30 Jul

Law Firms are under increasing strain. Many small and medium-sized legal firms are already debating whether to continue in their current form or merge with another firm.  

If you're thinking about adopting this approach, the most important thing to address is if the merger/takeover is "a good match." As these demands mount, some businesses may panic and seek simple, quick fixes. A merger may appear to be the simplest method to address these issues, but is it?
What factors should you consider while considering mergers?

1. Goals and objectives: It is becoming increasingly clear that in the current environment, the law firm has only two options: sink or swim. Simply surviving still is no longer an option. Legal firms that do nothing and expect to continue as they have for many years face extinction. They are vulnerable and may not survive the numerous threats posed by the ongoing reduction in legal aid rates.
As a firm, you must establish your unique vision of the future for your own practice. Is the merger aligned with your short-term and long-term goals?

2. Merger Structure: Is the new merged firm's structure compatible with yours?  It's possible that the merger may offer up previous unconsidered options. But, if not, how will the merger help you hit your target? Be extremely wary of a merger for the sake of a merger. Does the other company have a different clientele, and serve a distinct geographical or professional community – do they have strengths and skills in areas where your firm is weaker? Is it really worth taking over another business and all of its clients if that firm is still devoted to what is left of legal aid?

3. Size: A lot of firms may be enticed to combine based solely on the misguided assumption that bigger is better. This is a risky and too simplified viewpoint. Larger organizations may have advantages in certain areas, such as financial gains from economies of scale, broader areas of competence, higher depth of legal speciality, and better managerial resources, but they may not. A larger practice may be inefficient as well, with insufficient financial management, plenty of offices, & poor communication channels. Large legal firms with several partners may be difficult to adapt and resistant to change. Could the merged businesses' position worsen rather than improve as a result of their expansion? There are several examples of organizations that were scared into merging on the premise that their size would help them survive, only to perish completely years later. Could the merger's position worsen rather than improve?

4. Standard: The world in which Solicitors operate is challenging, and it is not getting better. To survive, businesses must make difficult commercial decisions that may not always fit well with the milieu of gentlemanly professionals. Just because you wish to combine with another business does not mean you have to take on all of their work, staff or partners. If there is a particularly profitable department or simply a fee earner, why not consider headhunting them rather than taking on the entire firm? Similarly, is there a business that is appealing as a whole but has one partner, department, or even client type that you just do not want to bring on board? Consider a merger that does not include that department.

5. Leadership: Control is a vital component in whether a merger succeeds or fails. Every successful business needs a clear vision as well as strong yet sympathetic leadership. Consider a merger of two typical local law firms, with all existing partners receiving a stake in the new business. Who will be the firm's senior partner, how will management decisions be made, and how will partners be listed on the firm's letterhead? All of these concerns have emerged in previous mergers, and as the phrase goes, "those who haven't read their history are bound to repeat it." Any legal company's vision will become increasingly important, and if there is no agreement on who ultimately bears responsibility for choices in a combined firm, there will be little clarity in its direction.

6. Culture: Every business has its own particular culture, which essentially means "how we do things around here." One successful firm may laud traditional values, have a solid traditional customer base, be sceptical of "marketing" attempts, and favour a formal style of doing business that emphasizes professional principles. Another similarly successful local practice may have open-plan offices, a less strict dress code, and a managing partner who is excited about marketing with a full-time marketing assistant and may regard itself as a company providing legal services. Imagine how these two companies might join if their stock shares were about equal. It would almost certainly be a fiasco, with a subsequent ugly de-merger on the horizon.

7. Value: While a lawyer's practice must always adhere to the greatest professional standards, it is, at its core, a business that exists to generate income. The most crucial question to ask about each merger is if it adds "value." What is the point of the merger if it does not result in cost savings, new business prospects, or improved profits? If two firms that are both struggling to be profitable merge, unless there are cost savings, such as in overhead or some other way to increase profitability, all you're left with is a larger firm that is struggling to be profitable, with all the trials and pressures that any merger inevitably brings. Simply put, if a proposed merger does not provide value, it should be rejected.

8. Branding: Every legal practice has a unique value proposition. You may be fortunate to have a reputation for offering high-quality legal services as well as outstanding client care to high-net-worth customers, or you may be known as a truly competent legal aid practice with a reputation for going the extra mile for the client, whether it is lucrative or not. Likewise, the legal practice with whom you intend to combine may have a terrible reputation for taking care of its clients. The perception of the new firm among current and potential prospects is critical to the success of any merger.

9. Background checks: Before engaging in any contractual merger, any prudent firm will conduct extensive due diligence on the other firm's performance. Apart from the previous several years' finances, probably the most significant papers you should review are the other firm's internal complaints record and, most crucially, their professional indemnity insurance records. If your insurers are going to demand a significant increase in your rates, you should think twice before merging.

10. Change: Never underestimate the challenges and period of upheaval that will inevitably accompany even the most successful merger. Many attorneys and support workers just dislike change, and one thing is certain: any merger will bring lots of it. Even if the merger is essentially a takeover, with one business owning 100% of the newly combined practice, there will be a significant change. New colleagues, increased or decreased responsibilities, workplace relocation, and the implementation of new systems may all be disruptive. Even in the smoothest mergers, there is an unavoidable cost to all of this.

Even if your organization has resolved that daring action is necessary, you should always explore the alternatives to any merger/sale/acquisition. There might be various solutions to your problem or ways to approach that business opportunity you spotted. A long-term marketing strategy that results in slower but constant organic growth internally might be the answer. While a merger may ease some of your challenges, bear in mind that even with successful mergers, there will always be unexpected barriers and difficult settling in time.

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