Small Firms and the Merger Dilemma

  • August 14, 2014
  • Tim Perrin

Seven years ago, Garry Benson set up shop as a sole practitioner in the Rutland neighborhood of Kelowna, British Columbia, but he had bigger plans than a one-man shop in the suburbs. Just eight months later, he joined forces with two other lawyers. Over the next five years, with three more mergers, Benson built his firm to nine lawyers.

Then, in a flurry of activity in the spring of 2008, he changed everything again. “We opened an office in West Kelowna on April 1,” says Benson. “Then, on May 1, we merged with Salloum Langin and on June 1, we merged with Roger Watts and his personal injury practice.” His nine-lawyer, single-office practice morphed into seventeen lawyers in three offices in 61 days.

About the same time, in downtown Kelowna, Dominic Petraroia was also plan-ning some big changes. Like Benson, he headed a nine-lawyer office, but he was casting for bigger fish, much bigger. His catch: Vancouver’s Farris, Vaughn, Wills & Murphy, a firm almost ten times the size of Petraroia’s operation.

“We had been thinking about [a merger with a Vancouver firm] since the mid-90s,” says Petraroia. “We started to carry on our practice in a way that would be attractive both to clients who were having work done in Vancouver, and to larger firms. At the same time, we didn’t know if a merger would arise at all.”

When Farris Vaughn approached them in 2007 to open talks, the partners in Kelowna were definitely interested and the merger came into effect on March 1, 2008.

Now, a bit more than a year into their respective new “marriages,” both firm managers profess satisfaction with the moves, but consultant Karen MacKay of Phoenix Legal Inc. in Toronto says that any merger, “whether it’s two people or twenty, is a lot of work. Too many people spend time working on the wedding and no time working on the marriage.”

That may be why Benson says that he looks first for a personality fit when looking to bring someone into the practice. “That’s been a key to almost every hire we’ve done or merger completed,” he says. And it’s not just the partners who come under the microscope. “Our senior associates are our future partners, after all.” Benson admits that not everyone who has come into the firm over the last seven years has stayed, “but for the most part, people who have joined us have found the niche they were looking for.”

Petraroia, on the other hand, says the decision to join the big Vancouver firm was driven by three things. “First, the firms were similar in the way they worked and approached the practice of law. Second, the people and culture were a superb fit. Finally, strategically, they [agreed] that a lot of good law was being practised outside of Vancouver; they just needed to tap into it.”

Paula Alvary of the Boston consulting firm of Hoffman Alvary has helped firms from five lawyers to five hundred navigate their way through mergers. She says that if she had to name just one key to making any merger work—big firm or small—it would be the sharing of clients. “That means the firm leaders need to have lists of clients that, on day one, they will start sharing,” she says. “The standard for this is not [to share] in exceptional cases, not because it is essential, or that we finally have a maritime lawyer or whatever it is. The standard has to be because it is possible and plausible. If it won’t hurt the client and you can plausibly do an exchange of services, do it.”

Compensation, succession-planning need to be addressed early on

But there are certain issues that tend to surface in small firm mergers that don’t arise when big firms decide to dance. “Small firms usually don’t have good succession planning in place for the clients or for the leadership of the firm,” Alvary says. “The founders are typically entrepreneurial and natural leaders. The second-generation members may not be the same as they joined a going concern. How do you transfer prestige and stature to that next generation?”

Also, in small firms, a founder often wishes to be compensated for building something out of nothing. On day one, there was nothing on the balance sheet for WIP and receivables; today, there may be hundreds of thousands of dollars. “This is not the same as hard, paid-in capital,” says Alvary. “This is just for unbilled time and uncollected receivables.” At a big firm, no one is ever asked to buy into that float—sometimes in the millions of dollars—or compensated on the way out for their “share” of it. If the issue isn’t addressed in a merger, it can still exist years later when one of the founders is preparing to retire or wants to leave for another reason.

There may be lots of good reasons to merge two practices: the greater economic security of a more diversified practice, perhaps some cost savings in being able to centralize some services such as accounting. Gary Benson has even been able to create his own IT company that handles the firm’s IT needs and makes a profit on outside work.

But, ultimately, says Toronto’s MacKay, the key question is simple: “What is it that we can do as a group that we cannot do individually?”

Without a clear answer to that question, a merged firm may survive to the extent that it doesn’t immediately collapse, but it will never thrive, never reach its potential financially or in terms of personal satisfaction for the lawyers or the staff.

Tim Perrin is a freelance writer.