Before Saying 'Yes' to a Merger

In the great American tradition, romance is just as important in a merger as it is in a marriage. But if harmony and economics are a disaster, love soon flies out the window.

When merger talks between law firms develop into a genuine interest, full disclosure of information becomes an early essential. Both firms soon come to the point where they would like to make intelligent determinations on the basis of factual data. Decisions will then be aided by an analysis of this information. Not only will these facts be of importance during the consideration of whether the merger itself should be consummated, but they will also be of greater value later in making the resulting organization more successful.

Despite the obvious opportunities, the integration of small groups of attorneys into a larger firm does not always succeed. This is precisely why “due diligence” should be the mantra of both parties in anticipation of any acquisition/merger. Following is a representative number of suggested areas in which the acquiring firm must perform appropriate due diligence.

Reasons for Leaving

Although it may appear to be obvious, you must focus on why a group of attorney candidates are leaving their present firm. Considering all that you may know about the practice of law, the current legal marketplace, and the reputations of other members of the candidates' firm, how comfortable are you with the articulated reasons? Do they make sense? How likely is it that the same conditions may resurface at your firm?

Practice Area and Client Base

The candidates' practice areas and client bases must be carefully scrutinized. Who are the candidates' clients by name and by industry? It has been my experience that a candidate may be a risky choice if one particular client accounts for more than 15% of that candidate's gross revenue. Also consider:

• What specific type of work is performed for each of the candidates' top 10 or 15 key clients? If the work is litigation, for how long will each matter continue? What will replace these pieces of litigation when they go away?
• Is the candidate the principal contact for these clients?
• How much of the work does the candidate perform himself or herself, as opposed to work performed by other partners or associates?
• Will clients follow the candidate when he or she changes firms? If so, which clients does the candidate expect to follow him or her? What are their annual billings? How dependent is the candidate on these particular clients?
• How will the candidate complement the firm's practice?
• To what extent will conflicts of client or business interests affect the candidate's contribution to the firm?

Financial Profile

In my experience, financial data and management information about a candidate is usually available. Nevertheless, many firms overlook the candidate's historical performance and focus instead on the current year, especially if it's a profitable one. I endorse reviewing candidates' three-year track records in order to discern trends in their financial profiles. For example:

• What have been the candidate's actual performance statistics over the last three years?
• What has been the candidate's realized hourly rates over the past three years? How do these rates compare with those charged by your firm? How will the candidate's clients react to these hourly rates?
• Is it realistic to expect that the candidate's lower hourly rates may be increased to be compatible with rates charged by attorneys in your firm? How much work-in-process does this candidate currently have? Has this amount been increasing or decreasing over the last three years?
• What are the candidate's total and aged accounts receivable? Have these amounts been increasing or decreasing for each of the last three years?
• How much of the candidate's recorded time does he or she usually write down or off? How much of other partners' or associates' time does the candidate usually write down or off?
• How much pro bono work does the candidate perform?
• How much new business has the candidate generated within the last three years?
• How much repeat business has the candidate generated within the last three years?

Financial Health of the Candidate's Key Clients

Some questions to consider are:

• Has the candidate's practice from these clients been growing or declining?
• Have the amounts of work-in-process and accounts receivables from these clients been increasing, leveling or declining?
• Have the aging of work-in-process and receivables from these clients been increasing, leveling or declining?
• What is the economic future of the candidate's practice area from these ongoing clients?
• What is the economic future of the candidate's key clients?

Personal and Professional Backgrounds

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• Does everyone involved have the credentials listed on their resumes?
• From discussions with members in the same specialty area of the larger firm, do all of the candidates possess the actual experience that they purport to have? Are the members of the larger firm competent to make this judgment?
• Do the candidates have a reputation, or is anyone working on types of client matters that may be perceived as damaging to the larger firm?
• Are there any known complaints or proceedings pending against the candidate?
• Are there any known complaints or proceedings pending against other parties with whom the candidate has been associated in any capacity?
• Is the candidate aware of any ongoing investigations involving him/herself?

'

Time to Accomplish

All of this process does take time. The ordering of special equipment, the construction of appropriate quarters, the design and purchase of necessary forms, stationery and announcements, the drafting of new agreements and the problem of client notification and notice to members of the bar need a carefully worked-out timetable.

A merger of some well-established forces can be accomplished within three to six months, some may be planned over a longer period, and most find that many aspects of the merger take place gradually during the period designated.

Conclusion

The benefits from a well-conceived merger can often be apparent even before the physical merger is consummated. Again, for an increasing number of firms, this may be the only way to accomplish rapidly, or at all, their professional and organizational goals and their desired continuity of existence.

Joel A. Rose, a member of this newsletter's Board of Editors, is a certified management consultant and president of Joel A. Rose & Associates, Inc., Management Consultants to Law Offices, in Cherry Hill, NJ. He has extensive experience consulting with private law firms, and performs and directs consulting assignments in law firm management and organization, strategic and financial planning, lawyer compensation, mergers and acquisitions, and legal services marketing. Rose may be contacted at 856-427-0050 or [email protected].

