Viv Williams, consulting director at Symphony Legal, explains how you should approach finding a merger partner and what you should be looking for. (Updated 2 Jan 2020)
Merging your law firm (or acquiring another law firm) can be a huge step towards your strategic goals, but it isn't an easy option. It's not uncommon for merger talks to fail, or for completed mergers to deliver far less than was hoped for. Finding the right partner is vital.
Being clear about your objectives helps clarify what you should be looking for. You then use the early stages of the merger process to get a better understanding of what the other firm offers and identify issues that need to be resolved.
Your merger objectives
The most successful mergers tend to be those that are driven by a desire to better satisfy client needs. You should think about who your clients are, what clients you want to attract in the future, and what sort of demands they will place on the firm.
For example, you might identify strategic objectives of expanding the firm's geographical reach into new locations, or adding expertise in particular practice areas. Or you might want to strengthen the firm's financial position to invest in new technologies or upgraded marketing.
In practice, the rationale behind a merger may be more defensive. For example, a firm under financial pressure may see a merger as a way to pool resources and cut costs (although mergers initially add to the workload and costs and can make a bad problem worse). For smaller firms, the wish to merge may be driven by existing partners' retirement plans.
"Ask yourself the same questions as you would before inviting an individual to join the partnership. How will they help the firm? Are they a good fit?"
Andrew Otterburn, consultant, Law Consultancy Network
Being clear about your strategic objectives puts you in a much better position to assess your options.
- Is merger the best way to expand the firm? Could you set up a new office yourselves, or recruit additional partners with the expertise you want?
- Do you need a full merger, or could you achieve your objectives through a looser association? For example, you might be able to satisfy clients' need for overseas representation by joining a network.
- Would stronger succession planning be a better way to prepare for retirement?
- Should you be looking for a larger firm to buy your firm, rather than aiming for a merger of equals?
"Keep going back to the original strategic plan. Will the merger deliver what you were aiming for? Is the 'synergy' you are hoping for real or imagined?"
Denis Stevenson, Business development director, Rowlinsons Solicitors
Finding potential partners
Your strategic objectives should provide the broad outlines of what you are looking for in a merger partner. It should be relatively simple to identify firms meeting those basic criteria through basic research – for example, checking directories for firms covering your target locations and with the right expertise – but this is only a starting point.
You may also be aware of potential partners through the firm's networks of professional contacts. While an existing relationship will give you a head start in exploring a potential merger, it is worth widening the net to include a review of more potential candidates. There is likely to be only a relatively small number of firms that match your criteria.
Equally, you should be thinking about how attractive your firm is likely to be to these partners – do you match what they would look for in a merger? Mergers based on a growth strategy may throw up natural partnerships, where each firm offers complementary strengths. But if you are following a defensive merger strategy – perhaps because of low profitability – you are less likely to appeal to more successful firms.
Think carefully about how you approach potential partners and who should be involved. The smaller the number of individuals, the easier it is to keep things quiet until you are ready. At the same time, you'll need the wider partnership's approval at some stage. Be ready for leaks from discontented partners (or other firms) looking to destabilise the deal, your personnel and your client relationships.
"Few initial discussions lead to a merger. While you should widen the net, avoid widening it too much. Engaging with a specialist third party can help you progress in a targeted manner without running the risk of the market viewing you as a distress sale"
Andy Poole, partner, accountants Armstrong Watson
All 'mergers' are arguably acquisitions, even if no money changes hands, because someone needs to be in control of the enlarged firm.
If the firms are too closely linked in size, it may not be clear who is in control. This can lead to disagreements and under-performance after the merger.
When a larger firm merges with a smaller firm, which is more common, this is less of an issue. If the partners in the smaller firms don't want to lose control, they will not merge at all. Often, partners in the smaller firm are happy to give up control and responsibility and to focus on servicing their clients – provided that they do not face being eased out of the firm.
For the larger firm, a merger with a much smaller firm needs to be sufficiently transformative to justify the effort and disruption. Otherwise it may be easier to achieve a similar outcome through lateral hires and organic growth.
"Choosing the right merger partner is not dissimilar to choosing the right partner in your personal life. The more you hit it off from Day 1 and share the same interests and ambitions, the higher the likelihood that you will still be together decades down the line!"
John Staniforth, partner, accountants Moore Kingston Smith
A good cultural fit is vital. Understanding the other firm's culture should be your number one priority in exploring the merger. While you may already know the other firm's reputation, you should use preliminary talks to discuss how each firm approaches key issues:
- How fee-earners are compensated and promoted. How do partners' incomes compare to those of more junior lawyers? Does individual partners' compensation reflect seniority, 'eat what you kill', or a more collaborative approach?
- Relationships between lawyers and other employees. Do partners dominate decision-making? How much of the management of the firm is delegated? How highly are management activities and non-fee-earners valued – for example, in terms of compensation?
- Work-life balance. Are lawyers expected to put in long hours as a matter of routine? What are attitudes towards maternity/paternity leave, holidays, and career breaks?
- Clients. Is the primary focus maximising billable hours or delivering client value? How successful is the firm in building cross-functional client teams?
- The firm's values. For example, how much pro bono work does the firm do? What is the firm's involvement with the local community?
"If the key players can build a trusting relationship, it becomes much easier to deal with tricky issues like sharing out roles in the merged firm"
James Kerr, head of professional indemnity, Travelers
While detailed financial negotiations should be left until later in the process, it's worth checking two key issues from the outset.
First, is the other firm 'financially-compatible'? A big difference in indicators like charge-out rates, fees per partner, fees per fee-earner and leverage suggests a different culture. Big differences also make it unlikely that you will be able to complete a merger without some form of payment (or unequal division of future profits), adding to the complexity of any deal.
Second, are there any financial black holes that might derail a deal? Problem areas can include unfunded pension commitments, substantial debts (either to partners or to external funders), or long-term lease commitments. A poor professional indemnity track record can completely undermine the financial logic of a merger.
Other problem areas that can emerge during negotiations include:
- Potential loss of talent – for example, an ageing partnership looking for the opportunity to retire, or key talent who are not happy with the proposed merger.
- Overlaps in personnel and how you will deal with them.
- Client conflicts, particularly if these represent a significant proportion of any individual partner's fee income.
- Special deals that any individual partner may have negotiated with their firm.
- Practical issues integrating technology and billing systems. While a merger can be an opportunity to develop new, best-practice systems, you will not want to be dealing with too much disruption all at once.
"Only merge with people with whom you get along – if you want the merger to succeed"
Bill Willcocks, managing partner, Barcan+Kirby
Merger partner top ten
- Start with a strategy – be clear on what you hope to achieve.
- Take into account what clients and prospective clients want from the firm in future.
- Consider other options that might deliver the same – or better – outcomes.
- Identify broad merger partner criteria such as location and practice strengths.
- Don't restrict your search to firms where you already have contacts.
- Be realistic about which potential partners might be interested in your firm.
- Be clear about whether you want a merger of equals and what this implies.
- Culture is key – check that any potential partner is compatible.
- Identify any potential deal-breakers as early in the process as possible.
- Look for personal chemistry and a shared vision for the future of the merged firms.