Best Practice: Providing financial info in a law firm merger

Asked and Answered

By John W. Olmstead, MBA, Ph.D, CMC

Q. I am the managing member of an 14-attorney firm in Miami. We initiated discussions with a large firm in Boston concerning the possibility of our firm merging with their firm. We met with one of their partners recently at their offices and he presented our interest to his other partners. He has advised us that there is an interest in having us meet the other equity partners and taking discussions to the next level. He would like some initial financial information from us. We feel we must provide them with some financial information at this point, but are unsure what to provide at this stage. I would like to hear your thoughts.

A. Law firms exploring possible merger partners often move too quickly to financials. I recommend trying to hold off on providing financial information until after three get acquainted meetings. I like to see the initial focus on the people, culture, and general fit. Poor fit causes more merger failures than practice economics. However, in your situation the door has been opened and the large firm is going to want to see some initial financial information to "qualify" you and determine whether further discussions are worth their time investment.

I suggest that both firms sign a non-disclosure statement and that you initially provide them with the following high-level summary information in a spreadsheet in columns for the last five years of history. The per lawyer/equity partner calculations can be calculated in the spreadsheet based upon the headcount data inserted in the spreadsheet.

• Headcount by the number of equity partners, non-equity partners, associates, Of Counsel and other attorneys, paralegals, secretaries/assistants, and admin staff.
• Fee Revenue
• Total Revenue
• Total Expenses
• Net income available to equity partners. (Add back guaranteed payments and other income that equity partners received)
• Profit Margin
• Fee Revenue per Lawyer
• Fee Revenue per Equity Partner
• Expense per Lawyer
• Net Income Per Lawyer
• Net Income Per Equity Partner
• Schedule of billing rates (current only)
• Compensation ranges by Equity Partner, Non Equity Partner, Associates - past five years
• Current malpractice insurance coverages and with whom.
• Current Lease obligations - office space and equipment

I would not provide any more data at this stage pertaining to clients or detailed financials. The next step will be for the other firm to share information with your firm.

Good luck!

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John W. Olmstead, MBA, Ph.D, CMC, (www.olmsteadassoc.com) is a past chair and member of the ISBA Standing Committee on Law Office Management and Economics. For more information on law office management please direct questions to the ISBA listserver, which John and other committee members review, or view archived copies of The Bottom Line Newsletters. Contact John at jolmstead@olmsteadassoc.com.