By Gene Commander
Colorado law firms face mounting business pressures. Most notably, firms are grappling with a new brand of supply chain disruption that is causing a shortage of affordable and productive talent.
The Opportunities Presented by M&A
Law firm mergers are bouncing back nationally as the pandemic eases, according to Reuters. But Law Week Colorado data suggests only a handful of Colorado firms have merged in the past five years, so the opportunities are ripe.
Mergers provide opportunities for like-minded, future-focused law firms to gain bench strength and market share while better serving an enhanced client base. Properly designed mergers can help firms operate more cost effectively, offer greater breadth of services, sensitively address leadership and transition issues and reenergize their talent’s entrepreneurial spirit. While mergers can boost market share, reputation and goodwill, the greatest advantage they offer in today’s business climate is ensuring firms have the talent needed to meet growing client needs. Mergers involve a variety of nuanced professional, financial and ethical issues, however, so mergers that are not carefully considered and executed present significant business risks.
Executing M&A
Four basic steps are essential to execute an M&A transaction.
First is identifying a promising, like-minded candidate for merger. A deliberate process is required to find the right match. In the initial stages of evaluating potential candidates, law firm leaders would do well to ask themselves and their colleagues what lawyers and practice groups from other firms they admire the most and who they’d truly like to build a deeper business and professional relationship with.
When it comes to making an ideal match, size isn’t determinative — rather, it’s mostly about cultural and financial compatibility. Considerations when evaluating cultural fit include degree of camaraderie, leadership styles and attitudes toward diversity, equity and inclusion. Notably, it takes time to truly understand what makes another firm tick, so law firms should exercise patience in developing a full understanding of one another’s culture. One option for doing so is to serve as co-counsel on legal matters.
As for financial compatibility, billing rates and compensation plans are among the key indicators. Chances are slim that a law firm subscribing to an “eat what you kill” compensation philosophy will find lasting common ground with a firm committed to a value-based compensation plan.
The second step — once two firms agree that a match appears promising — is conducting robust due diligence. At the outset, both firms should sign a mutual nondisclosure agreement to permit open-book disclosures and negotiations, so word doesn’t leak to clients or competitors and scuttle the deal. Another first order of business should be to exchange client lists and check for business and ethical conflict issues. Those checks should be periodically refreshed until the final papers are signed.
Firms should also exchange verifiable financial metrics for at least the past three fiscal years, such as balance sheets, profit and loss statements, income tax returns, K-1s and W-2s, business origination numbers and individual cash receipts. Also critical are professional assurances regarding matters such as past, pending or potential malpractice claims and grievances along with upcoming changes in client relationships. And firm leaders must be prepared to walk away when red flags appear or the deal just doesn’t feel right.
Third is for both organizations to build a durable consensus in support of the merger at the opportune time. Leaders should build consensus by letting all voices be heard — and by taking seriously any concerns that are raised. All key leaders, not just the most visible ones, should be included so they understand that they are valued in the process and will be valued in the merged firm. Firm leaders should share with employees how the merger will help the firm attain its vision and how it may affect employees’ work, compensation and benefits.
Last, thoughtful investments in post-closing integration are essential to realizing a merger’s full promise. Ample efforts should be devoted to integrating the firms’ business operations, including practice management, information technology, billing, financial reporting and marketing, in a way that appears seamless from the client’s and business community’s perspective.
Beyond the technical aspects of integrating two firms, the merged firm should synergize the successful elements of both legacy firms so that the whole becomes greater than the sum of the parts. Including leaders from each firm in the combined firm’s leadership team can help support a culture that speaks to all human capital. A generous budget also should be directed to helping cultivate relationships and understanding among the different parts of the merged firm. Further, firm leaders should jettison policies and procedures inconsistent with the new firm’s vision for the future, such as outdated compensation plans and staffing arrangements.
Firm leaders should recognize that a merger will yield its return on investment in years, not months. And as a final word of caution, M&A is just one part of a firm’s smart growth journey, and firm leaders must be mindful during the merger process not to neglect other important investments. Most critical is ensuring a magnetic law firm culture where talent wants to stay by promoting professional growth, career advancement and well-being.
In closing, law firms need refreshed strategies as they confront a daunting labor market. M&A merits serious consideration as a means to solve talent challenges — especially in Colorado, where few mergers have taken place in the last five years. Although a deeper dive into the advanced mechanics of M&A opportunities is beyond the scope of this article, this piece highlights the key elements to successful law firm mergers that can help Colorado firms enjoy continued prosperity.
– Gene Commander has more than 40 years of experience in the legal industry while practicing construction law with small, midsize, regional and national firms. He formerly served as managing shareholder in the Denver office of Polsinelli PC, an Am Law 100 national firm. Gene is now an executive business counselor for the legal and construction industries, with a special focus on business growth strategies for Colorado law firms. He can be reached at [email protected].