Law Practice Management Asked and Answered Blog

Category: Larger

Aug 01, 2018

Law Firm Merger or Of Counsel Arrangement and Due Diligence Information from Larger Firm

Question:

I am a solo practitioner in upstate New York and I hope to retire three years from now and move to Florida and spend my retirement years there with my family. I have been talking with a larger firm, twenty-attorneys, in Albany that has an interest in me either merger my practice with their firm or joining as Of Counsel. My plan would be to work three more years, gradually phase back, and transition clients and referral sources.

I have had several meetings with the partners in the firm and they are now asking me for detailed due diligence information – tax returns, financial statements, etc. I have no problem providing these documents however I was wondering if I should be asking them for information. What do you think?

Response:

I believe that you are entitled to similar due diligence information from the other firm. You need to see what you are getting into.

Usually the smaller firm gets less – but they should share some information with you as you have with them.

I would ask for the following from them (or discuss with them):

Five years profit and loss statements, balance sheets and tax returns.
Lawyer and staff headcount for each of those five years.
Current hourly billing rates.
Description of practice area mix of clients by dollars collected – practice type and office location.
Description of how the firm bills (hourly, flat rate, contingency)
Copy of all leases (office space, equipment)
Copy of malpractice insurance policy and last application.
Salaries and benefits for equity and non-equity partners.
Any governance plan or agreements.
Copies of all partnership agreements or operating agreements for all business entities.
Any documents pertaining to the retirement of partners including information as to obligations for partners who have already retired and those nearing retirement.
Compensation data for equity and non-equity partners.
Copy of the written compensation plan for equity partners if one exists or if not a discussion of how the compensation system works.
Information on the line of credit and copies of all debt agreements.
Copies of third party vendor agreements (equipment leases, subscriptions)
Copy of the firm’s present malpractice insurance policy and most recent application.
List of benefits provided.

I presume that you all have discussed any potential client conflicts of interest, etc.

You need to zero in whether the arrangement is going to be a merger or Of Counsel arrangement. If the arrangement is to be an Of Counsel arrangement the firm will be less likely to be willing to share all the information on the list and you will have less need as well. However, I believe you should at least have the basic financial and compensation information.

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

Apr 11, 2017

Client and Management Transition in a Larger Law Firm

Question:

I am a member of the executive committee of a seventy-five attorney firm in Houston, Texas. We are a first generation firm. Several of our founders are in their sixties and we have recently begun discussing succession planning and how clients and management duties will be transitioned. We would appreciate your thoughts in these areas.

Response:

In larger firms, clients are more likely to be large sophisticated clients, possibly Fortune 500 companies, which refer many matters to the firm during the course of a year. Often such clients may be both a blessing and a curse for the firm. A blessing in that their business provides the firm with huge legal fees during the course of a year. A curse in that their business represents a large percent of the firm’s annual fee collections and a significant business risk if the firm were to lose the client. An effective client transition is critical, takes time, and must be well planned.

Successful client transition – moving clients from one generation to the next – is a major challenge for larger firms. Shifting clients is not an individual responsibility but a firm responsibility. To effectively transition clients the individual lawyer, with clients, must work together with the firm to insure the clients receive quality legal services throughout the transition process. Both the individual lawyer and the firm must be committed to keeping clients in the firm when the senior attorneys retire. Potential obstacles include:

The firm’s complacency regarding the relationship between the responsible attorney and the client;
Clients who are uncomfortable with other lawyers in the firm doing their legal work;
Other lawyers in the firm not being familiar with the client’s business;
Senior attorneys who do not include younger attorneys in meetings with clients; and
The point lawyer not identifying the appropriate lawyer successor to the client.

In larger firms, partners may have management responsibilities as well as client responsibilities. A retiring partner may be a managing partner, executive committee chair or member, or serve as a chair or member on other firm committees. Retiring partners will have to transition these responsibilities to other partners in the firm.

Transitioning client relationships and management responsibilities effectively can and where possible should take a number of years – preferably five years – typically not less than three years. For this reason, many firms use five-year phase down programs for retiring partners. These plans provide detailed timelines and action steps for transitioning client relationships and management responsibilities.

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