United we stand?

A critical eye, a practical head, a willingness to embrace change, and a commitment to a lot of effort on something that you may finally decide won’t work. These are only some of the qualities needed by solicitors contemplating a practice merger. And don’t just assume that it’s an all-or-nothing choice: as the panel text indicates, there may be various options open if you are prepared to think flexibly.

That at least is the essence of the message delivered by the two consultants with whom the Journal discussed the subject, Jonathan Edwards (formerly of Golds), and Malcolm Mackay.

Both, for example, agree that merger possibilities are more likely to be in solicitors’ thoughts in the current economic situation, but that particular care needs to be taken with “defensive” mergers – as opposed to the opportunistic or the acquisitive, in Edwards’ classification – if they are not to end in disappointment.

“I never think they are a terribly good idea with the economy where it is”, Mackay observes. “They can be quite a big distraction, and there is often a lot of short term cost” – mainly staff related. While acknowledging that they do make sense, for example to create a strength in an emerging market, he cautions: “I always maintain that there has to be a strategy first, and the merger is simply the means of delivering the strategy.”

Edwards on the other hand believes that where, say, there are several small practices in one town, there may well be tremendous pressure at present to look at merging, simply because of the cost structures of running a business. “Added to the regulatory cost – insurance (especially indemnity premiums), running a cashroom, money laundering and the rest – you’ve now got problems of pressure on capital, and a huge reduction in some core business, especially conveyancing. It’s a double whammy.”

Big undertaking

No one, however, should underestimate the time and cost taken up by a merger. As Mackay puts it, it’s important to get beyond the excitement of seeing it as a good thing to do, and get into the practicalities as well: you have to devote time and resource even to see if it is going to work.

For Edwards, it’s impossible to overestimate the work, the responsibility and the time involved. “Negotiations and mergers take over running a business. If you’re an under-resourced practice and you are merging, the pressure of the merger itself may push you over the edge – mergers are hugely demanding, taking your focus totally off doing the things you should be doing day to day.” If your business is big enough, the work should be ring fenced and given to an individual or group – it’s impractical anyway to have a whole partnership scrutinising points as they emerge in negotiations.

He also points out that the process will crystallise issues that a firm may not have been addressing, such as client retention, claims experience, unrecoverable fees or disbursements, borrowing, tax and accounting issues. “It is a good idea for a firm to consider how others would see it and ask themselves first if there are any issues within their practice that may cause problems.”

Firms considering merger, Mackay points out, sometimes fail to see that their adopted strategy may call for thinking beyond the immediate partner: “Sometimes it can make sense to create something a bit more: maybe the addition of one or two lateral hires to add to your strength in your chosen key area, can all of a sudden create real strength in the market. It’s about survival of the fittest, firms having real demonstrable skill sets and specialisms, but also the ability to deliver commoditised services in other areas.”

Edwards highlights the different considerations on each side where two firms of unequal size plan to combine. With the culture of the larger firm likely to prevail, priorities on its part probably centre on doing due diligence on the smaller. The partners of the smaller firm, on the other hand, have crucial psychological issues to address.

“Someone said to me after merging with a bigger partnership, ‘I’m in mourning for myself’”, he relates. “Although they got a reasonable deal, they felt the loss of importance, of status, and I don’t think people should underestimate the psychological effect.”

It’s called culture

Both consultants identify the culture fit of the two firms as crucial, while agreeing that it is difficult to define such a thing and it has to be as much as matter of gut feeling as anything.

“It’s about behaviours, it’s about professional standards, it’s about personal standards, it’s about attitude to clients, attitude to service, that’s become the key issue now, it’s how firms see their clients”, Mackay comments. “It’s not about just delivering legal advice, so how a firm sees service delivery is a very important part of the whole culture. I’ve seen examples where firms had totally different backgrounds and ways of thinking, and it ended up in a lot of unhappiness.”

Edwards returns to the personal angle. “The best way you can deal with this is to imagine yourself in the new business before you’ve even got to the agreement stage. If you’re used to having your own room, will that continue? Or a secretary? Someone to make the coffee? It’s the trivial things that can often make a difference to people’s lives. It’s different if you’re 50 or 60 than if you’re 30. ‘Culture’ is possibly too inexact a word, it’s almost like an impact assessment. Cultural things come from that.”

The wood and the trees

Once you have a merger partner in mind, Edwards and Mackay both agree that there are some key issues that should be addressed as early as possible in the process. This is where, in Mackay’s view, it is particularly important “to stand right back and say, in the great scheme of things, where does this take us, what are the client issues? That’s one thing I would really stress.” If you’re just looking at whether you’re going to deal with your immediate issues in the firm, it’s not the right way to go about it. “Seeing it from the client perspective is one of the things that often gets overlooked.”

