Warning Signs of Law Firm Changes Ahead: Potential Merger, Acquisition, or Failure

Clayton Dodds, Law Office of Peter N. Brewer

In recent years, some of San Francisco’s largest law firms have been the subject of wholesale changes.

Failed mergers, toxic acquisitions, and looming bankruptcies threaten the stability of a firm, often resulting in dissolutions that leave administrators and associates without jobs. Law firms are constantly adjusting their businesses to match industry forces, such as corporate work shifting in-house and downward pressure on pricing.

In a sea of constant disruption, it is critical to recognize the difference between responsible business pivots – and signals of impending distress.

In April, the Legal Marketing Association – Bay Area Chapter hosted a panel discussion about identifying the warning signs of law firm disruption, moderated by consultant Michael Colacchio.

The panel included Brian Colucci, Chief Business Development and Marketing Officer at Kilpatrick Townsend & Stockton; Gerry Holt, Principal of Holt Consulting Services; and Michael Kovalich, Business Director at Greenberg Traurig.

In discussing a variety of examples of bankruptcies, successful mergers, and failed acquisitions, the panel highlighted a number of predictors of law firm downfalls. The panelists also outlined strategies for law firm personnel to either improve the internal operations of the firm – or recognize when it is time to get out.

Many dissolutions occur because of a bad culture fit between pre-merged firms. A good firm doesn’t necessarily equate to a good fit for merger. A law firm that has a clearly articulated set of values is much more likely to perform better – in fact, a positive culture can be a sign that business is going well. Internal marketing within the firm plays a huge role in establishing strong values, and offers a higher probability of success.

Leadership at the top is also a strong indicator of success or failure. The lack of leadership, integrity, or accountability by managing partners and administrators renders the law firm ineffective. For non-leadership personnel, downward trends can be identified and observed by knowing the roots of the business model and the underlying economic factors that affect growth. So, take the approach of an internal analyst or consultant by being proactive in understanding the business of the firm – including financial performance, key rainmakers, and industry trends.

Poor financial performance can indicate that a firm is preparing for merger or bankruptcy. Expensive building leases and lavish guarantees for lateral hires can sink a firm. However, balance sheet issues are lagging indicators for poor fiscal management – it might be too late. Follow the rainmakers and their business – if they are leaving, it may be time to “vote with your feet.”

The downfall of large firms is sometimes inevitable, but being proactive in understanding the firm’s business, and observant of key industry trends and macroeconomic factors, can make the warning signs more apparent.

About the author:

Clayton Dodds is the director of marketing at the Law Offices of Peter N. Brewer, a Silicon Valley boutique real estate law firm, and the co-chair of the communications committee for the Legal Marketing Association Bay Area Chapter. He writes and speaks on topics such as online marketing, law firm operations, analytics, and technology, and can be reached at clayton@brewerfirm.com.