Law firm mergers can be very difficult to execute. Well, a good number have worked so far. But at the same time, so many have failed. There are several reasons why law firm mergers might fail. One major reason is finances. Unless the combined firm can find a formula to gain economically from the merger, it might be impossible to escape failure. In most cases, this financial advantage allows the combined company to push ahead with the merger discussion.
This is why you need to discuss financial issues very early in the merger process. Mergers can be structured on different kinds of financial strategies. For instance, the acquiring firm could receive the acquired firm’s work-in-progress (WIP) and law firm merchant account receivables in return for guaranteed compensation and other considerations such as a return for capital credit. Alternatively, the acquired firm could retain its WIP and accounts receivables and contribute a portion of this towards capital. There are several ways to structure financial deals; the important thing is to model the structure at the outset.
Other than that, you also need to discuss factors such as compensation levels for partners, staff, and attorneys among other issues. Here is a list of other factors that should be discussed early on to avoid future conflicts;
- What expenses are assumed by the acquiring firm? Typical expenses may include; existing contracts and leases.
- What level of tail insurance is necessary and who should pay for it?
- What redundant costs exist and which ones can be eliminated?
- What capital will be contributed, by who, and when?
- How much will the integration cost? Where does the money to fund this come from?
- Will it be necessary to hire a broker? If so, will the brokerage fee be amortized or expensed?
Workable financial structures include, at a minimum, a proforma combined income statement and balance sheet even if just for the first two years following the merger. You also need a cash flow analysis for the same period as well as key financial metrics including; profits per partner, revenue per lawyer, and profits per equity partner.
Finally, the merger must address two critical issues;
- Compensation for the acquired firm’s partners, and
- Goodwill.
Once these issues are addressed, it becomes easier to find a formula to make the combined company benefit from economies of scale.