He also advises, from the preliminary discussion stage onwards, that as well as someone on each side taking the lead role, you have someone to play the devil’s advocate and ask the critical questions. This ensures a proper risk analysis on each side. And in many cases this is where it makes sense to bring in external advisers to help see things in perspective.

Edwards particularly stresses this point, recalling the saying that the one who acts for themselves has a fool for a client. “Solicitors are very poor at that. There’s an absolute need to separate the emotional from the practical issues, and it’s always better to have an accountant or adviser help with this. That’s where the size thing is the most relevant. The psychological issues are much less extreme for the big firm, but they could severely impact upon a smaller firm.”

Likening the steps in the process to snakes and ladders, he adds, if you land on something you don’t like, you go down the snake. And you’ve got to keep in mind a plan B. “A merger can gain a life of its own, and become an end in itself rather than the means to an end. Plan A may not work, and that means backing out.” If the plans are coming about because of a relationship between someone in each firm, make sure it remains a dispassionate, focused business process and not something that happens “because we go golfing together”.

Diligent diligence

When it comes to doing due diligence on the other firm, Edwards is uncompromising. “Are you buying a pig in a poke? Especially in these days, the diligence has to be absolute. You have to be clear that it’s a process to be gone through, so that you’re not hurting people, but you have to be harsh and carry out a full diligence – a file check on a proportion of the files, look at the books, the claims record, whether there are systemic issues in claims, the atmosphere the business is conducted in, how the business is run, anything that might be in there.”

Other points Mackay highlights in this context are any outstanding employment claims (grievances as well as formal claims), disputes of any type, the bank position, lease obligations and any risks arising, and also “at a less formal level, what is known about the partners in the other firm and how they get on? Have there been running sores for years? These things are not necessarily apparent when you go round and have a nice cocktail party and see all the smily faces”.

Edwards suggests a two stage process, starting with a “pre-diligence” as early as possible, to gather information about accounts, loans, HP, capital balances etc, so that someone reasonably qualified can look at it and identify where there might be problems. That should lead on to the heads of terms of the agreement. (He believes, though not everyone would agree, that these shouldn’t be crystallised until you’re past the first stage of diligence.) “If you’ve done diligence properly, the merger agreement shouldn’t be as complicated, because you should be able to disclose everything so there is less need for provisos in the agreement. It’s much easier to warrant an actuality than to consider 1,000 what ifs.”

How to break the news

The major issue of communication begins with your staff. Mackay emphasises that this isn’t just to do with legal obligations: communicating your joint vision, and how the staff will be engaged in the process, is absolutely crucial at the appropriate time. Those you want to come with you will have to adjust to the prospect of a new environment; if they don’t like the idea they may walk. “One thing that will make a huge difference, I say this from experience, is having dry runs in communication. The people that are going to be communicating to staff need a little bit of coaching, but also someone else in the firm should listen to the presentation, pull it apart, stress test it.”

Informing clients has to be equally carefully planned, as Edwards points out. “You can’t have whispering campaign; it has to be militarily set up so that everyone gets the information at the same time. Important clients expect to be spoken to. The wrong message getting out can be fatal. If you haven’t got the resources, get someone to help you.”

Not to be overlooked

Looking ahead to when (hopefully) the plans come to fruition, who will run the new firm? While the question may well create sensitivities, “In this kind of climate good quality leadership is absolutely crucial, more than it has ever been before”, Mackay asserts. Does a natural leader emerge? Is there a natural no 2? Often a bigger firm provides an opportunity for resource to be put aside so somebody’s firmly in charge. Again, every merger situation is different.

Also important, though only mentioned in passing here, are issues such as compatibility of office IT, phone systems etc – potentially expensive to bring together; liability for claims arising from past and current transactions, and insurance cover; dealing with conflicts of interest that emerge; marketing the new entity; and, as Edwards puts it, “stupid things like notepaper, cards, pens. Someone has to do it – and preferably not the day of the merger!”

At the end of the day, they agree, it’s what is right for your firm. “It’s very important to bear in mind that firms will think very differently about issues and this comes back to the culture point, so the process has to be designed around individual firms; it’s not something one can reduce completely to a standard project plan”, Mackay sums up.

“The one certainty though is that there will be something that you never thought of that will crop up at some point in the process.”

And Edwards’ concluding advice is: “Be practical. If you start being pompous or unreasonable then you might as well quit.”

Jonathan Edwards, Law Practice Consultancy. e: jonathan.edwards@ lawpracticeconsultancy.com

w: www.lawpracticeconsultancy.com

Malcolm Mackay, Malcolm Mackay Consulting. e: mm@mmconsultancy.net w: www.mmconsultancy.netn