Law firm mergers continue to be popular and 2023 was no exception. They are complex transactions that require not only strategic business planning, but also due diligence to make sure the law firms are compatible on several fronts. It is not as simple as two firms deciding to merge on a Friday afternoon and opening as a new and improved combined law firm on Monday morning. There are many moving parts, some not as apparent as others, which need to be evaluated when calculating whether a law firm merger or law firm acquisition is right for both organizations. Beyond the customary due diligence, there is a considerable amount of research and deliberation that must be completed before law firms can decide on the long-term commitment to a merger.
In an uncertain economy, mergers and acquisitions can be extremely attractive to firms looking to increase their depth in their practice groups by merging with other firms, especially boutique firms that may have difficulties weathering the economic downturn. There are many good reasons why law firms should continue to focus on growth even in a down economy. However, law firms need to differentiate between growth where one plus one does equal 10, focusing on growth that makes good business sense and matters to clients, and growth that is simply for the sake of growth. Growing a firm in size and scope does not always make the law firm better or different from the client’s point of view.
Law firm mergers and acquisitions should serve as a broader business goal. If merging or acquiring is not going to benefit both firms, it should be avoided entirely. While this may be only one side of the equation for consideration, the combination of the two firms must create a more competitive market position for the merged firm, or it will deplete resources without improving the bottom line.
As the largest law firms continue to grow, the market for legal services continues to be segmented with an economy that is driving law firms to merge or acquire other firms. Interest in mergers and acquisitions remains high, and has rebounded after deals dropped off during the COVID pandemic. Clients have become more sophisticated and have more complex legal issues. This has raised the bar on the competitive landscape and law firms are finding that practice depth, geographic coverage and other strategic factors––and some factors not so strategic––are becoming more critical to their success and profitability.
Law firms approach strategic growth in many ways depending on their size, practice growth and specific need. Many firms are content to grow organically which is more like a conservative safe mode approach, but there are other firms that have created strategic growth plans. Most of these firms have sufficient capital, or know where to find it, to make those investments in talent, but the precursor to law firm mergers and acquisitions is attributed to two primary sources:
These could be organic or strategic modes of growth, but in some cases, it is more about opportunity that presents itself at the right place and time. In the end, it is about identifying the right platform for client, firm, revenue, profitability and compensation growth. Again, if all parties involved do not benefit, it is not worth pursuing.
The number of mergers and acquisitions in 2023 and in years past has created a wealth of experience and lessons learned in evaluating and closing deals. Most successful mergers and acquisitions are based on clear strategic thinking, but there remain several concerns that law firms should keep in mind as they evaluate their options.
First, law firms should have their growth strategy in place prior to evaluating a merger or acquisition opportunity. The strategy should be clear on the firm’s vision, key practice areas and geographic areas targeted for growth. In addition, the plan should address how the firm’s ideal merger partner will contribute to and benefit from being a part of that growth plan. Plus, firms need to consider whether the combination of the two firms would achieve the strategic goals for growth identified and meet the standard of one plus one equals 10 bottom line? Does this merger or acquisition increase business, increase revenues, improve profitability and increase partner compensation?
Before law firms get too far into any merger or acquisition discussions, law firms need to determine what being “better” means to the firm, as well as explore the implications for lawyers and staff, daily operations and overall strategy.
Law firms need to define “better” both externally and internally. Externally referring to benefits to clients and market position, and internally, referring to improving financial performance and depth as a combined firm. The goal is to be exceptionally better, so law firms must have the willingness to do the things required to become better as a combined firm.
The willingness to define and meet the better expectation now brings behavioral components to the mix and law firms need to step out of the empirical assessment and focus on the culture of the two firms and how the combined firm will achieve the better goal.
Culture is critical to the success of any law firm merger or acquisition. The future prospect can look great on paper with financial, market, productivity and profitability projections that are rosy red and full of promise. Further discussions and financial due diligence is complete, and two firms combine. Everyone lives happily ever after, but not always! Some post-merged law firms experience levels of dysfunction that require “fixing,” or result in a failed merger.
The importance of law firm culture has become more pronounced and implicit in the profession, but even with that stated, culture is often discounted when compared to financial and strategic due diligence in mergers or acquisitions. The culture of two law firms must be successfully aligned if the merged firm is going to be culturally stronger. Unfortunately, mergers and acquisitions can fail due to cultural incompatibility, despite the other areas of added value. Post-merged firms might be more profitable, but the lawyers and staff may not work well together. Mergers and acquisitions by their very nature are expensive, but a failed merger can prove to be even more costly.
In our next column, we will explore both the right and wrong reasons for law firms to merge as well as discuss the development of merger and acquisition checklists that will identify and explore both the detailed financial and nonfinancial due diligence components for success.
