Law Practice Management Asked and Answered Blog

Category: Acquisition

Apr 17, 2019

Law Firm Merger/Acquisition – Should We Merge or Acquire

Question: 

I am the managing partner of an eight attorney firm in Dayton Ohio. We have two equity partners (both in our early fifties), two non-equity partners, and four associates. Our practice is a very niche specific practice and there are only three or four other practices in the state that do the work that we do. There is another firm in Cleveland, Ohio that has approached us regarding possible merger or acquisition. The firm does similar work that our firm does but this firm also handles some areas that we don’t handle but would like to get into that falls within our niche area. There are two founding partners in the firm – one in his late sixties and the other in her early seventies, one associate attorney, and four staff members. The two partners are planning on moving towards retirement and are looking for a succession strategy. They have not shared with us their timeline or any financial information. We have had one face-to-face meeting and several phone calls. We would appreciate your take on this, next steps, and whether we should pursue further.

Response: 

You have not indicated whether your firm has a strategic plan? If you do my next question is whether this practice area and having another office three and one half hours away supports the vision of your firm?  Often, but not always, a merger will emerge as a way to achieve some aspect of the firm’s vision. For example, a merger might help the firm:

• Enhance the firm’s competitive advantage.
• Increase the firm’s lawyer bench strength.
• Add practice areas that are complimentary to existing areas.
• Geographical market expansion
• Increase or diversify the firm’s book of clients.
• Solidify client relationships.
• Increase the depth and breadth of services.

The above would be right reasons to consider a merger or acquisition.

You should take pause if the reasons you are considering merging or acquiring the other firm include:

• To merger because other firms are merging.
• To correct internal weaknesses.
• To solve financial problems.
• To deal with unproductive partners.

If your firm does not have a strategic plan you may want to at least engage in some form of internal self-analysis to insure that you are looking through a clear lens, are building a sound business case for the merger or acquisition, and are identifying the characteristics of the ideal merger/acquisition candidate.

In your situation you are looking at actually acquiring a practice three and a half hours away with two senior partners that will be retiring. Obviously, there are risks but the devil will be in the details that will come out of a thorough due diligence examination which I believe is your next step. Here is a link to a prior post concerning information that you should ask the other firm to provide. 

Your due diligence examination should focus on:

• The firm’s practice and culture
• The firm’s clients and client mix
• The firm’s people
• The firm’s attorneys
• The firm’s financial performance and overall economics.
• The firm’s infrastructure including IT and communications systems and practices.

Right up front you should ask the partners in the other firm their specific timeline for retirement and how long they will be available for client and management transition. A key issue will be whether clients will remain with the firm when they retire? Are there others in the firm, non-equity partners or associates, that the clients have confidence in to the extent they would remain with the firm or will this all be on your shoulders as owners of the acquired firm? The other question you should should ask up front is what the partners of the other firm are looking for in the form of purchase price or compensation for the firm.

Click here for our blog on mergers

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

Aug 30, 2017

Law Firm Practice Acquisition – Acquiring a Personal Injury Practice

Question: 

I am a non-equity partner in a four attorney personal injury plaintiff law firm in Newport Beach, California consisting of the firm owner, two associates, and myself. The owner is planning on retiring and has provided me with a proposal to sell me his practice. How do I determine whether this is an opportunity or a potential curse? You advise is appreciated.

Response: 

I would start by asking yourself if you have the desire, inclination, and ability to manage a business – a law firm? Do you have the self discipline required? Do you have the needed capital or access to appropriate level of credit line? A personal injury firm will have to fund client advances as well as operations until cases are brought to conclusion and this will require capital or a credit line. I would check with the firm’s bank and other banks to see if you will be able to obtain the same credit line that the firm has enjoyed in the past.

Ask the owner for the following documents:

1. Income tax returns for the past five years.
2. Profit and loss statements for the past five years.
3. Balance sheets for the past five years.
4. Headcount expressed as full-time equivalents for the past five years by year for attorneys, paralegals, legal assistants, staff.
5. Firm lease if the firm leases office space.
6. A spreadsheet listing of all open cases providing the name of the case, the date opened, type of case, expected value of the case, expected referral fees due others, expected fee due firm, client advances invested in the case, and date the case is expected to conclude and fees will be received.

