Best Practice Tips: Law Firm Merger/Acquisition–Should We Merge or Acquire?
Asked and Answered
By John W. Olmstead, MBA, Ph.D, CMC
Q. I am the managing partner of an eight-attorney firm in Dayton, Ohio. We have two equity partners (both in our early 50s), two non-equity partners, and four associates. Our practice is a very niche-specific practice and there are only three or four other practices in the state that do the work that we do. There is another firm in Cleveland, Ohio, that has approached us regarding a possible merger or acquisition. The firm does similar work that our firm does. However, this firm also handles some areas we would like to get into that fall within our niche area. There are two founding partners in the firm (one in his late 60s and the other in her early 70s), one associate attorney, and four staff members. The two partners are planning on moving toward retirement and are looking for a succession strategy. They have not shared with us their timeline or any financial information. We have had one face-to-face meeting and several phone calls. We would appreciate your take on this, next steps, and whether we should pursue this matter further.
A. You have not indicated whether your firm has a strategic plan. If you do, my next question is whether this practice area and having another office three-and-a-half hours away support the vision of your firm. Often, but not always, a merger will emerge as a way to achieve some aspect of the firm’s vision. For example, a merger might help the firm:
- Enhance the firm’s competitive advantage
- Increase the firm’s lawyer bench strength
- Add practice areas that are complementary to existing areas
- Geographical market expansion
- Increase or diversify the firm’s book of clients
- Solidify client relationships
- Increase the depth and breadth of services
The above would be the right reasons to consider a merger or acquisition. You should take pause if the reasons you are considering merging or acquiring the other firm include:
- To merge because other firms are merging
- To correct internal weaknesses
- To solve financial problems
- To deal with unproductive partners
If your firm does not have a strategic plan, you may want to at least engage in some form of internal self-analysis to ensure that you are looking through a clear lens, are building a sound business case for the merger or acquisition, and are identifying the characteristics of the ideal merger/acquisition candidate.
In your situation you are looking at actually acquiring a practice three-and-a-half hours away with two senior partners who will be retiring. Obviously, there are risks, but the devil will be in the details that will come out of a due-diligence examination, which I believe is your next step. Here is a list of information you should ask the other firm to provide.
Your due-diligence examination should focus on:
- The firm’s practice and culture
- The firm’s clients and client mix
- The firm’s people
- The firm’s attorneys
- The firm’s financial performance and overall economics
- The firm’s infrastructure, including IT and communications systems and practices
Right up front, you should ask the partners in the other firm their specific timeline for retirement and how long they will be available for client and management transition. A key issue will be whether clients will remain with the firm when they retire. Are there others in the firm, non-equity partners or associates, that the clients have confidence in to the extent they would remain with the firm, or will this all be on your shoulders as owners of the acquired firm? The other question you should ask up front is what the partners of the other firm are looking for in the form of purchase price or compensation for the firm.
John W. Olmstead, MBA, Ph.D, CMC, (www.olmsteadassoc.com) is a past chair and member of the ISBA Standing Committee on Law Office Management and Economics and author of The Lawyers Guide to Succession Planning published by the ABA. For more information on law office management please direct questions to the ISBA listserver, which John and other committee members review, or view archived copies of The Bottom Line Newsletters. Contact John at firstname.lastname@example.org.