In the great American tradition, romance is just as important in a merger as it is in a marriage. But if harmony and economics are a disaster, love soon flies out the window.

When merger talks between law firms develop into a genuine interest, full disclosure of information becomes an early essential. Both firms soon come to the point where they would like to make intelligent determinations on the basis of factual data. Decisions will then be aided by an analysis of this information. Not only will these facts be of importance during the consideration of whether the merger itself should be consummated, but they will also be of greater value later in making the resulting organization more successful.

Despite the obvious opportunities, the integration of small groups of attorneys into a larger firm does not always succeed. This is precisely why “due diligence” should be the mantra of both parties in anticipation of any acquisition/merger. Following is a representative number of suggested areas in which the acquiring firm must perform appropriate due diligence.

Reasons for Leaving

Although it may appear to be obvious, you must focus on why a group of attorney candidates are leaving their present firm. Considering all that you may know about the practice of law, the current legal marketplace, and the reputations of other members of the candidates' firm, how comfortable are you with the articulated reasons? Do they make sense? How likely is it that the same conditions may resurface at your firm?

Practice Area and Client Base

The candidates' practice areas and client bases must be carefully scrutinized. Who are the candidates' clients by name and by industry? It has been my experience that a candidate may be a risky choice if one particular client accounts for more than 15% of that candidate's gross revenue. Also consider:

• What specific type of work is performed for each of the candidates' top 10 or 15 key clients? If the work is litigation, for how long will each matter continue? What will replace these pieces of litigation when they go away?
• Is the candidate the principal contact for these clients?
• How much of the work does the candidate perform himself or herself, as opposed to work performed by other partners or associates?
• Will clients follow the candidate when he or she changes firms? If so, which clients does the candidate expect to follow him or her? What are their annual billings? How dependent is the candidate on these particular clients?
• How will the candidate complement the firm's practice?
• To what extent will conflicts of client or business interests affect the candidate's contribution to the firm?

Financial Profile

In my experience, financial data and management information about a candidate is usually available. Nevertheless, many firms overlook the candidate's historical performance and focus instead on the current year, especially if it's a profitable one. I endorse reviewing candidates' three-year track records in order to discern trends in their financial profiles. For example:

• What have been the candidate's actual performance statistics over the last three years?
• What has been the candidate's realized hourly rates over the past three years? How do these rates compare with those charged by your firm? How will the candidate's clients react to these hourly rates?
• Is it realistic to expect that the candidate's lower hourly rates may be increased to be compatible with rates charged by attorneys in your firm? How much work-in-process does this candidate currently have? Has this amount been increasing or decreasing over the last three years?
• What are the candidate's total and aged accounts receivable? Have these amounts been increasing or decreasing for each of the last three years?
• How much of the candidate's recorded time does he or she usually write down or off? How much of other partners' or associates' time does the candidate usually write down or off?
• How much pro bono work does the candidate perform?
• How much new business has the candidate generated within the last three years?
• How much repeat business has the candidate generated within the last three years?

Financial Health of the Candidate's Key Clients

Some questions to consider are:

• Has the candidate's practice from these clients been growing or declining?
• Have the amounts of work-in-process and accounts receivables from these clients been increasing, leveling or declining?
• Have the aging of work-in-process and receivables from these clients been increasing, leveling or declining?
• What is the economic future of the candidate's practice area from these ongoing clients?
• What is the economic future of the candidate's key clients?

Personal and Professional Backgrounds

'

• Does everyone involved have the credentials listed on their resumes?
• From discussions with members in the same specialty area of the larger firm, do all of the candidates possess the actual experience that they purport to have? Are the members of the larger firm competent to make this judgment?
• Do the candidates have a reputation, or is anyone working on types of client matters that may be perceived as damaging to the larger firm?
• Are there any known complaints or proceedings pending against the candidate?
• Are there any known complaints or proceedings pending against other parties with whom the candidate has been associated in any capacity?
• Is the candidate aware of any ongoing investigations involving him/herself?

'

Time to Accomplish

All of this process does take time. The ordering of special equipment, the construction of appropriate quarters, the design and purchase of necessary forms, stationery and announcements, the drafting of new agreements and the problem of client notification and notice to members of the bar need a carefully worked-out timetable.

A merger of some well-established forces can be accomplished within three to six months, some may be planned over a longer period, and most find that many aspects of the merger take place gradually during the period designated.

Conclusion

The benefits from a well-conceived merger can often be apparent even before the physical merger is consummated. Again, for an increasing number of firms, this may be the only way to accomplish rapidly, or at all, their professional and organizational goals and their desired continuity of existence.

Joel A. Rose, a member of this newsletter's Board of Editors, is a certified management consultant and president of Joel A. Rose & Associates, Inc., Management Consultants to Law Offices, in Cherry Hill, NJ. He has extensive experience consulting with private law firms, and performs and directs consulting assignments in law firm management and organization, strategic and financial planning, lawyer compensation, mergers and acquisitions, and legal services marketing. Rose may be contacted at 856-427-0050 or [email protected].