Succession Planning for Law firms

The law firm world has changed without many of us noticing it. Many of the Partners who now wish to retire, bought into their firms in the 60’s, 70’s or 80’s when it seemed good business to buy equity for departing Partners and, more often than not, also agree to pay an annuity to them and their spouses.

In those days this seemed only reasonable. Track forward to 2017 and this is no longer the case. The rug has been pulled out from under their feet. Retiring Partners need to put themselves in the shoes of the next generation and ask, if you had your time again, would you buy in now? If the answer is yes, fantastic, you have clearly got a good firm and you should have no problem retiring, if it is no, then how can you expect anyone else to do so. To take each of these in turn:

If you would buy in again, then you have choices. You are clearly doing most things right so I would imagine you have thought about succession and have lined up salaried Partners who are happy and ready to take over. Or, if they are not ready to take over but are good fee-earners then you have a good vehicle to be acquired by another firm.

If the answer was no I would not buy in, and be honest here, then your choices are more limited. No doubt you have been an excellent lawyer for your clients but you have probably neglected your firm. This is the more common situation and not attractive to any junior Partner.

The most practical solution is to approach other local firms, or the national consolidators looking to open in your locality, and essentially hand them the keys to the firm, work for a few months to ensure the clients transfer over and leave. This is an undignified end to a professional career and entirely avoidable with a little planning but at least is saves run-off.

We are often asked when partners should start looking at succession and the answer is broadly when their ages start with a 5. If your age starts with a 4 you are probably someone else’s succession and have plenty of time to plan how to improve the firm. If you age starts with a 6 however, your options are more limited and becoming worse every year so start work on this immediately and aggressively.

The ideal time is mid 50’s. At this point, if you decide the right route is to bring on junior partners you are still going to be around for 5-10 years to mentor them, hand over relationships and ensure the firm is in a good place. Alternatively, if you decide a merger makes best sense, your firm is an attractive proposition and you will have 5 -10  years to enjoy the benefits of being in a larger firm and the enhanced profitability the merger has produced.

If we can help with your firm, please get in touch.

Why do some mergers work and others just don’t?

Why do some mergers work but others do not?

The answer is 6 P’s – Prior Preparation and Planning Prevents Poor Performance.

April 2017

This is the £1m question and the simple answer is that the losers frequently conduct the process in a casual fashion, with little structure. Those firms who tackle mergers with intelligence and planning will be the winners. As Kenny Rogers will confirm in the final paragraph!

Over the years we have developed the ‘Go-Path’ template internally as a check-list to make sure our clients have completed the initial high-level thought process. It has six parts, all of which should be completed as the merger procedure rolls out. These may seem too “management-speak” if you are running a small firm, but even for a sole practitioner thinking them through will help achieve your goal:

  1. Goals;
  2. Objections;
  3. Process;
  4. Approval;
  5. Timetable;

If the Go-Path concept is followed then checks and balances will either progress the matter towards a successful conclusion or there will be an exit before any damage is done, certainly before too much money is spent. Incidentally, it is far better if both parties follow this methodology together and exchange information at each stage.

Goals. Both firms should have documented goals. These should be contained in existing business plans. If such work has not been done then this area should be revisited. This needs to be done before any search for a merger partner takes place and helps the research and choice of merger targets as well as facilitating an informed discussion when initial meetings occur with targets

The next part of the methodology should be a critical examination of the goals and aspirations of the two parties and how these aspirations will be carried over to the new firm. This should include input from strategic plans, partners and key staff. The output from this work will include clear concise statements like “double revenue in the next five years”, “expand into the Thames Valley”, and “build up the tax and probate department”. These goals should be founded on the baseline of current financial performance. It is worth noting the advantages of an early acquaintance with each party’s goals and of being able to work towards them becoming common goals – or perhaps finding out that they could never be the same!

