After a multiyear slowdown, merger activity among law firms picked up sharply in 2013. According to consulting firm Altman Weil, there were 58 merger announcements in the first nine months of 2013 — an increase of 40% over the same period in 2012.

If your firm has considered a merger in the past, now may be a good time to actively pursue a deal. However, it is important to recognize the risks inherent in such transactions and understand that merger deals generally take longer and are more complicated than you have likely anticipated.

Mergers are Actually Acquisitions

Motives behind the recent uptick in law firm consolidations vary, but many firms are finding that a merger is the easiest way to expand. Merging can provide instant access to new practice areas, geographic regions and even clients that work only with larger firms. And deal-based synergies, such as economies of scale, mean your firm might be able to reduce overhead costs.

Note that the word “merger” is a little deceptive. The majority of deals are, in fact, acquisitions in which larger firms buy smaller ones. Whether your firm is the buyer or the seller will determine what you need to accomplish before and after the deal closes. For example, sellers will want to prepare financial statements for due diligence review and ensure that the prospective buyer can finance the deal. Buyers are responsible for thoroughly reviewing financial and legal documents and for integrating the two firms.

Decision Time

To enable a deal to proceed quickly and efficiently, both firms should organize teams that include such key players as their managing partner, practice group leaders and heads of human resources, accounting, marketing and technology. Deal teams should meet regularly and be responsible for:

• Identifying and dividing up merger-related tasks;
• Managing problems as they arise;
• Preparing or reviewing due diligence documents; and
• Keeping the merger on schedule.

Most merging firms must make difficult decisions about issues, such as integrating different accounting systems, determining whether staff layoffs will be necessary or physical offices should be merged. If the merging firm’s partner compensation methods differ, you must decide on a single, fair approach. You will also need to form a new management team, which entails evaluating the merits of various partners and possibly choosing between several partners to represent one practice area.

Such decisions can lead to disgruntled partners. It is important to deal with partner issues before closing the deal or they may resurface during the critical integration stage.

Due Diligence Matters

During the due diligence stage, buyers typically review at least three years of the selling firm’s historical financial performance. Items of particular interest include debt decisions, such as the firm incurring debt to compensate partners rather than to enhance operations. Partner capitalization requirements, unfunded retirement plans and outstanding receivables — all of which could harm the combined firm’s value — should also be scrutinized.

Just as critical to the prospective merger’s value is client retention. Whether merging firms can hold on to clients often depends on whether the partner responsible for the account stays with the firm. So it pays to provide incentives to those attorneys.

Keep the Lines of Communication Open

Throughout the merger process, good communication is key to avoiding the most common pitfalls associated with business combinations. For example, the parties’ deal teams should talk regularly to ensure they are providing required information and that both agree on the merger’s progress to date.

As soon as it is feasible, inform associates and staff about your merger to prevent rumors and anxiety from disrupting business. Enlist the help of human resources personnel to communicate changes related to salaries and benefits as well as possible layoffs and relocations. Partners should meet with larger clients to assure them that they will continue to receive high quality work and personal attention.

Dodging Obstacles

Even if a prospective merger partner is profitable, offers practice synergies, and shares your professional standards, strategic objectives and partner compensation methods, you are likely to encounter a few obstacles on the way to closing the deal. To prevent such obstacles from derailing your merger, work with advisors who have experience combining law firms.

If you are considering a merger or acquisition and would like more information, please contact Kal Shiner at 312.670.7444.