During the past years, we have seen major changes to the landscape of debt collection law firms. These changes have come in many forms, such as the merger of two or more law practices, expansion into additional states and, regrettably, certain firms closing shop. These changes are, in my opinion, a direct result of the increase in compliance requirements by regulatory agencies and our clients. In other words, it costs more today to operate your law firm and, as a result, owners must identify new ways to meet client needs while maintaining profitability.
There are some key points law firm owners and decisionmakers need to make when addressing the future of their law practice. I have had a fair amount of experience in this area with my own law practice and, given I am a CPA who began his legal career as a corporate and tax attorney, I am able to provide a broader perspective on the subject.
With that in mind, let’s examine the example of a debt collection law firm with 24 employees and two partners who each own 50% of the firm. Both partners are 58 years old. With revenues and profits having been flat since 2013, the partners are looking for options to “merge” with another law firm.
While this scenario appears simple, there are countless considerations. The first question you have to ask yourself is what is your ultimate goal? Are the partners looking to sell the practice and walk away or do they want to continue to work? If the latter, then until what age? After the possible merger, are you looking to take on a heavier role in your new entity or are you looking “to tap the brakes” and begin the process of giving up control? All are major factors in determining how you proceed.
Let’s further assume that you found a target firm that is interested in discussing the possibility of a business combination. I choose to use the term “business combination” to encompass all the methods one can utilize to combine practices: merger, sale of assets, sale of goodwill and/or employment agreements. Each of these vehicles has benefits and risks which need to be fully reviewed by you and accounting/tax consultants prior to proceeding.
At the outset of these discussions, be sure to prepare and have all parties sign a Non Disclosure Agreement (NDA). Next, you and the target firm should exchange financial information such as the previous three years tax returns and firm financial statements. Other reporting essential to this process is an employee census, an inventory of open files, a list of top clients and determining if there are any crossover clients.
Depending on the type of combination, the parties may consider performing a valuation of each firm by an outside vendor. For example, if you are purchasing shares in a law firm, the valuation becomes very important. Complicating any valuation are the many methodologies to value a service company. In my opinion, it is very difficult to properly value a law firm as it does not have a great deal of hard assets. An additional factor to review is owner compensation. This is a major factor in determining value. Finally, look at the trends in the income and expenses flowing from the business as a method of determining the success of the firm.
If the valuation makes pursuing the combination discussions viable, one of the most important things to consider is the databases and computer systems of both firms. The integration of the data and systems can be one of the most costly and time-consuming parts to the process. In my experience, do not take this aspect of the transaction for granted. This process needs to be worked through with both firms and the clients to prevent surprises.
Many other factors go into this process. In the end, a great deal of the success of the transaction boils down to your team. Therefore, it is critical to determine if you have the proper staff in place to make this transaction a reality. With any such venture, the road to get there may get bumpy; however, with proper people and planning, all should go well. Good luck!
Fred N. Blitt, Esq., is a partner with Blitt and Gaines, PC in Illinois and Couch, Conville and Blitt in Louisiana. He is past president of NARCA. Contact: