Practice management; Law firm mergers

Better together?

Date: 27 January 2012
Authors: Viv Williams & Phil Jepson
Issue: Vol 162, Issue 7498
Categories: Features, Profession

Viv Williams & Phil Jepson tap into the merger discussions sweeping the legal profession...

According to research by Baker Tilley, 75% of UK law firms have spent some or all of the last year in discussions about mergers with other firms and many have offered themselves to larger practices as a potential exit plan. In the US, law firm mergers are up by 80% in the first three quarters of 2011 compared to the same period in 2010, with the market driven by transactions involving smaller firms.

Why is it that in the UK transaction volumes remain low, especially in comparison to volumes of discussions? First, it’s useful to consider the drivers forcing law firms to review their businesses and consider changing their shape and size:

The Legal Services Act: this is not only worrying the high street but also larger firms who fear attack from well-funded, but as yet unidentified, outsiders.
The economy: this has undermined the finances of most firms and removed the comfort that firms previously enjoyed. The oft-used refrain—“we are happy as we are”—has virtually disappeared.
Professional indemnity premiums: small firms with less than ten partners are finding their options reduced year on year.
The regulatory & compliance regime: the weight of this is perceived to fall disproportionately on smaller firms.

Taking these factors into account there is a clear view that the UK market needs to and will consolidate.

Law firms of all sizes feel threatened by differing aspects of market deregulation. Some of the fear is well-founded but the effect has been to create a frenzy of “discussions”.

Selling the business can seem an easier option than solving a strategic challenge. We have seen one or two large mergers clearly driven by the “Let it become someone else’s problem” attitude.

What is clear is that firms are much more open to the idea of discussing merger than they were before the recession, despite the lack of available funds. It is also the case that firms are becoming more open to the idea of merging with something larger than themselves. This should pave the way for lots of merger activity. So why are so many conversations going off the rails?

Where did it all go wrong?

Some discussions should never have started in the first place because there is clear incompatibility between the firms, whether partner personalities, types of work, lack of finances, etc. Others go awry because either one or both parties lack the skills required to progress them to a successful conclusion. Putting two law firms together is a complicated business. Aside from a range of business and financial criteria to consider, there are human elements and a wide range of vested interests and constituencies to satisfy.

Few partners in firms have the skills and resources to evaluate and process a successful merger without using skilled external advisers—the cost of integration, both physically and financially, is immense. Therefore, in order to improve the ratio of discussions to mergers, it is important for firms to recognise that fact—and get help.

A DIY merger is a bit like a large DIY plumbing project. You can, but why would you? Get the experts in. They can do the job quicker, at a known cost and without you having to pay to have your DIY efforts undone and then redone at a later date.

If you are a firm which is considering combining your business with another, what is the best way to prepare and execute?

Be clear & honest about why you are doing it

Firms may have clear objectives and a strategy in place to take them towards their objectives in which case a merger could be a way of executing the strategy. They may need rescuing. They may lack particular attributes in their business and be looking to add new skills.

Any one of these reasons is valid but firms should make sure they know why and be willing to share the reason. If they don’t know where they are going, any road will take them there. If firms are not clear what they are looking for and why, it is easy to be distracted and end up in talks with the wrong firm, which at best leads to wasted time and at worst leads to a failed or bad merger.

Whatever a firm decides to do, it should not pay to be put on a marketing list or a list of firms for sale—it has more chance of selling a week of timeshare in Spain.

Don’t just talk to people you know

Most law firm mergers used to be started on the fourteenth tee and sealed in the clubhouse between partners from different firms who knew each other. Bad idea. There are many firms out there and even in small markets you will not know or understand all of them. Firms need to do proper market research to help them identify who is out there who might fit what they are looking for.

If a firm is taking the initiative, it should use a professional intermediary to make the approaches. Once a potential seller knows what firm is interested in them, they immediately gain a false expectation as to the value of their practice. Additionally, being turned down can be embarrassing for both sides. An intermediary can make a discreet approach without revealing a firm’s identity.

Once a basis of interest is established a confidentiality agreement can be signed and things can move forward.

Firms should avoid being the subject of market gossip for as long as possible. It is better to avoid registering domain names until it is clear that the deal is going to happen.

