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.”

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.

Stakeholder Behaviour

M & A’s aren’t just about the mechanics of the deal. Focusing on people is key. Our Senior Partner, Jeff Gillingham, explores Stakeholder Behaviour in this PDF document.

MP Magazine – July/Aug 2008

The Art of the Law Firm Merger

By Jeff Gillingham, published March 2009 by Ark Publishing


If you cannot achieve growth from current client baselines, a merger may well be the only way to ensure the increases in turnover and reductions in costs that will prevent the diving economy eating away at fee incomes.

The Art of the Law Firm Merger gives you a clear understanding of:

  • the merger process from start to finish
  • how and when to recognise the indicators that the merger is not in the best interests of your firm
  • the use of templates and methodologies that ensure the success of your chosen merger
  • how to ensure that your primary goals are achieved
  • how to achieve success with cultural change to ensure your law firm works as a business
  • how to embrace best practice, technology and new management structures

It also explores:

  • staff selection
  • management approaches
  • in-house training
  • reward structures
  • review methods that will make successful change a reality

The Art of the Law Firm Merger defines an effective communication strategy for keeping stakeholders informed and supportive of the process, assists you in setting timelines for all stages of the merger and even discusses methods for measuring the results.

The Go-Path template (Goals, Objections, Process, Approval, Timetable, Help) is explained in detail but above all, the merger process in this important new report is always placed exclusively in the context of the very unique considerations relating to law firms.

The Art of the Law Firm Merger is available now with a cover price of £295.

If you are interested in a copy please contact Ampersand Legal – welcome@ampersandlegal.co.uk

Merger Ahead

As the credit crunch bites, mergers provide the best strategy for growth. Or do they? Nigel McEwen explores this area in Merger Ahead.

Merger_Ahead

Mergers and Managing for Profit

Whilst a fear factor may push law firms in the direction of a merger, proceed at your peril if you are not currently managing for profit. Tracey Williams, chartered accountant, gives a black and white guide to improving financial management and profits…

“Observe all men, thyself most.”

These words, poetic license permitting, are of equal application to a law firm’s position in the current legal market. Sensible and honest self awareness is the key to survival in any environment, not blue sky thinking and ill thought out strategies, but the sort of thinking that can embrace merger activity.

“These are extremely challenging times for businesses of all sizes and across every sector – and professional services firms are no exception,” said Janet Marton, chair of the Solicitors Group of the Institute of Chartered Accountants in England and Wales (ICAEW). “In the present climate, sound financial management is more important than ever”. See Table 1 for the ICAEW’s 10-point credit crunch survival guide for law firms.

Assuming that your firm has fully implemented the credit crunch guidance, you may be emerging from the recession in good shape. You may even have a new business model fit for the Legal Services Act 2007 future and be well placed to consider making lemonade from the lemons that the economy is dishing up. Perhaps you would like to take advantage of your relative strength and are considering a merger?

Smith & Williamson conducted a survey of 120 law firms and in December 2009 reported that while firms of all sizes anticipate a rise in mergers, those from medium sized firms (those with 50-99 partners) appear to anticipate the highest level of mergers. There appears to be even greater interest in acquiring bolt-on teams from other firms. Team bolt-ons avoid the cultural and integration issues and may achieve the upside that firms are looking for without carrying any additional baggage.

This suggests that behind-the-scenes discussions regarding mergers and acquisitions are a regular and current feature in the legal community.

Inevitably, not all acquisition discussions come to fruition. The all important cultural issues aside, talks commonly break down due to reasons of financial performance and partner/member remuneration and in the current climate. These are more important than ever.

Law firm partners are paying themselves too much. Law firms are rarely worth as much as partners believe.

This is according to Professor Stephen Mayson, director of the Legal Services Policy Institute. “Firms need to generate returns for owners, investors and staff. The essence of this is managing for profit”. The assertion is that most law firms manage for turnover and even if they can understand profit, there are too many profit-takers.

Whilst the above is somewhat controversial, unsurprisingly, valuation techniques are no different despite the present climate. Profitability is usually the only way in which the relative value of the two law firms can be determined, and so it continues to form the financial basis of a law firm merger. If the difference in profitability of the two firms is wide, a complex remuneration scheme will need to be put in place in the ‘new’ firm to reflect this. Otherwise, if all partners are remunerated on the same basis, the existing profits of the partners of the more profitable firm will be diluted.

From experience and as a general rule of thumb, partners seem willing to trade off up to a 10% in profit per equity partner (PEP), provided the business case and supporting analyses demonstrate that this is recoverable quickly, and that the merged firm will be able to generate a sustainable level of profitability above the pre-merger levels.

Differences in PEP, depending on the factors, can be accommodated in a number of ways. Current remedies range from not bringing all the equity partners across to the merged firm, to agreeing a minimum performance standard for the ‘new’ firm and for partners operating below the standard to receive special profit shares. This could be on a permanent basis or preferably for an agreed period.

It is not quite clear if the legal sector is through the worst of the recession. Whilst a fear factor may push firms in the direction of a merger, proceed at your peril if you are not currently managing for profit. You will be forced to differentiate between the elements that make up your net profit and you may be in for a shock. If your numbers stack up, start making lemonade!

Table 1 – The ICAEW Solicitors Group 10-point, credit crunch survival guide for law firms:

  1. Ensure fee pricing is reviewed regularly and that annual charge-out rate increases become a thing of the past.
  2. Exercise good control over unbilled work and disbursements to maintain working capital.
  3. Monitor cash flow on a daily and monthly basis – it is important to give the banks detailed, relevant information in a clear format.
  4. Concentrate on minimising large items of expenditure, but don’t waste undue time reducing immaterial amounts.
  5. Remember – it is seven times more expensive to attract new clients than it is to gain extra work from existing ones.
  6. Try to avoid cutting jobs by redeploying fee-earning staff to busier departments – or seconding them to clients.
  7. Take debt collection work away from busy fee-earners and put it in the hands of a nominated debt collector/department.
  8. Charge all time, bill fully and quickly, requesting payment up front whenever possible.
  9. Consider sale and lease-back of the car fleet to accelerate tax relief and reduce the tax cost by choosing low CO2 emission vehicles.
  10. Look at staff costs. A salary sacrifice scheme replaces employees’ taxable pay with tax-free benefits such as extra holiday, life assurance, childcare vouchers and critical illness cover.

Whilst a fear factor may push law firms in the direction of a merger, proceed at your peril if you are not currently managing for profit. Tracey Williams, chartered accountant, gives a black and white guide to improving financial management and profits…

Tracey Williams MBA is a chartered accountant and a member of SSG Legal’s advisory board, with experience of helping commercial organisations grow via merger or acquisition.

If you would like to find out more about how Ampersand Legal could help your firm to ensure competitive advantage as you come out of this recession, then please Contact Us.