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Why Do Law Firms Merge?

Why Do Law Firms Merge?

Last week there was an article in my local newspaper that talked about two law firms that were merging. I was intrigued by the idea of two completely independent firms joining and how the people at each company would react to this news. As I read through the article, I wondered about the reasons behind the merge, asking myself: why do law firms merge?

Law firms will merge for different reasons, depending on the specific strengths and weaknesses of the firms in question. Some common reasons that two law firms will merge include: 

  • Increase the geographical reach of the firm
  • Add on new areas of specialty law practice
  • Improve on current specialties by adding new experts
  • Create a more competitive position in the market
  • Increase or decrease the number of clients
  • Financial concerns by one or both firms

What Factors Lead to Law Firms Merging?

What Factors Lead to Law Firms Merging?

 

Most law firms are always looking to expand their practice, often through obtaining more clients who need their services. There are many different ways that a law firm can go about this, and one of the most common ways is through a merger. A merger will bring two separate law firms together, combining their clients and cases and their lawyers, support staff, and other administrative personnel.

Specialty Areas of Law

Two law firms may merge to improve the services they offer in specialty areas of law, such as international tax law, divorce custody law, or commercial real estate. There is no limit to the types of specialty law that a firm can practice, so many different specialty law types could benefit from a merger.

If a practice already has attorneys specializing in that area of law, a merger might bring these experts from both firms together. This can increase the depth of law practiced, as each attorney will bring a different skill set and legal history to the table. Both law firms will benefit, as overall, there will be more experts to tackle complex cases.

If only one practice has attorneys who work in the specialized area, then the merger can help bring that new area to the other law firm. In this case, the newly merged law firm will have the personnel and resources to tackle cases that fall under this specialty that only one of the firms would have been able to handle before the merger.

Geographical Range

Another common reason that two law firms merge is to increase the new firm’s geographical range. This is an easy way for a firm to have a presence in new countries or geographical regions where they don’t currently practice.

Merging with a firm that is already practicing in a region makes it easier to add new clients in that region. It also removes many of the administrative barriers that come along when trying to open a business in a new area. Many things, such as relationships, bank accounts, and professional services, have already been established, leaving room for a smooth transition.

Client demand in a particular geographical region can also be a factor, especially around specialty practice areas. If the clients of one firm demand additional services that that firm can’t provide, pursuing a merger may be an easy way to improve their ability to address those legal needs and better meet the needs of their current clients. This can be especially valuable if clients threaten to take their business elsewhere unless the firm can meet their needs.

Financial Issues

In some situations, law firms have previously made bad decisions that have left them in a financially vulnerable position. They may have over-extended in both personnel and office space, leaving them with too much unused real estate that they can’t afford the payments on. In other situations, a law firm may have made a poor financial investment that has destroyed much of its capital.

In rare situations, a law firm has been charged a fine for bad behavior. This is usually levied by local, state, or even federal government agencies for violations of laws or other policies. Merging with another firm can provide the financial resources to pay this fine and help rebuild the firm if there were previous layoffs.

What Steps Need to Happen for Two Law Firms to Merge?

What Steps Need to Happen for Two Law Firms to Merge?

Law firms are highly complex business entities, and mergers don’t happen overnight. At a minimum, they require months of dedicated and detailed planning to make sure everything goes smoothly without having a negative impact on their clients.

Determine Merger Objectives

Before any actual work is done, both law firms need to think carefully to determine if a merger is the right choice for their business. They should review their strategic plans and determine how a merger will help them reach their goals or if they need to revamp their current goals.

Each firm should also make sure it has done everything possible to improve its functionality and image before the merger conversations even begin. Reviewing and cleaning up their strategic plan is only the first step. They need to apply the same scrutiny and self-reflection to their financials, open lines of credit, and overall monthly expenses.

While in this contemplation phase, law firms should avoid entering into any new long-term commitments that could impact a potential merger. This includes avoiding any new long-term leases on real estate space for offices, taking on risky client cases, or unfunded partner retirements. They should also be careful when adding new partners during this time, as a partnership can be a crucial point of negotiation for any potential merger.

Complete a Full Internal Assessment

Once a firm has decided that a merger is the best course of action, they need to evaluate every aspect of their business operations carefully. Working from the top down, this includes reviewing current partners, associates, administrative personnel, and support staff. There need to be clear job descriptions for each person, as well as an understanding of the dynamics at both the team level and firm-wide.

Other areas that need to be assessed and documented include:

  • Firm culture
  • Work ethic
  • Billable expectations
  • Human resources policies (vacation days, sick time, benefits, etc.)
  • Practice philosophies
  • Office space
  • Technology solutions (case management, customer relationship management, payroll systems)

Negotiate the Merger

After the assessment stage, the senior leadership for both firms will meet to negotiate the terms of the merger. They can be assisted by outside legal counsel or special merger consultants who are experienced in helping mergers proceed quickly and smoothly. These specialists can help make sure minor concerns don’t derail the entire merger process while also ensuring that issues from small to large are appropriately considered and addressed.

The negotiation phase will also include creating a merger implementation plan that will indicate what final solutions will be put into place before the merger is complete. This includes negotiating and agreeing on all of the items listed above, ensuring that everyone will be on the same page. The two law firms must decide on issues from the overall firm philosophy to what caseload management system to use.

Implement the Merger

At last, the day has come to merge the two law firms together! If both firms completed extensive assessments of their individual practices, implementation could go quite smoothly. As long as senior leadership made decisions during the negotiation phase, individual departments can tackle their areas of responsibility.

Integrating two law firms together can sometimes even begin before the ink is dry on the merger agreement as long as there is a high level of confidence that the merger will actually go through. This can allow individual teams to get ahead on some practical transition issues, which improves the chances of a successful merger without impacting client services.

During a merger, a transition team usually leads the charge to make sure the merger plan’s actual implementation is running smoothly. Implementation will usually take several months to be complete, and it may take even longer for personnel to feel like they’re working in a new and singular firm. The transition plan may continue to meet for months after the initial merger date to ensure any issues have been addressed before the merger process is considered complete.

What’s the Difference Between a Merger and an Acquisition?

What’s the Difference Between a Merger and an Acquisition?

With a merger, no money changes hands. The two law firms are coming together to become one in pursuit of creating a better business opportunity under a new-and-improved larger entity. With an acquisition, one law firm purchases another, including their personnel, client list, caseload, real estate, and any additional resources. It is a complete takeover of one law firm by another law firm.

Both law firms can negotiate many of these things during the acquisition process, and a firm can try to get more money for any of their assets if they think they are being short-changed. However, the acquiring firm can also choose to walk away, which can be detrimental to the firm they are trying to acquire if they are in financial straits. As with mergers, most acquisitions utilize an independent counsel or consultant to ensure everything proceeds smoothly.

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