Objections. It might seem negative to focus on objections before the merger project gets off the ground, but it will save time and help focus minds. Objections come from people – so this is a people issue. Objections to mergers are usually split into two categories. One set of objections is about strategy, direction, ability, capability, skills, etc. In other words, concerns about where the business is going and its ability to get there. The other set of objections is about redundancy, change, demotions, loss of status, moving location, etc. In other words, concerns of individuals and how change will affect people welfare. “Will I be good enough?” is often a deep-seated people concern that manifests itself in myriad symptoms, all of which will conspire to defeat the best of intentions. Sometimes these personal objections will not come to the fore immediately. This is a real issue and one that must be constantly monitored. Either way there must be a conduit for objections. It is best if there is a formal process and one that is blame-free. Never ever castigate someone for bringing a potential problem forward. Obviously the issues that are not personal are easier to draw out. People will quickly express their concerns about the computer systems, whilst they will hide their personal issues.

Process. A merger must follow a process and should have a designated champion. It is beneficial to map out the steps that are to be followed and to make sure that all those involved know the phases and their responsibilities in each phase. The order of work is important. Whilst some tasks can be conducted in parallel others are sequential, particularly when the practices are being merged. Checkpoints must be put in place to review progress and to constantly check the logic of the deal.

Approval. Once you have your goals set, the champion should revert back to the partner group for approval on a regular basis. Do not leave this until the end of the deal make sure the Partner group is still committed and still behind the process. Additionally, the ongoing cost of the merger process, in money and time, should be transparent and approved by the partners.

Timetable. This should be formal and fairly rigid. There is also an argument that the timetable should be quite tight, thus avoiding procrastination and indecision – time kills all deals. The timetable should commence with investigation, include engagement, HOA, due diligence and completion, and CRUCIALLY cover the actual merging of the practices and their infrastructures. Some mergers get very difficult when the two firms are finally moving together. There is a tendency for the tail to start wagging the dog. The IT department will say that it needs six months to merge the systems. The accountants will want three months to merge the accounts. The advice is to merge the law practices, run two systems and sets of accounts for a while, and start to benefit from all the reasons for merging the practices that were agreed in the first place. Many will disagree with this approach, but the need to reduce the cost of the transaction and to get the fee earners working at maximum efficiency is vital.

Help. All of this work is onerous and not to be taken lightly. It is time consuming and has a tendency to become a priority over the business of the practice. This is the time to engage experts. Whether it is the first action of researching potential targets or the programme management of merging the practice, the money spent on outside help will pay dividends.

Finally, under no circumstances must a merger become ego driven or continue when it becomes apparent that considerable surgery is required to make two practices compatible. As Kenny Rogers once said “You’ve got to know when to hold ‘em, know when to fold ‘em, know when to walk away and know when to run.”

4 merger case studies from 2017

With the summer holidays coming up, we thought it would be useful to review 4 recent mergers to highlight the wide variety of deals that get done. With mergers, no one deal is like another and there is no right or wrong way of doing them!

Case Study 1

Our client was a sole practitioner firm in the Thames Valley. Fee income was c£400,000 from the Partner and 2 part time paralegals carrying out typical local work. The firm had provided an excellent income for 20 years but was run as a life style business and now the Partner wished to retire. We undertook a research exercise, looking at local firms who might want to enter the town as well as firms already there with the key element being to assess their staff to make sure that firms we approached had the capacity to come in and take over the clients over a 12 month hand-over period. We quickly found that one firm was particularly well suited and terms were agreed on an earnout basis with the merger going live 4 months after our instruction.

Case Study 2

Our client was a small west end property firm who we had known for a while. They had a particularly strong and loyal client base generating over £1m in fees. Both equity partners were in the mid-50’s and they had begun to worry about eventual succession and the burdens of compliance. Having been together in their own business for a long time it was important that the firm the joined was culturally alike and would allow them to operate as their clients had come to expect. Knowing the London market well, we arranged 3 meetings for them and quickly moved onto agreed heads as full equity partners in a 6 partner firm. Joining in their 50’s means the 2 Partners will have time to enjoy the benefits of the larger firm rather than just joining as a route to retirement.

Case Study 3

Our client was a West Country firm looking to merge with a like-minded London practice. One of the firms that we approached had been approached a number of times over the previous 18 months and felt that a lot of time had been wasted and so they had decided to remain independent. However, after the initial rejection we went back to them to re-sell our clients proposal and they agreed to meet. It quickly became apparent that both firms complemented each other so well that a merger made perfect sense and negotiations ran smoothly to a deal which satisfied everyone.