Have a clear process

Firms should make sure they know in advance what information they want to exchange and at what stage. At your end the key stakeholders need to know what the discussion and approval process will be—and support it. One of the major causes of failed merger discussions is loss of focus and direction partway through; one or both parties lose their way and discussions run into the sand.

Don’t be like George Bush

Aside from being a good piece of general advice, the meaning in this context is that firms need to think about what is going to happen after the merger is done. How will it be implemented? What are the key roles? Who will fill them? What systems need to be in place? How will the firm accommodate the “big beasts” on both sides of the deal?

As soon as the deal is confirmed, a firm should set up an integration team to project manage the post-merger integration of systems, work and people or better still, bring in support from consultants who have integrated numerous mergers in the past.

If you do this well you can realise the synergies and benefits of the combined business. If you do it badly then you will find that 1+1=1.5 (or less).

It goes without saying that the good people in both firms need to commit to the combined entity rather than leave. Therefore, good communication, inside and outside the business, is vital.

See & seize the opportunity

Law firm mergers in the current market are largely about combining the skills, experience and clients of two groups of people who are each fairly loosely bound together and unco-ordinated. They are unlikely to be realising the true value of the business they have at the moment.

Combining two businesses can be an opportunity to release inherent value in a number of different ways. A merger creates pressure for change and a willingness to accept change that would otherwise be non-existent. It creates opportunities to move people around in the business, resolve leadership issues and change culture.

A good attitude to take is that the firm coming out the other side of a merger will not be the same as either of the firms that went into it—see this as an opportunity, not a threat.

To increase the value of a practice in merger discussions, or for outside investment, it is essential to look at the key issues that a potential investor, acquirer or merger candidate would find attractive in a law firm.

Examine every area—clients and how they are communicated with, the motivation of staff and the need to deal with under-performing staff and partners, careful control of finance and targets, the relationship of partners and clients and whether the former can be replaced by fee-earners, the embracing of technology, a website that attracts business, measurable and accountable marketing spend—all are areas to redress to gain the greatest value for a practice.

13 important merger lessons

Get help—DIY doesn’t work.
Follow a merger matrix (a document that helps see early in negotiations which parts of the businesses fit and helps decide if each candidate is worth pursuing) and have questions that could be “deal breakers” in the first meeting.
Before discussions begin, fully research the potential merger candidate. Ensure you know the work ethic of the firm, partners and fee earners and attitudes to staff.
Ensure the two practices are a “good fit” and never gloss over issues such as personalities. Many a merger fails because of personality issues and the reasons behind the merger. Is it really a good idea?
Check out partners in the target firm—take references and check with the bank and credit agencies. We have seen merger failure because one partner had invested heavily in buy-to-let properties, could not maintain his portfolio and became bankrupt.
Take professional advice on your corporate structure—the partnership model is no longer the solution.
Agree responsibilities. Who will be the leader and MD? Who will take responsibility for the administrative functions and who will be responsible for which clients? Again mergers fail because these lines are not drawn prior to talks.
Develop clear and concise job descriptions for partners and all staff, including expectations for chargeable and recoverable hours and charge out rates.
Agree all salaries and how profits will be retained in the new business.
Agree staff structure and who is getting which office and ensure you standardise hours of employment etc.
Dispose of under-performing staff and partners. In the current environment a firm cannot afford to carry any member of the team that cannot or will not perform.
Prepare a marketing plan that is measurable and focuses both internally and externally.
Be open with the partners and staff of both practices: do they understand how merger will affect their status? Do they understand the new expectations as to time, effort, etc?

And finally

A growing number of firms are coming to see opportunity and potential in merger and are becoming more flexible in what they are prepared to consider.

While that’s exciting, it makes it more important to do it correctly. The huge gap which presently exists between the number of conversations taking place and the number of deals being done suggests that firms have a way to go yet in learning how to identify the right merger partner and then how to deliver the “right” deal.

The above checklist will go part of the way to assist in this difficult process but it is wise to take professional advice and guidance on board at an early stage.

Viv Williams & Phil Jepson are directors of 360 Jepson Holt.

E-mail: viv.williams@360jepsonholt.co.uk & philip.jepson@360jepsonholt.co.uk

Website: www.360JepsonHolt.co.uk

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