Law Firm Merger – Pitfalls to Avoid

Question:

I am a partner in a twelve attorney firm in Rockville, Maryland. We are a corporate transactional and litigation firm. We are a first generation firm. The firm was founded by the present four equity partners twelve years ago. We have been very successful over the years and this is borne out by out by our excellent financial performance. While we have done well in our core practice areas we have been considering diversifying our practice into government sector work due to our proximity to Washington D.C. and we have been considering merging with a six attorney (three partner) firm in D.C. that is totally focused on such work. Can you share with us any pitfalls that we should look out for.

Response:

It sounds like this might be an opportunity if the cultures and people are compatible, the practice area makes sense for your firm, there are no conflicts, the billing rates, and other factors are in line. Start getting to know the firm and its people. Then move to conflicts checks and ask for five year’s of financial statements and tax returns, internal financial reports, attorney and staff compensation data, partnership agreement and other partnership documents, 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. Make sure there are no pending malpractice claims or other liability issues.

Obviously you will want to do all the due diligence that you can. Initially examine and make the following calculations:

Headcount by the number of equity partners, non-equity partners, associates, Of Counsel and other attorneys, paralegals, secretaries/assistants, and admin staff.
Fee Revenue
Total Revenue
Total Expenses
Net income available to equity partners. (Add back guaranteed payments and other income that equity partners received)
Profit Margin
Fee Revenue per Lawyer
Fee Revenue per Equity Partner
Expense per Lawyer
Net Income Per Lawyer
Net Income Per Equity Partner
Schedule of billing rates (current only)
Compensation ranges by Equity Partner, Non Equity Partner, Associates – past five years
Current malpractice insurance coverages and with whom.
Current Lease obligations – office space and equipment

Examine the balance sheet items such as bank debt, large tapped out credit lines, equipment leases and other liabilities. Take a look at the partner capital accounts. Then examine the items that are not recorded on the balance sheet – namely unfunded partner retirement buyouts and long term real estate leases. What are the ages of the partners in the candidate firm and are there partners close to retirement? What are their provisions for retirement of these partners? These are often major deal breakers in mergers and scare away potential merger partners.

Keep in mind that the financials are only part of the equation – the other part your gut feel. Does the potential deal make sense? Will one plus one equal three – will a synergy result? Do you feel comfortable with the people (partners) in the other firm? Do you share common vision and philosophies and will you make good partners?

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

Posted at 09:15 AM in Mergers
Tags: Avoid, Firm, Law, Merger, Pitfalls, to

Oct 18, 2017

Law Firm Merger – Pitfalls to Avoid

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