WELL PLANNED MERGER

by Joel A. Rose

     Romance is as important in a merger, as in a marriage. But if harmony and economics are a disaster, love soon flies out the window.

     Many firms seek to merge with or acquire a small group(s) of attorneys because they expect size and a better balance of skills and client base to provide them with improved professional service and long-term economic advantage. However, the problems in the establishment of a new firm resulting from a merger of established firms, or in the liquidation of the affairs of such a merged group, are infinitely complex. Mergers do not always succeed. The miscarrying of a merger provides more problems in the disentanglement that the original bringing together of the attorneys.

A Composite Case History

     The reasons for merger in one recent case the author's firm was involved with was the desire on the part of what we shall call "The First Firm" for improved lawyer management and augmented expertise in certain potentially profitable fields of law.

     The principal reason for the second firm was the desire to improve measurably, its economic position on a continuing basis. The second firm also hoped to be able to attract larger and more profitable clients and to recruit the type of personnel that a firm with good income and better balance of clientele could attract.

Significant Differences

     Initial analysis indicated that there was a complementing of the fields of law, and the probability of the merged groups being able to serve a more varied and profitable clientele. Some of the fields of law that were discussed as the most profitable were, on the basis of the facts, quite marginal in their ability to produce a profit for the firm. Others, that had traditionally been though least of, were substantially profitable.

     Discussion meetings and individual conferences revealed substantial differences in thinking on income payment. A mature type of lawyer and nonlawyer administration to plan and carry on problems of salary administration, organization and human relations was needed. Resolution of these differences had to be made. Conservative older partners still under the influence of "depression year economics" had to come into agreement with much younger partners. The younger lawyers' income goals were based on their desire to continue a progression for themselves and their families.

     It was brought to light that some income was excluded by certain partners from the arrangement that all income from the practice of law should come into the firm. The associates in one firm were expected to bring in business and were allowed to serve their own clients and did not account to the firm for this income. The associates in the other firm were also expected to bring in business, but were paid a salary and bonus.

     Organizationally, the parties to the merger found that there were differing classes of associates or junior partners. The non-capital status of younger partners needed to be changed so that the age, date of admission to the bar and stature of individuals would receive a similar treatment in the newly resulting organization. Similarly, the salary and bonus, or other compensation pattern for associates, was subject to review, so that an acceptable and conforming patter could be provided. The motivation to associates to continue with the enlarged firm was a most important consideration.

     The firm distributed income on the basis of performance at the end of the year and the other firm set percentages in advance for an entire year. The first firm calculated units of participation on the basis of work performed, business obtained and profitability. The second office used a percentage figure based mainly on the age groupings of the partners. Retirement arrangements for members of each firm differed and had to be reconciled. One firm considered all net income as profit for the partners. The other firm counted net profit after salaries (or draw) to partners had been deducted.

     With all of these differences, the members of the two firms were already getting assistance from each other, including enhanced representation in more difficult cases and representation in more complex client situations.

Benefits Recognized

     Recognizing that they were able to gain benefits of organization and specialization, they now found it easier to resolve differences. They were ready to move on to other considerations.

     More attention was given to balance sheet items of the two firms; the assets, liabilities, and capital arrangements. Capital requirements considered an assumed interest in the assets of the firm, including cash on hand, unbilled work and accounts receivable, costs advanced, library, furniture, and equipment and leasehold improvements.

     The thoughts of each firm, turned toward assets in inventory of work that are as yet unbilled or cases not yet consummated, as in a substantial personal injury case. There was now an opportunity to complete or partially bill major matters, or settle or complete major cases, and perhaps exclude these from the assets of the enlarged partnership.

     A major point to be discussed was the income improvement that was particularly sought by the second firm in this merger. Agreement was then needed on income objectives of the new firm, policies in terms of hourly fees, as well as how the income would be divided. The firms decided to include considerations of such factors as business obtained, work done and profitability, and appropriate records were developed for the enlarged organization.

     The merging organizations were able to turn toward a firm name that did not include all the powerful personalities in the merged firm. The objective was to solve a continuing problem as the firm grew and others would acquire prominence. The matter of retirement disability was settled, and, with this treated, the firm found ready agreement on other things. The firm determined its administrative organization, and many other problems then solved themselves.

     The two firms held many meetings, and they were able to set target dates for accomplishment, which led them to the date for the merger.

Statesmanship and Leadership

     The merger of two firms calls for statesmanship and leadership of a very high order. One such area of statesmanship has to do with the selection of the firm name. Another area of statesmanship is called for when the discussion covers the amount of retirement or disability benefits for partners. Still another form of statesmanship is needed when organizational requirements are determined for overall administration or for specialized areas of legal endeavor. The leader who takes an early position on any matter, small or large, and who is capable of modifying their position, lights the way for others to exercise statesmanship where resolution of any other problem becomes essential.

Typical Problem Areas

     Other areas may also present problems. The expense allowances, and the basis for these allowances, is a question that will come up sooner or later. Should the firm permit all lawyers to have some expense allowance? Should the firm help the associate, who has little personal funds available, to represent the firm in the manner in which the firm has become accustomed? Should expenses be provided as incurred? Are expenses for clients being reimbursed and properly recorded by the lawyers? Should an attorney be permitted to belong to a number of clubs? How should automobile expense be handled? Any system that is used for expense allowances should be applied with rationale and equity, but not necessarily equality.

