Law Practice Management Asked and Answered Blog

Category: Law firm merger

Aug 02, 2011

Key Documents Needed to Launch a Law Firm Merger/Acquisition/Sale Initiative

Question:

Our firm is a 5 attorney firm in Detroit with three partners and two associates. The three partners are 79, 72, and 67 respectively. All three are considering succession and exit options. While internal succession is an option the firm has had a few merger chats with larger firms – on isolated unplanned occasions. We are having problems getting focused and generating interest from other firms. Is there a suggested process and or documents that we should prepare to generate interest and properly package our firm?

Response:

Suggest that you start by preparing an offer package that can be provided to other firms that you may approach directly or indirectly. A good offer package consists of the following:

  1. A firm profile (without identity for some presentations)
  2. Nondisclosure Agreement
  3. Detained Offering Memorandum (Confidential Descriptive Memorandum)

    4. 

The Offering Memorandum

Tells the firm's story
Provides relavant facts other firms want to know including:

  1. Legal structure of the firm
  2. Ownership & Governance
  3. Key Management
  4. Organizational Chart
  5. Client Breakdown
  6. Practice Areas/Mix
  7. Marketing
  8. Historical Financial Performance

Potential Growth Opportunities
Potential Synergies or Economies of Scale
Proposed Deal Structure

The firm profile is the first point of contact with potential buyers/merger partners. It summaries the key points and describes the firm without revealing any identifying information. If an interested party wishes to go to the next step a nondisclosure agreement is executed an a offering memorandum with more specific information is then provided.

Using tools such as these can help you focus your effort, cast your firm in it's best light, and reduce wasted effort on the part of all parties.

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

 

 

 

 

Mar 22, 2011

Considering Merging or Joining Another Law Firm: What Should I Look For?

Question:

I am a solo practioner in Southern Missouri. I have been in practice for 20 years. I have a very successful practice with an excellent client base. I have three paralegals that I am able to keep busy. I have recently been thinking about whether I should consider joining another law firm. What should I be thinking about and what should I be looking for?

Response:

I believe that the key question is – can a law firm offer its lawyers a measure of value independent of the skills, talents, and contributions of its partners? The answer can only be answered by recalling the advantages that the best law firms have over sole practitioners or groups of lawyers who share overhead and nothing more. These advantages include the following:

Just because a law firm holds itself out to be a firm does not mean that the advantages listed above exist in that specific law firm. If not – you might be better off staying solo.

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

Jul 15, 2010

Valuation of My Law Practice For Merger or Acquisition

Question:

I have been thinking merging or selling my practice. How do I determine what my practice is worth?

Response:

You might want to consider retaining the services of outside advisors to help you with this process. There are a variety of methods used to value law practices including:

  1. Fair Market Value Methods
  2. Rule of Thumb Methods
  3. Price Earnings Ratio
  4. Discounted Cash Flow Models, etc.

CPA practices are often valued using a rule of thumb method employing a multiplier of 1.0 to 1.5 times average gross revenues for the past five years. Thus, a practice with average billings of $400,000.00 per year might sell for $600,000 with 50% of the purchase price paid upon closing and the balance (50%) paid over a five year period based upon subsequent collections.

Law practices are more difficult to value. CPA firms often have more repetitive work from ongoing clients and less risk in the practice – say compared to a personal injury law practice. CPA firms often have enforceable non-compete agreements which are non enforceable and therefore non existent in law firms. Law firms have much more fluctuation in practice valuation and no valuation model dominates. The rule of thumb model – when used – ranges from .5 to 3.0% – and will dependent upon the amount of repeat business, extent of institutional vs indivdiual clients, and the ability to sucessfully transfer clients to the acquiring practice.

Look for ways to institutionalize your practice in a way that your practice is not "uniquely you."

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

Apr 08, 2010

Why Do Law Firm Mergers Often Fail

Question:

Our firm has been discussing the possibility of merging with another law firm of similar size. We are are 25 attorney firm. We have heard horror stories of firms that have merged and been unhappy with the experience. Why do mergers fail and what should we look out for?

Response:

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 excitment about new client potential – jump immediately to an examination of practice economics and the financials. They fail to perform proper due dilligence on the people. It is critical that firms insure that cultural due dilligence 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.

Do all the due dilligence that you can – start with the people – then move through the rest of the process.

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

Jul 15, 2009

Should We Merge With Another Law FIrm

Question:

We are a small six attorney litigation firm. We have two partners and three associates. One of the partners wants to retire within the next five years. The other partner will continue to practice for another 10-15 years. We love practicing law and consider ourselves to be very good lawyers. However, we find firm management and administration to be a challenge and we are not skilled in this area nor do we want to be. We have a good book of business and clients. Recently, we began discussing the possibility of merging with another law firm. What are your thoughts about firm's like ours merging with another law firm?

Response:

Obviously, merger or acquisition of law firms is becoming more and more commonplace. Hildebrand is projecting 44 mergers (firms with five or more attorneys) in 2007. However, research indicates that 1/3 to 1/2 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. 

Right reasons for merging might include:

  1. Improve the firm's competitive position.
  2. Increase specialization – obtain additional expertise.
  3. Expand into other geographic regions.
  4. Add new practice areas.
  5. Increase or decrease client base.
  6. Improve and/or solidify client relationships.

I would start by thinking about your reasons for wanting to merge and your objectives. Ask yourself the following questions?

  1. Do you want to practice in a large firm? If not, what is the largest firm that you would want to practice in?
  2. What is driving the desire to merge?
  3. 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? 
  4. Is your name being part of the firm name important to you?
  5. What are your expectations and objectives for a merger?
  6. What are you looking from a merger partner?

Make sure that you look for a complimentary fit. Since you are weak in firm leadership, management and administration – look for a partner that is strong in these areas. Strong leadership, management, and administration may be hard to find in a firm under 25 attorneys.

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

Jul 15, 2008

How Do We Prepare Our Law Firm For a Merger

Question:

We are a 25 attorney firm and we are discussion the possibility of searching for merger partners? What is the process?

Response:

You 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:

  1. 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.
  2. Work on and clean up your financials. Improve the financial performance of your practice. Eliminate deadwood. Writeoff uncollectable A/R and WIP.
  3. Avoid entering into long term committments 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.
  4. Enhance firm image where you can.
  5. 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 Accessment (Due Dilligence)

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 Withdrawl, Expulsion Policies
Management Structure
Practice Compability
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 accomodate the larger entity.

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

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