Analysis of Law Firm Failures - Early Warning Signs
There has been a great amount of discussion lately about the implosions of Heller and Thelen, and the effect that the economy had on these firm failures. As many firms are courting lateral partners (it’s a brisk lateral partner market!), these partners are analyzing the stability of potential firms.
A new study from Hildebrandt International should provide an interesting base for such an analysis. In a recently-released white paper entitled The Anatomy of Law Firm Failures, Hildebrandt discusses a study of firm failures between 1998 and 2004. Hildebrandt concludes that “failed firms typically exhibit one or more major fundamental flaws, and the flaws usually fall into three primary categories:
Below average financial performance - often including excessive financial leverage, significant deferred obligations, low productivity, and poor realization;
Internal dynamics - primarily involving leadership issues, partners with incompatible goals, differences over compensation philosophy, and lack of succession planning; and
External dynamics - primarily involving competitive pressures related to the firm’s historical client base, access to new clients and desirable work, and inability to recruit key talent.”
Hildebrandt states that certain triggering events brought these flaws to light.
“Four types of triggering events were the most common: (i) overexpansion that weakened the firm over an extended period of time, (ii) the unexpected rapid or gradual defection of significant partners to one or more other firms, (iii) a breakdown in merger efforts for a firm that was already in serious financial distress and barely surviving, or (iv) the impending expiration/renewal of the firm’s primary office lease.”
Lateral partners, especially those contemplating their first lateral move, should consider these fundamental flaws and triggering events when formulating their diligence questions for a potential suitor!
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