Beyond the Handshake: The Essential Agenda For a First Law Firm Merger Meeting

The journey toward a successful law firm merger often begins with a preliminary first date, perhaps a simple one-on-one over coffee between managing partners. However, the first substantive discussion, whether it is between selected leaders or full merger teams, is where the critical business issues should be explored.

This meeting is essential and, if done correctly, can help both firms to quickly assess the potential of a merger, and avoid months of wasted time and effort. As a result of more than 20 years guiding, helping and fixing law firm merger discussions, we put together this short, substantive guide to a first merger meeting.

Obviously, the goal of any merger meeting is to determine if the proposed combination makes sound business sense. But it is all too common for firms to get sidetracked by war stories, irrelevant history, boasting, or term sheet specifics before this foundational assessment has been made. This agenda can help firms quickly reach a well-informed estimate of the likelihood of a merger’s success.

Assessing Business Case and Strategy

The initial discussion should center on each firm’s overall strategy, focusing on goals and the supporting strategies to achieve them. Each firm should detail their view of the next five years, even if a merger doesn’t happen. This includes plans for potential future mergers, geographical expansion efforts, and expected internal and external changes. If a firm’s described strategy isn’t clearly tied to its overall goals, ask for elaboration. Beware of strategies that “sound good,” but lack specifics or are unrelated to a clear end goal.

Next, explore each firm’s history. But this doesn’t mean a recounting of the firm’s autobiography. Instead, focus on its substantive operational history:

• Where has each firm’s strategy worked best in the past? What are the firm’s strongest aspects? A common characteristic of successful mergers is when one firm’s specific, pre-existing strengths help address the weaknesses of the other.

• Do you have a history of successful cross-selling or spreading work to underutilized lawyers? This is crucial, as many middle-market firms are little more than a collection of siloed practices. Or, some firms’ offices aggressively compete and never share work or clients, making it unrealistic to assume that they will change post-merger.

Do not hesitate to ask where the firm’s strategy has failed. A willingness to ask this question and the nature of the answers received can reveal a great deal about a firm and whether it is a good match. It also indicates how honest they are prepared to be about other difficult issues.

Other subtle ways to explore this question include:

• “What do you see as the biggest challenges the firm faced over the last three years, and what are the ones you anticipate over the next three years?” Assess whether they are honestly identifying tough issues or are being overly optimistic.
• “What are the biggest problems/challenges facing the firm now or in recent history?”
• “What are the missing strategic pieces to complete your strategy?”

Defining the Fit

Crucially, you should understand, “How does our firm fit into your strategy?” Both sides need to think about how the other would operate within a combined firm.

A good question to gauge this vision, especially when specific details are still emerging, is: “What do you think the legacy firm would look like, and how would it be operating within the combined firm, two years after the merger?” One of the common red flags in mergers is when a firm has a predisposition to thinking in terms of “our firm vs. your firm” post-merger. Or, put more simply, the most successful mergers are always characterized by leaders who instantly focus on creating a single, integrated entity and “what can we build and achieve together?”

If the firm has previous merger experience, ask:

• “Has your firm ever merged with/acquired another firm similar in size and market position to ours?
• If so, how did that work?
• What lessons did you learn from the experience? What would you do differently?”

Finally, one of the most blunt and important questions is: “How will your firm benefit from this combination?” Be wary if the answers are vague, overly optimistic, or general statements lacking specific detail or connection to the firm’s prior experience.

Exploring Core Philosophies

While it may seem early to do so, discussing core philosophies is fundamental to understanding if there is a cultural and structural match for a successful combination. Six key areas to discuss that routinely stop most mergers from going forward are:

1. Partner Compensation Philosophy: Discuss whether it is lockstep/seniority-driven versus merit-driven, the use of a formula versus a subjective approach, the role of management in setting compensation, and details about funded or unfunded retirement plans.
2. Role and Authority of Management: Is leadership strong and centralized, or diffuse among partners and offices? Does each office run itself (a typical red flag in less successful mergers)? Is leadership composed of a blend of skills, or is it exclusively staffed by rainmakers?
3. Capitalization Philosophy: Does the firm borrow for working capital, or do partners contribute/retain it? How much do partners contribute, and how does this affect the firm’s draw policy? How is capital returned to withdrawn or retired partners?
4. Market Position Philosophy: Is the firm pursuing specific market segments, or does it take a full-service approach? Does profitability vary dramatically by office or practice area?
5. Recruiting/Lawyer Quality Philosophy: What are the firm’s standards for the lawyers it recruits?
6. Partner Standards: Are there firmwide standards all partners must follow? Are exceptions granted? Do they have permanent, non-partner positions or income/nonequity partners? What is expected of a lawyer to remain a partner?

Discussion of Known Deal Issues

It is common for one or both parties to identify issues that are critical to continuing the discussions. Prepare to address:

• Firm Name Issues: Would either party have an issue concerning the merged firm’s name? Contemplating operating under different names by region is a common red flag, often cited by clients as creating confusion.
• Significant Financial Differences: Is there more than a 20% difference in profits per equity partner? Are there extraordinary differences (e.g., more than 250 hours) in average billable hours between timekeepers in the same category?
• Conflict Issues: Are there obvious, significant conflict issues? Conflicts are, in fact, the single most common reason law firm mergers fail to reach completion.
• Other Obstacles: What other obstacles do both sides foresee now that more is known about each other’s philosophies and operations?

The Importance of Honesty

Keep in mind that a law firm merger is more akin to a marriage than a buy/sell corporate transaction.

• A well-known McKinsey study reports that more than 70% of all mergers fail to achieve their goals, typically because of insufficient due diligence, cultural misalignment, and overly optimistic estimates of what can be achieved.
• In our experience, law firm mergers don’t vary much from this track record and often fail for the same reasons.
• Last—and no offense intended to these partners—but many M&A partners in law firms with extensive experience in negotiating mergers have zero experience in implementing and integrating a merger. And since a law firm merger is not an asset transaction by which anyone gets rich, it is the implementation and integration that determine the success of the merger, not the deal terms up front.

There is a natural human tendency to be overly polite or circumspect. But hiding weaknesses and overselling faux strengths is not a strategy for a successful, long-term relationship. You should be as honest and direct as possible in answering all questions, including those about your firm’s own weaknesses. This approach will prompt the other firm to be more willing to share their honest responses in return. It may seem obvious, but both firms should think about their answers to everyone of these questions in advance.

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