Professional Services Accounting ARTICLE -

What to Expect When You’re Merging

Target Audience: Legal Professionals, Professional Service Firms, Law Firm Partners, Law Firm Accounting

Although mergers among U.S. law firms slowed during the recent recession, encouraging signs suggest that deal activity is picking up in 2011. According to legal consulting firm Altman Weil, there were 16 mergers in 2011’s first quarter, including several involving large multinational firms.

If you’ve thought about merging or have already begun talks with another firm, you may be looking forward to gaining new clients, experienced rainmakers, greater geographic reach, increased specialization and broader expertise. But before you can reap the benefits of merging, you’ll need to close the transaction. That’s often easier said than done.

First things first

In most cases, the word “merger” is a little deceptive — the majority of deals are, in fact, acquisitions, with larger firms buying smaller ones. Whether you’re the buyer or the seller will determine what you need to accomplish before your merger is considered complete.

For example, while sellers will want to ensure a prospective buyer can finance the deal, most information gathering falls on the buyer, which needs to perform thorough financial and legal due diligence. Buyers also bear most of the responsibility for integrating the two firms — often the most difficult stage of a merger. However, in mergers of similar-size firms, the parties may share many responsibilities and decisions.

Neither party, however, should enter deal talks without the help of experienced advisors. There’s plenty that can go wrong with a merger transaction before it closes, including financing difficulties, personality clashes, cultural incompatibilities and poor planning. Experienced advisors can help guide you through each stage of the deal.

A team effort

To close a merger quickly and efficiently, form a deal team that includes your managing partner, practice group leaders and heads of HR, accounting and information technology. The deal team may be responsible for identifying and dividing up tasks, managing problems as they arise, preparing and reviewing due diligence documents, and keeping the merger on schedule.

Most merging businesses must make difficult decisions about such issues as integrating different accounting systems and determining whether staff layoffs will be necessary, or whether physical offices should be merged or remain separate. Law firms have several specific decisions your managing partner or deal team, with help from advisors, must make.

For example, if the merging firms’ partner compensation methods differ, you’ll need to decide on a single, fair approach. You’ll also need to form a new management team, which entails evaluating the merits of various partners and possibly choosing between several partners to represent one practice area. Such decisions can lead to disgruntled partners. It’s important to deal with these and other “problem” partners before you close a deal. Otherwise, the issues will likely resurface during the critical integration stage.

Money and other matters

Merging law firms often have special financial issues, too. During the due diligence stage, buyers typically review at least three years of the selling firm’s historical financial performance. Items of particular interest include debt decisions — such as the firm incurring debt to compensate partners rather than to enhance operations. Partner capitalization requirements, unfunded retirement plans and outstanding receivables, all of which could harm the combined firm’s value, should also be scrutinized.

Just as critical to the prospective merger’s value is client retention. Whether merging firms can hold on to their clients often depends on whether the partner responsible for the account stays with the firm. So it pays to provide incentives to those attorneys who work on large or prestigious engagements.

Communication prevents problems

Even if your prospective merger partner is profitable, offers practice synergies and shares your professional standards, strategic objectives, and partner compensation methods, you’re likely to encounter a few obstacles on the way to closing the deal. Because poor communication is responsible for many of them, be sure to communicate effectively with:

Your merger partner. The two parties’ deal teams should talk regularly to ensure they’re providing required information in a timely manner and that both agree on the merger’s progress to date.

Employees. As soon as feasible, inform associates and staff about the merger to prevent rumors and anxiety from disrupting your firm’s business. Enlist the help of HR personnel to communicate changes related to salaries and benefits, as well as other sensitive information, such as possible layoffs or relocation.

Clients. Partners should meet with larger clients to assure them that they’ll continue to receive high quality work and personal attention — even during the integration process. This is also an opportunity to sell clients on some of the merged firm’s new specialties and expanded services.

Deal with the bumps

These are only a few of the issues you’ll encounter when merging with another firm. Most mergers hit a few bumps in the road, but as long as you’re organized and work with experienced advisors, your chances of closing a deal that benefits both parties are good.

Find out how our expertise in professional services accounting can add value to your business. Email us or call us at 1 (888) 875-9770.

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