Considering merging your law firm? Make sure it’s a marriage of like minds.
This year’s Bellwether Report: Brave New World has identified that 1 in 3 independent firms would consider a future merger. Luckily, help is on hand – here guest author Paul Stothard, of Pathways Management LLP, takes us through key considerations at each stage of the process.
It was David Pester, Managing Partner of TLT, who said “The reasons for our merger weren’t always clear to the outside world. When we merged a reaction was, “Well, what will that do?’ What we had recognised was each other’s ambitions”. Whilst we will cover here a few key issues to concentrate on when considering a merger, David’s quote should be hard coded into your mind and a shared ambition (or vision if your prefer management speak) is essential.
Every firm should have a strategy that sets out what it seeks to achieve in the future. Occasionally that strategy may clearly indicate that merger is necessary to achieve the long-term goals of the firm. More often than not, a merger opportunity will appear “left field” for consideration by the firm. Such an opportunity should always be tested against the strategy and consideration given to whether or not it moves the firm forward in realising the ambitions set out in the strategy. The bottom-line is that a merger is unlikely to succeed unless it is backed by a carefully thought out strategy.
Of course there are “rescue mergers” but these are driven by force majeur and success is defined more in terms of locking down liabilities and protecting client monies. Such mergers are not considered here.
Five drivers of merger
The strategic reasons to merger could well include the following:
- improving the firm’s competitive position
- increasing scale in certain disciplines, geographical areas or sectors;
- delivering increased specialisation (especially if the strategy is to become niche);
- adding new practice areas (improve portfolio, reduce risk)
- strengthening client relationships (improved/broader service offering)
Before you start: questions to consider
If, having run through the above, you believe that merger is a possible route forward for your firm then there are some key questions to address before you invest time, emotion and finance in seeking and attempting to execute a merger:
- Do you wish to practice in a larger firm? If so, how large? Think about the impact on your influence and control.
- What is really driving the desire to merge? If you think that merger offers an easy option then think again.
- What problems do you hope the merger will address? For example, it may be that the additional scale or strength in depth helps you to address some performance or behavioural issues.
- Is the firm’s name important?
- What are your expectations and objectives for the merger, both for the firm as a whole and for you personally. Be honest! Too often we hear “I am doing this for the long term sustainability of the firm” with the unsaid “provided I get what I want in terms of status and earnings”
- What are you seeking from a merger partner? What gaps can/should they fill? What weaknesses should they not duplicate?
If you answer these questions honestly they will help you decide firstly, if you really want to seek merger and, if you do, and what sort of merger you are looking for.
Preparing to merge
Ensure your business is as attractive as it can be before beginning the merger journey.
- Make sure you do have a credible business or strategic plan in place. It does not need to be “War and Peace” but it does need to ring with authenticity and be capable of convincing a potential merger partner that you have a plan for the future.
- Address the hygiene factors in your own business. Work on financial performance, eliminate deadwood, reduce lock-up.
- Whilst watching the operations, have an eye to the future. Avoid long-term commitments that might get in the way of a merger. Property commitments, Partner promotions, Partner retirements (with annuities, for example) are the obvious ones.
- Tidy yourself up! It might be a splash of paint, improved reception, updating the web-site. Look at your business as a stranger might and take a few simple steps to improve first impressions.
The dating game
So, you know the type of firm you would like to merge, and you are suitably spruced up but how do you go about finding candidates? You need to focus on generating leads that offer genuine merger opportunities without engaging in too many random and, all too often, fruitless discussions. Law firm management has often been referred to as pushing along a barrow full of frogs; law firm mergers can involve kissing a lot of frogs to find that prince!
Quite often your own network will provide opportunities and attending various sector networking events will generate introductions where an initial, gentle conversation can take place. Another approach is to retain one of the many consultants to review a market for you and to make the initial, no names approach to see if a suitable candidate’s “dance card is open”.
Hopefully, through whatever method you chose to use, you will find someone who seems a likely candidate. Before we rush headlong into a marriage, there a few critical things to consider.
Culture, Culture and Culture
If you were to ask couples why they got married you will get a range of reasons but they are unlikely to include the need to improve the operational efficiency of the household or to reduce accommodation costs through co-location. Why, then, would you combine two law firms with unique cultures and identities for those sort of reasons? There can, of course, be many reasons why a merger can fail but market commentary suggests that most failures arise from poor cultural fit.
Firms move all too quickly to the examination of the practice economics and finances, including “what’s in it for me” before really trying to get under the skin of the culture. This is a vital early step but can be difficult to achieve when, all too often, you are dealing with one or two senior people who may display considerable alignment with your own ethos and values. How can you ensure that this permeates through the organisation?
There is no escaping the need for some form of due diligence. At the very least, all Partners and key people should be interviewed to identify consistency of ethos and an overall sense of cohesion in the firm. A review of client files will not only shine a light on the regulatory control environment, but will provide an insight into the nature of client relationships; the tone of voice and the place of the client within the priority of the organisation. Finally, a review of staff files and appraisals will help assess the nature of the relationship between Partners and staff.
This merger process, if carried out properly, will consume resource and this is something you should consider carefully before you start. For many firms the burden of management falls on very few shoulders, and, without additional resource, working through a merger process can cause problems. Either the management of the business will suffer, the merger process will not be as effective as it should be or, if the individuals have client responsibilities then these can suffer and, in the extreme, clients may walk. Before you begin consider carefully how you can reorganise internal resource to support the merger process or look outside for some short term support, perhaps with merger and integration expertise.
Sealing the deal
There are a number of common pitfalls that strike mergers and can easily bring them to a juddering halt. Some common problems include:
- No communication planning. All too often the word gets out before the process is concluded. It is important to have a communication plan in place, including internal and external “press releases” that control the situation. Never forget that staff like to hear about their firm first from you, not the press. Also, any gap in communication leads to a void of uncertainty that staff will always fill with bad news
- A strong attachment to the old firm acting as a barrier. Plan how the merged firm will build on the strengths of the two legacy firms, ditch some of the traditional nonsense, and use the new found confidence and scale to develop something new and exciting. There is no need to be critical of either firm’s past, but together carefully critique each firm and the combined firm to ensure it is fit for the future.
- During the negotiation it is essential to remember that these people are going to be your future partners. Playing a game of hide and seek with disclosure in the hope of putting one over the “opposition” is not a sound basis for the future. Equally negotiating hard over every last bit of Partner reward will place undue pressure on performance going forward.
- If there are issues that are potential deal-breakers deal with them upfront before you invest considerable time, emotion and money in the process.
- Finally, ensure you plan the integration properly and don’t fall into the mistake of assuming that “management” will get on with integration from day one. It is not the deal that matters but what you do post deal.
Provided you take care in establishing what you are seeking to achieve through merger, invest appropriate resource in the merger process and ensure you allocate resource to the integration then a merger should deliver what you seek. However, if at any stage you begin to feel it is not right then stop. Whatever the investment to date, if it is not right it will cost a great deal more in the future. As Donald Trump said, “Sometimes your best investments are the ones you don’t make”.
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About the author
Paul Stothard, Partner, Pathways Management LLP
Paul is a Partner in Pathways Management LLP, a business providing management services to the legal sector. He and fellow Partner, Judith Dorkins, use their combined experience of law firm management to help firms across the sector to deliver business improvement whether through people development, strategic and structural change, risk management or brand service and process enhancement.
E : firstname.lastname@example.org W :www.pathwaysmanagement.co.uk