I would then prepare a firm financial profile spreadsheet spreading the revenue, total expenses, net income, owner earnings, and balance sheet summary over the five year period. Using the headcount data calculate fee per lawyer, expense per lawyer, and net income per lawyer and compare to general benchmarks. Hopefully fee revenue is in neighborhood of $400,000 or more per lawyer. Examine what the owner’s earnings have been over the five year period as well as the assets and liabilities on the balance sheet. Keep in mind that accounts payable and the firm lease are not usually reflected on a case-basis balance sheet. Consider the information that you have gathered and ask yourself the following questions:

1. Has the firm been successful and well managed?
2. Are revenues in line with what a four attorney personal injury firm should be generating?
3. Is the firm’s overhead in line?
4. How much additional income can I expect over the next five years?
5. What is my “payback” period – in other words if I pay X for the practice how many years of extra income as an owner will it take me to pay for the practice?
6. Considering what I have to pay for the practice, could I do better by starting my own practice?
7. Where are the firm’s cases coming from and what is the quality of the existing cases in process?
8. What level of case flow can I realistically expect when the owner is no longer here?
9. Using the open case listing, what do the future cash flow projections look like?
10. When the owner leaves will you have to hire another attorney? What level?
11. How much debt does the firm have?
12. What is the remaining lease obligation – term and amount?

This review will give you a good idea of whether this is a deal that makes sense for you.

Click here for our blog on law firm mergers

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

Aug 24, 2016

Law Firm Acquisition – Acquiring Another Practice

Question:

Our firm is a twelve lawyer firm in Austin, Texas. We have been approached by the owner of a three attorney firm in an adjacent city who has a complimentary practice consisting of institutional business clients. He is looking to retire within the next thirty days and he would like us to acquire his clients. We have reviewed his practice and we would be willing to take over his clients but not his personnel or other fixed assets. He has no interest in a merger or an lengthy relationship with us. It could add $800,000 per year to our practice. We would appreciate your thoughts.

Response:

It sounds like a great opportunity if there are no conflicts, the clients actually transition, and the billing rates are in line. Start with conflicts checks. Then ask for five year's of financial statements and tax returns, internal financial reports, schedule of billing rates, client lists, copy of building and equipment leases, and malpractice applications. Assess the stability of the revenue stream, repetitive ongoing clients, client dependency, etc. Prepare a letter of intent with terms for acquiring the practice. I would lead with a down payment of say $25,000 and then a percentage of collected revenue for say five years at 20% and see how he responds. He will want more certainty and a fixed price. If you have to go with a fixed price to seal the deal structure it with an initial down payment, payments over three to five years with provisions for reduction in the purchase price if the clients and revenues don't materialize. Make sure there are no pending malpractice claims or other liability issues.

Aug 02, 2016

Law Firm Acquisition Due Diligence – What Should I Ask For

Question:

I am the managing partner of a five lawyer firm in Denton, Texas. We have the opportunity of acquiring a sole owner practice in a nearby city with a complimentary practice area. We have had one meeting and our firm is interested. We want to initially do a quick and dirty due diligence so see whether this firm is really a qualified opportunity. What sort of information should we ask for?

Response:

I would initially ask for the following:

1. Five years profit and loss statements and balance sheets and tax returns. (2011, 2012, 2013, 2014, 2015)
2. Lawyer and staff headcount for each of those five years.
3. Current hourly billing rates.
4. Description of his mix of clients by dollars and by time expended – practice type and geography.
5. Description of how the firm bills (hourly, flat rate, contingency)
6. Copy of leases (space and equipment)
7. Copy of malpractice insurance policy and last application.
8. Salaries and benefits for attorneys and staff members.

Feb 16, 2016

Law Firm Acquisition – Acquiring a Personal Injury Plaintiff Practice

Question:

I am a partner in a two owner personal injury plaintiff firm in Los Angeles. We have four other attorneys. We do traditional personal injury work with a high volume of medical practice and products liability. One Hundred percent of our fees are contingency fees. My partner has expressed an interest in retiring and selling his interest to me. How do I go about determining a fair price to offer him for his shares? I would appreciate your thoughts.

Response:

It would be nice if the two of you could agree on a fair price. However, often it is not possible in a contingency fee practice. Often the primary value of a practice such as yours is the value of the pending cases on the books and those values are unknown until the cases are concluded in the future. It all depends on the extent of fluctuations in the annual revenue stream. I just completed two assignments where a dollar amount was agreed to based upon a gross revenue multiple. However, in both cases the revenue streams were fairly consistent over a five-year period. When there are extreme swings in revenue over a three to five year period there often is no choice but to base the acquisition price upon a payment arrangement as cases are completed. A percentage of completion ratio (how long the case was opened before the acquisition and when the case is concluded) or other method will have to be considered as well as overhead paid.

While cases in progress may be the major asset you also should expect to purchase your partner's cash-based capital account or shares of stock as well.

There are a variety of other approaches. I have never seen the same approach used twice.

Click here for our blog on succession

Click here for out articles on various management topics

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

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