Olmstead & Associates Law Practice Management Asked and Answered Blog

Contemplating Merging with Another Law Firm

 

Question:

We are a 15 attorney estate planning firm just outside of New York City. Ten years ago we had 37 lawyers in the firm. We have had several defections due to internal management problems pertaining to structure and compensation. We have operated more as a group of solo practitioners than as a true law firm. Recently we have considered the option of merging with a larger firm. What are your thought regarding the pros and cons of doing this?

Response:

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:

a. Improve the firm's competitive position. .Increase specialization - obtain additional expertise.
b. Expand into other geographic regions.
c. Add new practice areas.
d. Increase or decrease client base.
e. 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?

a. Do you want to practice in a large firm? If not, what is the largest firm that you would want to practice in?
b. What is driving the desire to merge?
c. 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?
d. Is your name being part of the firm  name important to you?
e. What are your expectations and objectives for a merger?
f. What are you  looking from a merger partner?
 g. 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 under 25 attorneys.

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

Law Firm Upstream Mergers/Acquisition - Merging With a Larger Firm

Question:

Our firm is a three partner general practice firm in a small community. Our ages are 72, 68, and 64 respectively.  Our firm has not adequately prepared for succession/exit of the partners. We have over the years hired associates but have been unable to keep them - they have all left for greener pastures. We are now contemplating merger with a much larger firm that has 40 plus attorneys. We have had several meetings at the office and we have provided them with our financials. They have not provided us with detailed information. We are getting frustrated. It has been over four months since we began talking with this firm and we seem to be "stuck" and not maintaining momentum. We have other options that we have just begun exploring. How can we get "unstuck" and move this process along?

Response:

Right off the bat - admit that this is not a merger of equals - it is more of an acquisition.  Hopefully, you have discussed firm name, whether your existing office will be retained or closed, and the future roles of each you as well as your staff. These are often deal breakers and many firm merger talks never get past this point.

You really need a project plan - or timeline - for a project like this with due dates and milestones. Otherwise, the process will continue to drift. You need a timeline for this merger candidate as well as other options that you are pursuing. I would contact your contact in the larger firm and agree on a timeline. You might want to ask them to provide you with a proposal within an agreed date - say 30 days and see what they come back with - it could turn out that their partners are not able to come to any consensus - and the merger simply dies.

If the firm does come back to you with a proposal - now it is your turn to do your due diligence. Start with the people - do you like these people and do you believe you would enjoy working with them? You should insist on a few social functions, etc. so you can get a feel for their people. Don't take a shortcut here.  Ask for their financials, personnel rousters, clients lists, partner demographics, list of partners that have retired and are receiving payouts and upcoming retirements in the future.

Insure that you obtain an understanding for the work culture of the firm? Are you compatible? Obtain all the detail that you can about governance and structure, the compensation system and how it works, retirement of partners - whether funded or unfunded, and complete details on the mechanics. How will the merger/acquisition be implemented? Will accounts receivable and work in process be pooled in the new firm - or worked off and collected in the old firm? How many shares etc will you have in the firm? Are ownership shares and compensation shares different?

All of these questions, and many more, need to be addressed in order to decide whether the merger makes sense. If it does and you decide to move ahead - then you and the firm can begin putting a implemention/integration plan together. 

Click here for our blog on succession and retirement

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

Law Firm Acquisition Due Diligence - Using Client Surveys To Ascertain Client Retention

Question:

Our firm, a 22 attorney law firm in Chicago, has been contemplating acquiring a 6 attorney firm in the suburbs. We believe we have done an adequate job of due diligence regarding financials, people, culture, systems, and practice-mix compatability. Our concern is client retention. What are you thoughts concerning how we can determine if the clients will stay with us?

Response:

Why not ask the clients.

Much can be learned by talking to the firm's clients. Structured telephone interviews and other forms of surveys conducted by a neutral third party can uncover many surprises as well as answers. Client satisfaction surveys can be one of the best due diligence tools that you can use. 

It is good business practice to see how clients might react to a acquisition or merger. Understanding where your prospective firm's clients stand and how they feel about service quality can be one of the most valuable inputs into your due diligence process that you can get your hands on. By finding out where your prospective firm's clients stand can tell you a lot of their future retention. 

Before you invest significant time, money, or effort in developing an overall acquision/merger implementation strategy, survey your prospective firm's clients to understand where their clients stand.   

You must be careful using this approach and insure that it is done with the permission and in concert with the prospective firm.  The approach must setup, communicated and coordinated properly. It must be sensitive to clients and done in a way to communicate and reinforce positive rather than negative signals to the clients involved. 

 Click here for our blog on mergers

Click here for articles on other topics

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

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)


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.

Click here for our blog on law firm mergers

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

 

 

 

 

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

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

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

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