Mergers and acquisitions: consider the owners
For many law firms making the decision to merge, acquire or be acquired is a significant step with a range of factors resulting in the final decision to proceed.
Taking this decision may well be the first, but regrettably it may not be the easiest as it may be being made out of necessity for the firm to survive as opposed to a strategic step.
As law firms start to assess the impact of COVID-19, for some, who have suffered a negative impact, they may have to accept that the future survival of the firm will only come from a merger. Therefore focus will need to quickly turn to being ready for the merger both professionally and personally.
Adjusting to that reality will be harder for some than others. Addressing the issues that confront everyone who has a say in the decision is essential to stop time from being wasted and failed attempts to merge which will lose valuable time and money.
In this article, we’ll explore some of the issue that the owners of firms should consider.
Consider the Owners
One of the most significant factors that causes a merger to fail is the approach and attitude of the owners.
The points below will give some guidance on factors which each owner should consider individually. It’s essential to be honest and up front with your concerns and your requirements as they will come out.
You may want to start this journey privately but eventually a discussion with all stakeholders will be necessary.
Facing issues before reaching the merger table is an important part of the process and will help to ensure the success of the merger, or may drive the firm into a different direction.
You (and your co-owners) know your business better than anyone else and you know your own requirements. Acknowledging them may be a hard step to take and accepting issues even harder. But from understanding comes solutions and being clear on your expectations and standing alongside your co-owners is an important place to reach.
Here are some of the more personal elements to consider.
Are you being acquired or acquiring?
An important question to address early on! The reality is that very few (if any) mergers are equal.
There will tend to be one firm that is dominant (the acquirer) and whilst you may all collectively acknowledge and discuss this being a merger and present it as so externally, privately, the reality may be very different.
If you’re the firm being acquired, acknowledge this, as pretending otherwise is likely to lead to problems further down the line. You’ll certainly find yourself in a much weaker position when negotiating if you believe you’re the dominant firm when the reality is you’re not and discussions are likely to fail early.
Be clear on the reasons
It’s important to be very clear on the reasons why a merger is necessary.
Most may be obvious but looking inwardly and accepting the positives and negatives will enable you to prepare for difficult questions and discussion whether they are obvious or not.
If your need for a merger is driven due to significant financial issues, firms and their owners need to accept this and accept the value of the merger is survival.
The negatives of the merger will be easy to see. You may need to work a little harder to demonstrate the positives and there will (or should be) many.
Preparing a prospectus that acknowledges the negatives but drives the positive could end up being a very positive document and assist your negotiations.
Are you ready personally
Have you considered the reality of a merger and your own personal requirements for a merger to be successful?
Where do you see yourself; do you require equity in the merged firm or are you ready to give up equity?
Not all acquisition firms are ready or happy to take on a new equity partner into the merged firm. At the other end of the spectrum some firms will simply not allow a partner from an acquired firm to release ownership so easily and may want commitment through taking equity.
Addressing this issue should be one of the first discussions points as often this issue is one where compromise is not possible, on both sides.
Employed or Consultant
If you’ve chosen not to hold equity, what position or status do you require in the new firm? Will you accept a position as an employee, or will you want to be a consultant? What will be the terms of your ‘employment’ or consultancy?
Remuneration, benefits, time off, working hours, responsibility and work that you’ll perform are all factors to consider when looking at your role.
Do you expect to be paid a lump sum on acquisition (assuming you’re being acquired) and what is the amount you’re expecting? Are your expectations realistic and have you researched law firm valuations or had the firm valued?
With most firms who actively acquire they will be fully aware of the arguments against higher valuations of law firms. You may find yourself disappointed with a valuation that sees you gain any capital value from the firm that has been built.
Do you have your own money tied up in the firm or have you provided personal guarantees? Are you expecting to have your own money released back to you and do you require a release from any personal guarantees?
Make sure you’re fully aware of the monies owed and where you’re committed and decide what must happen to them as part of the merger.
If you’re happy to leave money and guarantees in place, what terms or conditions would you want attached to this, if any, and when do you finally want or expect what is owed to you to be released?
