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. The departure of all these important partners will leave the company with lower customer revenues, even when it has the same office leases, pensions, bank loan payments and other obligations that still need to be paid.
Rather, they are the same partners who provide the revenue growth and client relationships that make the law firm's business model so profitable. The most serious liability comes from the fraudulent transfer doctrine, which allows a creditor to set aside any payment a company makes after it goes bankrupt if the company does not receive something of a reasonably equal value in return. Owning a law firm partner exposes your compensation to fraudulent transfer doctrine because it converts compensation into a distribution of benefits rather than a salary. To see why it does so, let's consider the collapse of Dewey & LeBoeuf, which remains the biggest bankruptcy of a law firm in history.
Some firms will successfully use law firm mergers to drive higher revenue growth and improve earnings per partner in the long term. A law firm can collapse, in other words, because a partner's property can cause a flight in society. Law firm partners also contrast with investors who own ordinary industrial companies. While a burgeoning collection of virtual boutiques and law firms is unlikely to overthrow the major brands that dot the big-law landscape, it only takes a handful of critical defections to sink an individual transaction.
Throughout his 20-year career in legal marketing, he has worked in and with a wide range of large law firms, medium and small, giving him valuable insight into the legal industry. Andrew Jillson, founding director of Hayse LLC, is a veteran when it comes to advising law firms and other companies on the challenges and opportunities faced by a company in transition. But this isn't exactly right, because law firms' capital structures are so strong that firms rarely become unable to pay their debts until near the time of their death. If customers are loyal to companies rather than individual partners, partners will be less likely to leave and companies will suffer less harm when they do so.
In addition to waiving outstanding business liability, law firms must also modify their partnership agreements to delay payment of principal to departing partners. At Finley Kumble, which in the late 1980s became the first major U.S. law firm to collapse, many of the partners realized how serious the firm's distress was only when they received their K-1 corporate tax returns at the end of the year, which showed how much of the distributions they received during the previous year it had been financed with debt. .
