Best Practice: Law firm mergers
Asked and Answered
By John W. Olmstead, MBA, Ph.D, CMC
Q. I am a solo in Bloomington, Illinois. I have just completed my third year in solo practice. I have one full time secretary, a paralegal, and I office share with a group of attorneys. My overhead is low and my margin is 61%. I have been approached by a two attorney (2 partners) firm regarding merging with their firm. One of the partners is relatively new (joined the firm 3 years ago) and the other is the firm founder and is planning on retiring in the next year. On average the other firm's revenue per attorney and partner earnings is on par or even less than mine. Their overhead is much higher. The two partners have been operating on a handshake with no succession/transition plan for the senior partner and no understanding of retirement financial arrangements (buy-out). While I have some concerns and fears about merging I believe that merger would provide me access to mentoring, additional resources and staff, and ability to improve my competencies and handle larger more complex cases. I would appreciate your thoughts.
A. I would be concerned that you have been approached to help with the buy-out of the senior partner. In essence this may be a large unfunded liability that you and the other partner will be saddled with for a number of years. It sounds like, based upon past performance of the other firm, that if there is a substantial buy-out of the senior partner you could end up making less for several years. Other than your rent there will be marginal cost savings as a result of the merger. Improvement in your earnings will be dependent whether you and the other partner can in fact generate larger cases, larger revenues, and increased leverage.
If I were you I would ask the firm to work out the details concerning the senior partner's retirement as to timeline, the mechanics, the cost/funding of the buy-out, and put same in writing. Once this is accomplished factor this into the rest of your due diligence and analysis.
If the firm is unable to get their arms around the retirement of the senior partner issue I would stay clear.
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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.