What are your final exit plans? How dependant is the merger on your expertise, your clients etc?
Everyone has to retire, eventually, and it’s important to address when. You may find yourself in discussions that lock you in for a period of time that makes you uncomfortable, or you may want to secure a longer stay with the firm and secure your future.
In particular, when giving up ‘power’ or responsibility it can be a shock to the system, there are countless cases where a person or people enter a merger willingly but choose not to stay due to the loss of status and decision-making ability.
If you’re seeking an exit, whether immediate or gradual, can the firm continue to service the needs of the clients and the staff post your exit? If not, what needs to happen to enable this to occur and how does the firm plug the gap your exit will leave?
In as much as you need to plan for your exit, so does the firm. Addressing this and being clear on requirements enables the appropriate action plans to be put in place in a time frame that works for all involved.
What will happen to your clients if you announce a merger? Can you be assured that they will stay with the new firm? How will you address issues and ensure that you sustain your clients, long term?
A significant driver for many mergers is the acquisition of expertise and clients, and putting those at risk can result in a failed merger or attempted merger. Consider your clients and the right message to secure their long-term loyalty as this may be a requirement of the merger.
Do you have post exit terms? Not everyone will simply retire for good. You may want the ability to continue to work in the same or another sector but may find yourself frustrated by restrictions that you agreed to, having not given full thought to your post exit requirements.
As with many matters it’s often easier to give advice to others but more difficult to deliver the same advice to yourself, or accept advice from others.
Being honest with yourself and dealing with issues will assist in the securing of a successful relationship. You may have to make compromises but accepting them and tolerating them are a world apart.
Are your partners ready?
In much the same way as preparing yourself for a merger, your partners and other senior people needed to support the merger must follow the same path.
Everyone in the firm who has the ability to positively or negatively influence the merger will have requirements and concerns. Discussing them will help to address and resolve them.
Every person must explore their requirement and ask themselves the questions above. They must be ready to discuss them and resolve them with their current partners.
It’s better to understand and acknowledge where the difficulties lie and resolve as many as you can before you start the merger process. They will come out and they will frustrate the process if requirements are unexpected or unreasonable.
As difficult as it may be to discuss such issues, every owner has a duty to set out their requirements and be prepared to engage in debate and make concessions where necessary and accept them.
Set out clearly the personal requirements
Once each owner has been through the journey of discovery and established their requirements, they must be set out clearly.
Each person is likely to have a different set of requirements. Establish commonality and identify the issues that are personal to one individual but not another. Seeing something written down is much easier to acknowledge and accept.
A simple document which sets out the clear expectations of each owner will assist the process of ensuring the merger partner is aware of and understands the requirements and can address them, even where they differ.
If there are unresolved issues be prepared to address them and explain why they are unresolved.
Identify and address the collective issues
Where an owner has set unrealistic expectations or is clearly not happy to proceed with a merger these issues must be addressed.
Unfortunately, these discussions bring firms very close to dispute territory and you may or may not have a partnership agreement that deals with this. The focus should be to avoid a dispute and resolve matters through honest, sensible and pragmatic discussions and agreements.
If an individual is being unreasonable it will need to be addressed. Ensure that your own views are addressing the collective aim of a successful merger and are not clouded by your own personal requirements.
It may be harder for some to accept a merger is necessary and time may be required to adjust. What is essential is to resolve these issues fully before you commence your merger negotiations or you place yourself in a weak position.
Choosing the right target
A merger may be a path out of difficult times but it’s absolutely essential to understand your merger partner.
You’ll not be fully aware of why your merger partner is seeking the merger and it may be that they are also facing an uncertain future which is not obvious to you.
The merging of two firms in difficulty is most likely to end in disaster and simply multiply the problems. It may be the case that there is safety in numbers, but the numbers have to work.
Too often, when a firm is being acquired, they do not apply the same level of due diligence as they would if they were acquiring. That is simply wrong! You must take the time to:
- understand your merger partner
- review your merger partner’s financial position
- understand your merger partner’s short, medium and longer term strategies
- ensure you fully appreciate what your merger partner expect of you and your firm
It’s your responsibility to ensure that you’re not walking from one problem into another. If issues arise post-merger, you risk losing a significant amount of control as you’re unlikely to be the only decision makers and you’ll now have new people with their own requirements and views.
