Should You Merge With Another Law Firm

Does a Merger Make Sense For Your Firm?
How to Get Started

By John W. Olmstead, MBA Ph.D CMC

Law firm succession and exit planning is one of the hottest management challenges facing attorneys whether they are partners in a law firm, a sole owner of a firm comprised of other employed attorneys and staff members or a solo attorney in practice with no other attorneys in the firm. We receive at least ten calls a week on succession related issues. Many firms are exploring “merger options” as one of their succession/exit options. Periodic merger option reviews should be incorporated in all long range strategic plans.

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.

Right reasons for merging might include:

• Improve the firm’s competitive position
• Increase specialization – obtain additional expertise
• Expand into other geographic regions
• Add new practice areas
• Increase or decrease client base
• Improve and/or solidify client relationships

Start by thinking about the reasons that your firm wants to merge and your objectives. Ask yourself the following questions?

• Do you want to practice in a large firm? If not, what is the largest firm that you would want to practice in?
• What is driving the desire to merge?
• 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?
• Is your name being part of the firm name important to you?
• What are your expectations and objectives for a merger?
• What are you looking from a merger partner?
• 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 fewer than twenty five attorneys.

Getting Started Preparing for a Merger

Start with 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:

• 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.
• Work on and clean up your financials. Improve the financial performance of your practice. Eliminate deadwood. Write-off uncollectable A/R and WIP.
• 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.)
• Enhance firm image where you can.
• 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. Here is a general outline of the process:

Merger Assessment (Due Diligence)

People

Philosophies, personalities, life styles, do the partners like each other, why does the deal make sense.

• Firm Name
• Conflicts
• Economics
• Partner Compensation System Comparisons
• Retirement, Voluntary Withdrawal, Expulsion Policies
• Management Structure
• Practice Compatibility
• Practice Philosophies
• Work Ethic
• Firm Structure
• Associate Management

Merger Implementation

If the two firms decide to proceed with a merger – then the process of merger implementation begins. A merger agreement is executed and a merger implementation plan it put in place. Then you begin working the plan. If the merging firms are of similar size (as opposed to a large firm acquiring a smaller firm) a lot of infrastructure work will need to be done – ranging from IT systems, management structure, space, etc. to accommodate the larger entity.

Good luck!

John W. Olmstead, MBA, Ph.D., CMC, is a Certified Management Consultant and the president of Olmstead & Associates, Legal Management Consultants, based in St. Louis, Missouri. The firm helps law and other professional service firms improve the operations and management of their practices and the lives of their practitioners. The firm, founded in 1984 serves clients across the Globe assisting them with implementing change and improving operational and financial performance, management, leadership, client development and marketing.

Dr. Olmstead’s assignments have covered the spectrum of management issues. However, in recent years most of his time is focused on engagements helping firms with:

• Partner Compensation
• Governance
• Succession/Exit Planning
• Strategy & Competitive Business Models
• Profit Improvement programs
• Client Service Programs

Dr. Olmstead is the Editor-in-Chief of “The Lawyers Competitive Edge: The Journal of Law Office Economics and Management,” published by Thomson West. He is currently serving as Past Chair, Illinois State Bar Association Standing Committee on Law Office Management and Economics and as a member of the Legal Marketing Association (LMA) Research Committee. Dr. Olmstead may be contacted via e-mail at jolmstead@olmsteadassoc.com. Additional articles and information is available at the firm’s web site: www.olmsteadassoc.com and blog http://blog.olmsteadassoc.com

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