To Merge or Not to Merge

Whether ‘tis nobler in the mind… never mind. You get where I was going with that. And I thought my English degree would never be useful.

I’ve had several recent strategy consults with lawyers about opportunities to merge their small firms with other firms – some small, some quite large. It’s a tough decision with lots of pros and cons to sort through. I thought it might be helpful for folks considering a merger to set out some pieces of how I run the analysis.

Reasons to Merge

When I talk to lawyers about why they are considering merging, there are two main answers that rise to the top.

The first (and worst) reason is because somebody asked them. It’s kind of surprising when you think of it: making a career-defining, multi-year, multi-million dollar decision largely because somebody asked you to join them. I get it, though. It’s flattering to be recruited. Practicing law can be a grind, and it is validating to have a lawyer you respect reach ask you to join their practice. Bonus points if you wouldn’t have been able to get hired by their firm straight out of law school. Very Pretty in Pink.

Someone asking you to join doesn’t necessarily make merging a bad decision… it’s just a bad reason to make such a big decision.

The other common (and better) reason is because the lawyer has been working in a firm where they have to spend a lot of their time running a small business and it turns out they just hate doing that. So, when a larger firm comes along that has a management structure in place – a firm where the lawyer can just practice law and not, for example, have to choose a retirement plan – that can be a highly appealing prospect.

I enjoyed managing a law firm, but it’s not everybody’s cup of tea. Running your own practice is about as much autonomy as you can get practicing law, but it comes at a price. Namely, spending about 25 to 60 percent of your time each week managing the practice instead of doing the intellectual work of practicing law.

Less frequently raised, but good reasons to consider joining another firm, are: 1) the ability to originate business that is performed by other lawyers in the firm (as opposed to referring it outside your firm), particularly if the new firm’s compensation structure rewards business origination; 2) the new firm is a larger platform from which you can service bigger clients; the reality is that many large corporate clients and high net worth individuals will not do business with a small firm. It’s a poor decision on the client’s part because as lawyers know, there is no correlation between the size of the firm and the skill of the lawyer, but as the saying goes, no IT director ever got fired for buying Microsoft; and, 3) you are able to receive internal referrals where you service work originated by other lawyers in the firm. If you are being recruited to join another firm, you are probably already pretty good at business development. But even if you are an A+ marketer, it’s always nice to have great work dropped at your feet that you didn’t have to hustle for.

Reasons Not to Merge

When considering the reasons not to merge with another firm, it’s useful to consider the reasons partner level lawyers leave firms. Sure, there are an abundance of particular and idiosyncratic reasons for why lawyers leave firms; to paraphrase Tolstoy, all happy law firms are alike; each unhappy law firm is unhappy in its own way. But despite the differences, when it comes down to it, departing lawyers usually are motivated by two things: issues concerning compensation and issues concerning autonomy and decision making.

I tell lawyers considering a merger (or any kind of partnership) that a law partnership is more like a marriage than a friendship. You must be able to resolve differences productively, and you have to be able to talk openly about money. Lots of lawyers don’t like to discuss money at all – it feels crass. But feeling unfairly compensated for your hard work feels even worse.

Top of my list for lawyers considering a merger is to ask the platform firm to explain their compensation system clearly, from soup to nuts. How do they award credit for originated work, for produced work, what is the overhead rate, how are bonuses awarded, what is the minimum billable rate, what are the expectations for annual billable work, and so on. Firms can be loath to share this information (which is an answer in and of itself), but it should absolutely be part of your merger discovery process.

One good way to figure out the answers to these questions (particularly if you are comparing two or three merger options) is to share your billing data for the last six months and ask if you produced this same amount of work under the platform firm’s compensation system, how much would you have been paid. It’s a clear way to cut through the doublespeak and obfuscation with which many law firms surround their compensation plans.

Lawyers considering a merger will want to understand with crystal clarity the compensation system of their new work home. If the answer is – and it often is – that some or all of the compensation system is intentionally opaque and handled by a management or executive committee to reduce internal strife, that’s a clear indicator that you’re role in your compensation determination will be secondary or tertiary. If you can be happy and comfortable with ceding that amount of trust to a new firm, you’re all set. But if you, like a lot of small firm lawyers, are used to the autonomy, clarity and fairness of understanding your own compensation, it is worth spending some time auditing whether that is something you are truly willing to give up. It’s an important thing to know about yourself.

The second issue – concerning autonomy and decision making – is, in my opinion, not so important. Lawyers get wrapped around the axle about being cut out of firm decisions and therefore losing autonomy. It feels bad. You’re part owner of a business but you have no say over which computers the firm buys or whatever.

The business operations decisions made can feel stupid, capricious or poorly thought out if you’re not a part of making them. It’s totally natural to believe that you would make better decisions if you were in the room.

The bad news is, you’re probably wrong. I’ve been both in and out of the rooms where those decisions get made for a long time, both in my own firm and advising countless other firms. Most of the time, the folks in the room are smart and trying hard and their decisions are probably about as good as yours would be in the same position.

The good news is, being out of the room saves you from an unimaginable amount of drudgery. 90% of the business operations decisions are boring, protracted and plodding. If, however, you can learn to be happy without the need to be part of the decision-making apparatus at your new firm, the world is your oyster. You are free to spend your time working on the intellectually challenging work you went to law school to do and doing the high value business development activities that affords you that work.

There are lots of other reasons to not merge into a new firm – getting conflicted out of important clients; having base billing rates raised to where you can no longer represent long-standing clients; having to go to firm holiday parties. But the last big reason is the culture/fit. Which is a Harvard Business Review approved way of saying what one senior partner said to me early in my career, “I try not to hire lawyers I don’t want to have lunch with.”

You’ve got to spend a lot of time with the folks at your new firm. Some of it will be great, some of it will be stressful. Make sure when you’re negotiating the merger, you’re sitting across the table from somebody you like well enough to see every day. Make sure that the new platform firm feels like a place where you can picture yourself doing your best work, while working among colleagues you respect and like.

Autonomy and collectivity are two ends of the same stick in law practice. There’s always a business to run, a retirement plan to figure out and clients to represent and business to generate. Figuring out which end of the stick you want to grab for the next phase in your career doesn’t have to be a lifetime decision – but it’s great to have options. Best of luck.