Why do law firm mergers fail?

Decreasing numbers of viable candidates, overall: Given all the consolidation in the legal market, the number of truly viable targets is small and shrinks with each announced merger of law firms. Some markets are more mature than others, which makes things worse in those markets. In short, I believe that the numbers-based strategy is the root cause of most failed merger initiatives. Growth often only exacerbates existing deficiencies.

At some point, the company will start merger negotiations with a healthier company. If negotiations are successful and the merger occurs, the company will be saved. If Merger Negotiations Fail, Company Will Die. And when it does, the end will come soon.

The management committee will convene a partner meeting to announce that the game is over, and the partners will vote to formally dissolve. Associates and staff will be stunned (see “Caught in Collapse”). Unlike many of the partners, relatively few staff members and associates will have left of their own free will prior to the dissolution. If a law firm were not owned by partners if, like Amazon and Chrysler, it were owned by investors, the fall in profits caused by the departure of one partner would be borne by investors rather than the remaining partners.

Model Rule of Professional Conduct 5.6, which requires a company to return capital to partners as they leave, can bleed a company to death. Even at the time of his death, Dewey, like any other law firm in the United States, had many partners who were still paid in benefit sharing rather than fixed salaries, so he had huge free cash flows over which his managers had complete discretion. Jewelry claims were often among the most important assets of bankrupt law firms, and settlements generally reached millions Although elite law firms almost all have grown much larger, most collapsed firms expanded with a speed and aggressiveness that was unusual even among peers. Since a law firm is owned by its partners, its increased expense partner compensation is not technically an expense at all and it doesn't even have to be paid.

The force with which law firms break down is astonishing because it has no parallel in other types of businesses. The management of a partner takes its strength from the peculiar way in which the partners of a law firm decide to leave or stay. The list of signatures includes marquee names such as Dewey & LeBoeuf, Heller Ehrman and Coudert Brothers, and slightly lesser-known but still important firms such as Darby & Darby, Adorno & Yoss and Lord Day & Lord. He currently serves as former chair of the Standing Committee on Law Office Management and Economics of the Illinois State Bar Association and as a member of the Research Committee of the Legal Marketing Association (LMA).

These linkages offer enormous opportunities for law firms, such as market expansion, increased depth and breadth of services, competitive advantage and strength of banks, diversification of the client base, but they also carry significant risks. Jewel's liability is not simply an obligation to help a company collect accrued invoices prior to a partner's departure; it is an obligation to share new invoices for the work a partner does after the company dissolves. Model Rule of Professional Conduct 5.6 requires a law firm to repay a partner's capital contribution when they retire, so that when a firm starts to go under, many partners begin to leave in the hope that they can take their capital before the company completely collapses. This leaves law firms with huge amounts of income that they can theoretically divert to any expense they want, including paying off debt.