Determining Whether a Merger is Right for Your Firm

Target Audience: Law Firm Professionals, Lawyers, Law Firm Associates, Paralegals, Law Firm Staff, Lawyers Offices, Human Resources, Firm Operations, Legal Strategic Planners, Long-term Growth Focused Firms

A Means, Not an End

A merger in itself isn’t a strategy. Rather, a merger is one possible means of accomplishing a strategy. So, determine your purpose for merging and exactly what you hope to gain:

• Is it to obtain a market position that neither firm could achieve on its own?
• Is it to access new clients, services or talent that enhances profits for both parties?
• Is it to increase your collective expertise in a specialty?
• Is it to cross sell legal services more effectively?

When assessing the viability of a merger, build a sound business case for it and evaluate the real potential for growth. Like corporate mergers, law firm mergers succeed when both sides have solid business plans and clearly defined strategic goals.

Above All Else, Synergy

A key reason some mergers don’t achieve their intended results is because integration efforts fail. To avoid this outcome, your firm must determine if there’s enough synergy to make a merger worthwhile. Here are a few areas to consider when assessing compatibility:

Culture. In most cases, mergers succeed when both firms share a vision for management, strategic goals, productivity and work intake standards, compensation, and ethical beliefs. Be sure you understand a potential merger partner’s culture and values — as well as your own — and are able to clearly communicate this information.

Finances. Financial history, operations and work performance play leading roles during merger negotiations. Discussions about capital programs, retirement plans and profitability are important because these areas can be the most divisive. Consider reviewing at least three years of historical financial performance in the early stages of discussions. Among many things, look for:

• Bad debt decisions, such as the firm incurring debt to compensate partners rather than to enhance operations, and
• Debt covenants, such as personal liability issues, partner capitalization requirements and unfunded retirement plans, all of which could diminish the value of combining with the firm.

Partner compensation. Determine if both firms’ partners are willing to work under one system. Otherwise, disparities in approaches to partner compensation or partner compensation levels can be a major obstacle in merger discussions.

Client relationships. Be aware of potential merger partners that are overly reliant on a small group of clients or might have trouble retaining clients should lawyers working on those engagements leave the firm. Losing a group of partners — along with a significant source of revenue — can kill the long-term value of a deal.

Client conflicts. Many client conflicts are relatively easy to identify through each firm’s conflict-checking system. But some also exist when the merging firms have major clients in the same industry. These types of conflicts are a particular problem in competitive, consolidating industries, including banking, telecommunications and energy. Firms should also find and resolve conflicts that may arise when combining different types of practice areas, such as a banking practice with a bankruptcy practice.

Better Together or Apart

Knowing when a merger is a good one may give your firm a chance to grow your practices and better serve your clients and position the expanded firm for long-term growth. Knowing when a merger isn’t right for your firm can save you from making a devastating decision. When a merger opportunity comes your way, having a clear sense of where a potential merging partner stands on key issues will enhance your prospects for a successful merger.

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