Case Study 4

Our client is a London firm operating on a fee-share basis with various consultants. We have developed this idea to bring in small firms which they house the firm, provide PII cover and IT, marketing, finance and compliance all for a % of fees generated. The small firm keeps its own identity and brand and we have now placed 6 small firms with this client all of whom have seen income increase and stress decrease as a result.

Get merger ready, even if it is not in your plans

How to get your firm merger ready (good practice whether you want to merge or not).

As a managing partner, you never know when that merger approach might come through which is right for your firm. At least half of the firms we work with did not actively plan to merge but each approach offers different opportunities and sometimes these can be compelling enough to change the strategy. Only the most blinkered firm would turn down such an opportunity, so why not get ready in any case? By running this process you will look at your firm through an outsider’s eyes which is good practice and often leads to improvements in any case.

So, at your next partner’s conference why not consider the following:

  1. Commitment. If your partners want to merge or are at least open to the idea, check that they are committed. Often the group seems committed but there is a saboteur in there who will derail any eventual deal so find out who they are early, what their objections are and overcome these.
  2. Agree what would be a successful outcome. As managing partner you need your brief so you can deliver on it or else you will waste time and will never get agreement once you have delivered what you thought they wanted.
  3. Prey or Predator. A large part of the process is this simple question. Naturally most firms want to be the predator, it is more comfortable and allows you to largely impose your culture on the merged firm, but this depends on the size of your firm and what you are looking to achieve. If you run a £300,000 turnover firm, firms smaller than yours tend to be lifestyle businesses and often the clients are very loyal to the current partner but might not be to an acquirer so you might want to be prey. Or if your aim is to access larger clients or a wider geography this will only be achieved by your firm being the prey.
  4. Choose a tight team. The merger process is really interesting and lots of people will want to be involved. This distracts them from the day job and leads to lots of voices and opinions trying to be heard. From the other side, this looks disorganised and confused. So, ideally you should agree a small negotiating team, consisting of the managing partner, the FD and one of the younger partners. This might seem strange but the younger partner has a longer future in the firm than you do and their voice should be heard. Then agree how you are going to report back to the partner group and stick to this. If you give regular and detailed feedback you maintain their buy-in and prevent them all popping in to see how things are going.
  5. Confidentiality. You must keep any discussions as confidential as possible. Always refer to the deal by a project name (e.g. Project Indigo or Project Samson) and ideally use external email accounts such as Gmail to deal with the project correspondence. This is not to say staff will be indiscreet but again this is an interesting process and if the staff are aware of it, it will be discussed and news will soon spread outside of the firm.

So, once you have your merger plan, or have agreed parameters to assess whether a merger approach would be interesting, what information will you need to collate to be ready? This should be updated regularly, but once a pack is ready this should be a pretty simple task. You could also use the headings in your pack as a questionnaire for the other side so that you both have comparable information.

Nowadays with insurance risk and run-off determining many mergers the first thing in the pack should be 3 years PII applications and your cover details plus details of any claims. You will also need the last 3 years accounts and up to date management accounts to show how the firm is running as a business. The third element are details of any leases. In our experience firms do not like taking leases from current partners, especially where one side does not own the office and the other does. To avoid problems, consideration of break clauses or even selling the property or taking it into a SIPP can help.

Staff are a key asset and so you will need all staff contacts, but more important to the health of the firm are details of significant leavers or joiners with notes as to their significance and reason for exit or hire. Partner demographics are also important, ideally showing a nice spread of equity partners in their 30s through to 60s rather than a host of 60 somethings with no succession. If there are any future stars in the firm who are not yet partners have their CVs to hand as well.

The other key asset are clients and a simple anonymous analysis, showing the top 10 clients in each department over 3 years and how much they contribute to overall turnover is very useful.

This is quite a weight of information but it can be summarised in a 2-3-page memorandum which can easily be swapped with the other side during the first stages. Finally, we would always recommend using a non-disclosure agreement which should include non-poaching clauses for both staff and clients. Whether these are fully enforceable is open to discussion but they do serve to put the discussions on a professional basis and in our experience most firms play fair and respect the confidences that inevitably are disclosed.