From Accounting and Financial Planning for Law Firms August 2016
Over the past two years I have been involved in three merger situations and I am currently working on two more.
I have work closely with the Managing Partners and Committees of these firms and have come away with the following factors that, I believe, determine the success or failure of law firm merger discussions.
Some of the factors overlap along the edges but I have presented them as separate factors for clarity.
The six factors are:
- Strategy – Have a strategy and be true to it
- Expectations – Know what you want
- Concessions – Know what you will give
- Outcome – Begin with the end in mind / Recognize your bargaining position
- Honesty – Numbers are numbers
- Timeliness – You don’t have all year
My professional experience with these keys and the conclusions I draw are based on my past 30 years of consulting to the legal profession. In that period of time, law firm mergers have become commonplace not the “Black Swan” of the 1980’s or even the one a week of the mid 2000’s.
In 2015 there were 91 mergers and the pace in 2016 appears to be ahead of that record year. Based upon my experience, if 91 mergers were completed two to three hundred were discussed in some manner or another.
With that in mind:
Strategy – Have a strategy and be true to it
Some law firms have a clearly articulated strategy, broadly understood by the partnership and supported by the firm’s investments of its resources (time and money). Most law firm’s do not. What they call a strategy tends to be an apple pie statement about providing client focused, superior quality legal advice at reasonable fees.
A good working strategy contains an analysis of a firm’s strengths and best way to leverage them into existing and new clients. A clear eyed recognition of the firm’s weaknesses and how the firm will address those weaknesses in the coming years and the identification of opportunities. That is, areas of the firm’s practices that may be developing or areas of law that are underserved by other law firms that the firm can profitably develop.
With a clear idea of what its’ strategy is, a firm can evaluate how a potential merger candidate helps it to achieve that strategy. If a merger does not help both firms involved in the merger achieve their goals, then proceeding with the discussions is pointless.
Being true to your strategy is a good reason to pursue a merger candidate. Pursuing a firm to get a strategy (because you do not have one) is not. Firms that merge with law firms that have a clear strategy will find themselves on the short end of the deal.
Partner right sizing, attorney and staff reductions, office closings and other financially necessary steps will fall disproportionately on the firm “without a clue”.
Expectations – Know what you want
I have worked with the leadership of many law firms to identify what they expect as a result of a merger. More compensation for the partners, increased financial security in uncertain times or assuming leadership of the firm because the current management is ineffective will come with a heavy price.
Clear expectations enable the two firms to frame their discussions around key requirements and not be distracted by non-critical issues that can take up considerable time and when solved do not aid the approval process.
One of the most contentious points of any merger is partner compensation and how partners are evaluated within their respective systems. What firms value and how much weight is ascribed to those factors are the Scholes upon which many a law firm merger has foundered.
In recent discussions that I lead one firm believed that all equity partners should record a minimum of 2,000 hours. A commendable goal that most of their partners achieved. However, they did so at an average bill rate of $450 per hour. The other firm in the discussions averaged approximately 1,500 hours per partner but their average rate was over $700 per hour. Any potential deal fell apart when the chairman of one firm was told that his 1,600 hours at $1,000 per hour was “sub-par” and that over time he would be expected to bill 2,000 just like everyone else.
Other issues that require clearly defined expectations include future investments to grow the practices, leadership positions, attorney retention and staff requirements.
Clear goals and objectives that can be presented to the partners for their approval will enable the management team to negotiate a better deal. A deal that when completed can be presented to the partnership and they will be able to “check off the boxes” and determine that the deal achieves what the firm set out to accomplish.
Concessions – Know what you will give
In addition to knowing what you want out of a merger firms should identify what they are willing to sacrifice in order to achieve their goals. What a firm decided to give up is depends on why they are having merger discussions.
Firms that are undertaking a “merger of equals” and truly are equal have a much stronger position than those firms that are either weaker financially of there is a significant difference in size between the two firms.
If the merger is really a rescue, then the rescued firm must basically accept whatever is offered. There were a couple of such mergers in 2015 and the resulting attorney layoffs and staff consolidations were dictated by the “acquiring” firm. The same holds true when small boutique firms or groups of lawyers join large regional or national firms. They take what they are given.
For those firms entering into a merger for the text book reasons of synergy and improving scope and quality of their legal services identifying those aspects of their culture, work regimen and management style that are negotiable and which are not.
In addition to identifying those aspects that will be subject to negotiation a firm should also determine how much they are willing to compromise. Mergers are like marriages and both parties need to compromise. I for one still fondly remember the white shag rug from my first apartment that did not survive my wedding vows.
Outcome – Begin with the end in mind / Recognize your bargaining position
As Steven Covey said in his book “The 7 Habits of Highly Effective People” begin with the end in mind and work back from that point.
By keeping your firm’s objective (requirements) at the forefront of your thoughts you not only save time and effort by not pursuing miscellaneous “shiny objects” you also focus your attention on getting the deal done.
Often, shiny object discussions emerge as key factors that, at the time, appear to be the most important issue that confronts the two firms discussing a merger. They are not. If the objective is a merger that benefits both firms keep that in the forefront of your minds and discussions.
I have seen to many mergers “go south” because the parties involved lost sight of their objective and conducted the negotiations like a game that had a score and the firm with the most points wins.
That may work in a corporate merger when the lawyers walk away from the deal but it does not work in an environment where the individuals on the other side of the table today will be in the office next to you tomorrow.
If the merger makes sense, if there are true synergies to be achieved and savings to be had who really cares about the new logo or the color of business cards. Both of which issues have caused mergers to fail in the recent past.
Honesty – Numbers are numbers
Similar firm performance in key performance measurement categories is important in any merger. But they do not have to be equal and in many instances vary widely.
Some firms merge because they want to be in a specific geographic location and need to strengthen or acquire a particular practice. They may also be referring work to a firm in that location that, if they had an office there, would be done in-house. The reallocation of work previously referred to outside law firms to a newly acquired office can often eliminate much if not all of the differences in performance metrics.
We worked with a large East Coast that did not have a California office and therefore sent significant work to numerous West Coast firms. By merging with a good but underperforming San Francisco firm they were able to capture almost $10mm in annual revenue and increase the new office’s metrics to better than the overall firm averages.
Successful mergers age built on the ability to recognize a need and finding a way to address the need in a innovative way.
Timeliness – You don’t have all year
There is an old adage about house guests that goes something like this, “Fish and houseguests begin to stink after three days”. I am not suggesting that a merger be completed in three days or even three months.
What I am saying is that they process should be moved along at a professional pace that requires the leadership of both firms to be engaged in the process and participate in a timely manner.
Any merger should begin with an agreed upon timeline that details:
- The length, breath and scope of due diligence activities
- Management Committee and Practice Chair meetings
- Office partner meetings
- Benefits quantification
- Individual firm meetings and vote dates
I have been involved in merger discussions that went for more than a year and in the end were not consummated. There were many reasons for the failure of the discussions and while timeliness was not the only one it was an important factor. Fatigue set in and the key partners in both firms could not continue to devote so much time to the merger discussions and away from their practices.
These are my keys to unlocking the successful merger door. I do not guarantee that if you use them your merger will succeed but I can guarantee you that if you don’t use them you will not succeed.
- Mark Santiago is a member of this newsletter’s Board of Editors and a certified management consultant. He is the managing partner of SB2 Consultants, headquartered in New York City. Santiago has consulted to the legal profession for more than 25 years in the areas of financial performance improvement, compensation systems, merger/acquisition due diligence and integration, and administrative support outsourcing. A frequent speaker and author, he was one of the three originators of LegalTech in 1981 and is a member of its Advisory Board.