This is addressed by conducting your own due diligence and understanding your merger partner. Make sure the firm is the right fit and not a poor option. Regretting a merger and trying to reverse it is likely to cause irreparable damage and is not a place to end up.
Understand the technology and system being used in the merger firm. It’s always important to adopt best practice when moving into a merger and not forcing one firms views and technology onto another firm, but sometimes there is no choice.
Understanding the system they use and the approach they have to technology is important as not everyone is ready to embrace new ways of working and in particular, those which are reliant on technology. Firms cannot run dual systems, it does not work. Moving onto one platform will bring consistency of approach.
If you’re going to be the firm changing, then ready yourself and your staff for the change and be sure to embrace the cultural change this will bring. You may also find that the people around you are ready but you’re not, which will be no easier to deal with but you’ll have to.
Are you ready to work for someone else?
A significant factor, which is part of the personal journey but also worthy of independent mention, is being ready to work for someone else.
If you’re being acquired or you’re moving to a position of joint decision making and you’ve become accustomed to making and taking decisions without needing the authority of others, it’s a huge step to find yourself in such a position.
For many this step is unpalatable and despite the public position of being ready, the private position is that you’re not ready. This will and undoubtedly lead to issues and disputes.
Your position in the firm has changed and your responsibility and decision-making powers will change unless you retain the same position as before, which is unlikely. It’s often this reason which drives post-merger fall out to be unacceptable. Ensure that you’re ready to seek permission or to at least seek approval as it may be much harder than first appreciated.
It may also be the case that for the first time in a while you’re presented with objectives and targets and expected to perform against them. Being managed where you’ve been the manager is again a significant adjustment and one that comes with difficulty for most, particularly where you’ve amassed a wealth of experience and you do not feel it’s being utilised or appreciated.
Health and wellbeing
A merger will bring significant change. It’s likely to be a stressful time as you face questions, decisions and explanations that may feel uncomfortable but necessary to move forward.
Ensure you have the support you need to move forward or engage expertise to secure the support. Be aware of your personal limitations and ensure you can manage effectively to deliver the right result for you, your firm, your partners and others who depend on you.
This article seeks to achieve no more than to give owners of law firms facing a merger as part of their future ‘food for thought’.
Too often the decision to merge has been taken but the merger does not proceed as all the owners were not on the same page or personally ready for the new future and the sacrifices they may have to make.
Even if the firm has made the decision to merge there is still a long way to go. When discussions, negotiations and due diligence start, a significant barrier to a successful merger is the approach and attitude of the owners. A ‘doubter’ can very easily frustrate a merger and this can be avoided by resolving issues internally before you approach the merger table.
An incoming firm who can clearly see issues in the partnership or a division between the owners will often take two courses of action:
- exploit the weaknesses
- walk away
Neither are acceptable and can occur at the start of the discussion or towards the end when the detail starts to be discussed and it becomes obvious that the full ‘buy in’ does not exist. Mergers do not happen quickly and if time is not on your side you need to make sure you take every step you can to avoid a failed merger attempt.
It’s imperative for all involved to ensure issues are addressed and dealt with and where compromises have to be made, address and resolve them before it’s necessary to reveal them to the merger firm. Also ensure they are resolved, once and for all and are not left to fester as they will come out.
Whenever possible it’s better to resolve your own issues than to expose them or get others to resolve them for you. Sometimes the input from an independent expert can help with finding solutions that may not be achievable without the external input.
Simply because the firm is being forced into a merger is often not enough to drive individuals to make the right decision by the firm. Pride, demands and aspirations all stand to get in the way but can be addressed through honesty and pragmatism.
A merger can be an exciting time bringing a secure future for all involved. But you must be ready personally, or you risk causing damage to yourself and those around you. Preparation and understanding of your own requirements and those around you will help deliver the outcomes you’re seeking.