     Attention has to be given to salary administration and personnel policies as an organization-wide program. What are the bookkeepers being paid? The secretaries? The file room personnel? What positions might be merged and what new positions might be created during the course of the merger? What vacation benefits are permitted and what holidays are provided? These policies and procedures have to be examined, not only for the non-lawyer personnel, but for the partners and associates.

     Also, mergers require getting very specific information on the capital interests of each partner. Some firms that we have studied exempt library, furniture and equipment, and leasehold improvements from the required cash capital interests of the partner, while others include these items. Some have no idea of the value of their unbilled work, their inventory of cases. Many merged firms set a requirement for a relatively small dollar figure for the cash capital interest, and have a modest obligation in case of withdrawal, death or disability.

     The obligation of the firm in case of withdrawal or retirement must be specific in regard to the cash capital interests, and what the interest of that partner may be in case of liquidation. The firms also have a legitimate concern for ownership of the files.

     Including assigned case responsibility, and the interests of each partner in the merged organization in unbilled work an accounts receivable, trust account bookkeeping are other items requiring study.

     Some merger situations disclose liabilities that the firm has incurred which could be important considerations for the individually liable partners. These may be in the form of bank loans, accounts payable, or personal responsibility for the leases. In some cases, older lawyers may wish to be excluded from being signatories on some of these obligations.

     Organizational discussions are necessary on the administrative and the legal organization. The administrative organization would include those who are to make judgment on the basis of figures obtained on the economic performance of lawyers, and how and over what period of time these figures should be accumulated and averaged before judgments are made.

     Additionally, the older partners might be particularly concerned about the obligation to them in case of disability or death, although these same benefits may well be paid on behalf of less senior partners. Further, the partners would be concerned with how much draw each would receive throughout the course of the year, and how and when this would be distributed.

     Work distribution and uniform systems need to be organized, so that the firms can operate most effectively and with efficient methods. The groupings of fields of law need to be discussed, and perhaps grouped under the leadership most able to succeed. The general system for handling client matters, time and money systems, and bookkeeping arrangements, must be determined. Specialization concepts which would lead to uniform methods for wills and estate planning, real estate, or negligence practice can be developed. New methods, such as automated processing of data and automated practice support systems should be discussed, and at times may be rapidly implemented. In other cases, these discussions can be tabled for a later consideration after higher priority items are accomplished.

     To determine space requirements, it is necessary to predict the size and shape of the organization as it will be after the merger and for the foreseeable medium-range future. The centralization of facilities and the integration and location of files are important problems, as well as case control and bookkeeping and billing methods.

     Lawyer personnel (including the partners) insurance arrangements, both personal and office, have to be studied.

     Retainer arrangements and billing policies have to be reviewed as individuals move in to help in various areas of the work of the enlarged firm. The policy on acceptance of clients and types of cases must be understood by all lawyers.

     The area of file control and file system has to be set up in relation to methods for handling correspondence, records of new matters as they enter the firm, file closing procedures, billing procedures, and internal arrangements of files. Such matters need to be handled with reasonable uniformity by all members of the enlarged organization.

     Management information reporting for the firm should also be set forth, so that the partners and others, who will be administering the fiscal and economic aspects, will have the information to use for day-to-day decision-making after the enlarged firm takes motion on its own. These data have to be available so that partners can make their own judgments on their performance and that of the firm, and so that associates can be informed of such data as is pertinent to their areas of endeavor.

Appraising Gains

     It is possible at a relatively early stage to develop information on the organizational and economic strengths and weaknesses of two firms. It is also possible to provide projections, as the merger study proceeds, of the probably gains in income, expenses, and organizational aspects of the proposed merger. A pro forma picture of the combined organization can be projected. Comparisons are now available to us for other like organizations, so that we can set and appraise economic targets, and recognize what is realistic.

Internal Communication

     Needless to say, as soon as it becomes apparent that the merger will take place, communication to all members of those in the organizations concerned should be made on a continuing basis. All have a need to know of either major or lesser decisions, and should be kept informed. Such actions as those concerned with space, equipment, systems, organization, committees, file control, and many others are of interest to almost all members of the enlarged organization.

     You don't want anyone to leave or become emotionally upset because of unfounded rumors. Lawyers and non-lawyers can unwarrantedly assume that the purpose of the merger is to consolidate positions or eliminate "deadwood," which will result in the discharge of certain persons. There generally will be personnel gains, gains by consolidation of libraries, gains in the efficiency of bookkeeping, billings and more effectiveness in the operations of the specialized areas of law in which the firm will be engaged. However, this can usually be done without disrupting the personnel relationships in the organizations which made each functioning entity for so many years. Generally, a growth probability is part of the merger action and experienced personnel are needed to handle the energized organization.

     If possible, the organization, forms and systems should be provided in manual form. They can then be readily reviewed by members of the enlarged organization and will be available for new members who will come into the merged firm.

Time to Accomplish

     All of this process does take time. The ordering of special equipment, the construction of appropriate quarters, the design and purchase of necessary forms, stationery and announcements, the drafting of new agreements, and the problem of client notification and notice to members of the bar, need a carefully worked out timetable. A merger of well established forces can be accomplished generally within three to six months, and most find that many aspects of the merger take place gradually during this period.

     The benefits from a well organized merger can often be apparent even before the physical merger is consummated. Again, for an increasing number of firms, this may be the only way to accomplish rapidly, or at all, their professional and organizational goals and their desired continuity of existence.

©1999-2015 Joel A. Rose & Associates