Archive for the ‘Mergers’ Category

Selling Your Law Practice to Retire? — Address the Buyer’s Needs

April 15th, 2009 by Jim Cotterman

Retiring lawyers are well served if they approach selling their practice by thinking like a buyer, a client and possibly an employee.  No, we are not suggesting that you negotiate against your own interests.  This is not about offers, due diligence, deal terms or the specific writing that memorializes the transaction.  This is about putting in place the means for the buyer to realize their objectives — client and possibly personnel retention.  The clients are the essence of the deal when a seller is retiring.  Without clients there is no value to the buyer.  And depending on the specific situation, there might be value in retaining the associates, paralegals and support staff who service those clients.  Buyers think about integrating the acquired practice into their firm.  This includes preserving current relationships and forging new relationships among clients and employees.  Find ways to accommodate those needs to have a successful deal.  Understand if your buyer has experience in integrating an acquired practice or if this new to them as well.  The buyer needs to be part of the transition efforts and the seller needs to devote time specifically to transition.

Clients select counsel for a variety of reasons.  Trust in the lawyer and the firm’s ability to handle their legal matters is high on that list.  In today’s market, value and price paid have taken on even more importance then they traditionally held.  Continuity in service is also an issue that is generally raised in connection with succession issues but is also seen in those firms where there is a high turnover amongst the delivery team (associates, paralegals and staff).  That high turnover may be due to partner relocations and/or internal firm realignments.  Either way, clients grow weary at the thought of training new people to their business, culture and priorities.

Employees worry about jobs, pay and benefits first.  After that they worry about changes in reporting relationships, duties, work policies and the like.  For most, this is a first time experience.  They will be nervous because most acquisitions that are covered in the press focus on the redundancies and efficiencies that mergers create.  And the one thing they are certain of is that things are going to be different.  Change may not be bad, but it is generally not well received initially because of the many unknowns that precede it.

Communication is the first element to consider.  Make sure your employees hear about the transaction from you before they hear about it from someone outside the firm or even worse from the announcements to clients and others.  Tell them yourself and in person if it is feasible to do so.  That has become much easier with video and audio conferencing.  Be honest and upbeat about the upcoming changes.  Have a carefully thought through message and don’t try to wing it.  Consider what questions the staff will have when putting the message together.  Identify positive changes and benefits to the employees.  During Q&A, admit if you don’t have a good response to a question and promise to get back to everyone once you do (make sure you actually do this). 

Equally important is the communication to clients.  They should hear of the transaction before the general public.  While a personal visit or call is most appropriate, either may not be practical for all of your clients.  For some clients this may not be a surprise, but rather the culmination of a collaborative process where the client knows you have been putting into place a transition plan.  Again the message is of vital importance.  Key to the clients is continuity during the transition and long term benefits of the deal.  This begins the introduction of the successor to the client.  While it may be delivered as introducing new resources and capabilities initially; eventually it will be about building trust in a successor.

Succession by Acquisition

February 10th, 2009 by Jim Cotterman

One of the expected drivers of law firm acquisitions is the succession and exit strategy needs of smaller firms, particularly law firms with under 20 lawyers, although this certainly this will affect law firms of any size. 

Many of these deals are being done because the senior group looks around and finds that they are short on talent immediately behind them who have the “right stuff” to carry the business forward.  There may be some rising stars further down the line, but they may not be ready in time and they may not stay very long if their assessment is the same as yours.  The best opportunity to monetize their interests (realize their buy-out expectations) may be to secure a deal with another firm.  Other viable options may also exist, but they will take resources and time to implement that a deal will not.

Yet there still needs to be a real strategic benefit beyond business continuity for doing a deal.  That benefit may be improved scope and/or scale.  Deals where one is simply “buying” clients, even when there is no “consideration” involved are risky to the buyer.  Note that most of these deals are not acquisitions in the traditional corporate sense where cash, notes and stock are used as the primary consideration.  Here the primary consideration is most often a compensation guarantee currently and possibly in the future upon exiting.  But I digress.  The very reason discussed above that may have prompted the senior partners to look for a deal is a warning to the buyer.  The buyer needs to understand the increased risk of acquiring a firm where the senior partners are moving out immediately or shortly after the deal closes if the rationale is along the lines described above.

Are De-Merger Clauses Useful?

October 23rd, 2007 by Jim Cotterman

Merger discussions generally center around the rationale for and methods of putting two law firms together.  The focus is on the opportunities to access new clients and markets, to qualify for more interesting engagements, and to bring on additional expertise.  There is a long list of issues to consider — strategy, culture, conflicts, financial results and the like.  Then there are structure concerns, redundancies, tax considerations, and more to negotiate prior to bringing the transaction to a successful conclusion.  Yet even with careful planning, every once in a while the pre-merger thinking misses the mark and the post-merger firm is not destined to make it. 
Like pre-nuptial agreements, de-merger clauses are often not considered appropriate.  Who wants to plan the breakup at the beginning of the relationship?  And certainly an “out” option may delay and complicate integration of the two firms — such as sharing clients, integrating service teams and combining administrative functions.  A de-merger clause may not be appropriate in all situations, but it can be helpful.  Undoing a failed merger is tricky under the best situations, it becomes much more challenging when one firm has given up its identity as part of the deal.  Having a roadmap can ease the difficult and sometimes contentious task of undoing the deal.
Here are some factors where a de-merger clause might be helpful:
Protecting client relationships — this can be complicated in two ways:  1) how client relationship responsibility is assigned in the combined firm (expertise, location, succession plan and the like), and; 2) who clients want to continue with as their advisors (the client’s wishes control).  A de-merger clause should think through how to fairly treat the firm who brought the client to the dance.  Then there are the new post merger clients.  Here the complications are how the client came to the new firm and where it ends up after the break up.  Particularly difficult are jointly obtained clients where only one firm will serve the client going forward.
People — A law firm’s most precious resources are its people.  Generally one would expect to have people return to their pre-merger firm.  Many times it is not quite so simple.  There may be some unofficial recruiting going on behind the scenes.  Some individuals may prefer to “cross-over” to the other firm.  Then there are the displaced personnel lost during rationalization.  Finally there are the reluctant participants — partners who went along with the deal with reservations and now desperately want to take their practices and leave.  Each of these scenarios can be anticipated and protocols agreed to as part of a de-merger clause. 
Infrastructure — It is more an issue when the firms have combined physically.  Someone will need to move or there will be costs to segregate and reconfigure space to accommodate two separate firms.  The same holds for technology, library and other shared administrative services.
Partial acquisitions — These are deals where not all partners become equity partners in the new firm.  In these instances the de-equitized partners are often bought out of their equity positions as part of the transaction.  If these buy-outs are relatively minor as a cost of the deal, a de-merger clause might be helpful.
When are de-merger clauses possibly not helpful?
Succession deals — The purpose of a succession deal is to provide an exit strategy for “sellers” while transferring clients and market presence to the “buyers.”  The acquirer will invest heavily in making the transfer successful and it would not be terribly helpful for the seller to have an out to pursue a more attractive offer that could come along.
Integration efforts — Forging a single firm out of the two predecessor firms is challenging and requires three to five years under good conditions.  Having a short term strategy to undo the deal complicates these efforts.  It is just common sense that each party will tend to protect their positions while the option exists.  Thus a discord to the efforts required to go forward as a single firm.