Making Law Firm Mergers Work
When a law firm goes on the hunt for a merger partner, examining financial and business factors is likely to elicit many promising candidate firms. But how do you narrow the field and realise a successful amalgamation from this fantastic roster of great firms? Considerations such as widening client relationships, gaining depth in valuable practice areas, expanding geographical reach, and leveraging back-office objectives to shape the strengths of each firm into a powerful combined body are all vital. However, although all these factors are important, alongside financial metrics and client lists, acquiring firms should also scrutinise the candidate firm’s workplace culture. But it is one area that is often overlooked.
When law firms merge, typically no money changes hands, and no propriety assets are transferred. The dynamism of a law firm merger lies in human capital. If the lawyers of one firm are incompatible with the lawyers of the other, then throwing the two together, no matter how strong the business case for doing so, is likely to be a recipe for disaster.
Thinking about the responses to the following eight questions can give you an incredible insight into a prospective partner firm’s true culture and help you decide whether the merger is good for your firm or if you should cast your net further:
- What does the firm stand for, and what are its core values?
- Does the firm’s leadership and its other partners embody and support those values?
- What is the firm’s reputation with its clients and within the community it serves?
- What is the quality of the firm’s output? Is excellence an active, consistent pursuit?
- Does the firm encourage and prioritise teamwork?
- Is there cutthroat competition or camaraderie? How do the partners treat clients, subordinates and each other?
- What criteria are used to determine partner compensation?
- What is the firm’s attitude towards and record on pro bono work, charitable giving, and diversity?
The dialogue for discussing these and other matters surrounding cultural compatibility really needs to happen in the early stages. If these preliminary talks go well, the next logical step is to think about creating a focussed and unified firm that provides an economic advantage arising from the combination. In most cases, this mutually beneficial financial impact will drive the merger discussions.
Calculating the financial business case should begin early in any merger process. This can be achieved with consideration of various financial constructs. The acquiring firm might receive the other firm’s work-in-progress (WIP) and accounts receivable in return for capital credit and other considerations. Or the acquired firm’s partners could retain their WIP and contribute a share to the acquiring firm as capital. There are many ways to model a merger, but whatever way is best for your firm, should be determined at the outset.
The financial modelling should clearly demonstrate how a merger will prove beneficial for both sides in the long term. Although some initial watering down of profits and revenue is to be expected, particularly if the acquired firm has greater profit margins, once the firms have been fully integrated, the merger should benefit from costs savings and increased revenue.
Once all these critical factors have been resolved, the final element – planning for integration – should be addressed, both during merger discussions and then for several months following the completion of the merger.
Combining large groups of people in a workplace setting poses many challenges; devising and implementing a comprehensive integration plan could assure a smooth transition. The benefits of a merger, from greater back-office efficiencies to better combined legal competencies and business development opportunities, will be realised more quickly if an integration plan is successfully implemented.
The integration process should begin as soon as both firms feel a high level of confidence that the merger will go through. A team should be assembled to lead the effort including members of staff from HR, finance, technology, conflicts, billing, and marketing, for example. This group should meet regularly during the later stages of the merger, and then weekly as the date for the merger approaches. Meetings should ideally continue for between three and six months after merging, or however long partners think it is necessary to achieve a seamless consolidation.
Among the first matters the integration team should examine are the IT systems at both firms. Often, the acquired firm will transition onto the systems of the acquiring firm, unless they are looking to upgrade both systems. Following the merger, redundant systems should be retained for a period of time to allow tech teams to complete their transition. This is particularly important for billing and finance functions. The ultimate goal is to keep the technical transition from interfering with the lawyers’ work, with any necessary training and orientation occurring as soon as possible after the merger (or immediately before), to enable staff to make as seamless a move as possible.
Essentially, the uppermost priority throughout all integration processes is to avoid the loss of business or confidence from any client. It is unacceptable for clients to hear about the merger through the media, and so a careful and precise plan to inform each client about the merger should be formulated before it is formally and widely announced. Firms should be prepared to answer questions about whether billing rates are likely to change as a result of the merger.
Mergers have become the pre-eminent agents of change and growth in the legal sector. For ambitious law firms, mergers offer a powerful avenue for growth and expansion and executing them smoothly is an acquired skill requiring a competitive edge. At Law Mergers & Acquisitions, we can guide you through the mergers process and help identify a suitable practice that is “in tune” with your business ethos. We also act as a third-party intermediary. Contact us for further information.