives. Ask yourself the following questions?

a. Do you want to practice in a large firm? If not, what is the largest firm that you would want to practice in?
b. What is driving the desire to merge?
c. If the desire to merge is being driven by a desire to retreat from internal problems – what have you done to address these issues internally?
d. Is your name being part of the firm  name important to you?
e. What are your expectations and objectives for a merger?
f. What are you  looking from a merger partner?
 g. Make sure that you look for a complimentary fit. If you are weak in firm leadership, management and administration – look for a firm that is strong in these areas. Strong leadership, management, and administration may be hard to find in a firm under 25 attorneys.

Click here for our blog on mergers

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John W. Olmstead, MBA, Ph.D, CMC

Sep 27, 2011


Law Firm Upstream Mergers/Acquisition – Merging With a Larger Firm

Question:

Our firm is a three partner general practice firm in a small community. Our ages are 72, 68, and 64 respectively.  Our firm has not adequately prepared for succession/exit of the partners. We have over the years hired associates but have been unable to keep them – they have all left for greener pastures. We are now contemplating merger with a much larger firm that has 40 plus attorneys. We have had several meetings at the office and we have provided them with our financials. They have not provided us with detailed information. We are getting frustrated. It has been over four months since we began talking with this firm and we seem to be "stuck" and not maintaining momentum. We have other options that we have just begun exploring. How can we get "unstuck" and move this process along?

Response:

Right off the bat – admit that this is not a merger of equals – it is more of an acquisition.  Hopefully, you have discussed firm name, whether your existing office will be retained or closed, and the future roles of each you as well as your staff. These are often deal breakers and many firm merger talks never get past this point.

You really need a project plan – or timeline – for a project like this with due dates and milestones. Otherwise, the process will continue to drift. You need a timeline for this merger candidate as well as other options that you are pursuing. I would contact your contact in the larger firm and agree on a timeline. You might want to ask them to provide you with a proposal within an agreed date – say 30 days and see what they come back with – it could turn out that their partners are not able to come to any consensus – and the merger simply dies.

If the firm does come back to you with a proposal – now it is your turn to do your due diligence. Start with the people – do you like these people and do you believe you would enjoy working with them? You should insist on a few social functions, etc. so you can get a feel for their people. Don't take a shortcut here.  Ask for their financials, personnel rousters, clients lists, partner demographics, list of partners that have retired and are receiving payouts and upcoming retirements in the future.

Insure that you obtain an understanding for the work culture of the firm? Are you compatible? Obtain all the detail that you can about governance and structure, the compensation system and how it works, retirement of partners – whether funded or unfunded, and complete details on the mechanics. How will the merger/acquisition be implemented? Will accounts receivable and work in process be pooled in the new firm – or worked off and collected in the old firm? How many shares etc will you have in the firm? Are ownership shares and compensation shares different?

All of these questions, and many more, need to be addressed in order to decide whether the merger makes sense. If it does and you decide to move ahead – then you and the firm can begin putting a implemention/integration plan together. 

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John W. Olmstead, MBA, Ph.D, CMC

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