The Idiosyncratic Role of Real Estate in Some Law Firm Mergers

Nov 15, 2018 12:00:00 PM | Michael Marget

Law firm mergers have continued to surge throughout the year, with a record 56 mergers occurring during the first nine months of 2018 alone (that’s one-third more than the average number of mergers for the same period over the past 10 years). So why is it that small and medium-size law firms are often motivated to merge into larger firms?

The Reasons for Law Firm Mergers

Just as with bringing onboard lateral partners, there are four main reasons small and midsize firms look to merge:

  • Improving competitiveness from a larger platform.
  • Expanding geographic reach to mine for prospective clients.
  • Obtaining additional expertise from complementary practice areas.
  • Improving and/or solidifying existing client relationships.

However, there is another reason that’s less “out in the open.” Here’s a little backstory.

My first gig as a law firm CFO/COO spanned 10+ years and included numerous individual and group lateral acquisitions, along with a fair number of small law firm mergers (i.e., acquisitions) as our firm grew from 70 lawyers to more than 400 lawyers. In cities where we already had a footprint, there was one additional motivating factor for smaller firms looking to merge: their office lease expiration date. Most firms initiated talks with us 12-18 months in advance of that date.

Why Law Firms Should Consider a Real Estate Broker

I’ve often thought a good offensive strategy for law firm growth might be to retain a real estate broker to identify merger prospects based upon upcoming lease expiration dates (There are few secrets among competing real estate brokers, as evidenced by phone calls I continue to receive from people I don’t know who are aware of when my office lease is up for renewal).  

The validity of this real estate broker-based strategy for law firm expansion was indirectly confirmed by a recent piece published in the New York Law Journal, “A Day of Reckoning for NY Law Firms When the Lease Expires.”

The article details the difficulties faced by small and midsize law firms dealing with lease renewals in the New York real estate market. Generational conflicts of interest are not unusual. It’s one thing to affix your name to a document guaranteeing a 10-year lease when your firm is generating a comfortable book of business and you are a young partner in your prime; it’s quite another when the law firm’s principal rainmakers are in their 50’s and 60’s.

3 Questions for Law Firms at Lease Renewal

Issues concerning client succession efforts and the mortality tables should concern partners of all ages before they sign on the dotted line. So, when it’s time for lease renewal, there are three questions small to midsize law firms need to ask themselves:

  1. Should we stick together and guarantee a new 10-year lease?
  2. Should we go our separate ways?
  3. Should we move as a group to a new firm better capable of meeting the short-term goals of the older partners and providing a long-term platform for the younger ones?

Whether you’re looking to compete more effectively, expand your reach, gain more expertise, or improve client relationships, law firm mergers may be the answer. But don’t overlook the peculiar role real estate obligations may have when looking to expand your successful firm. The end of a lease could be a new beginning—or the beginning of the end.

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Michael Marget

Mike Marget is an erstwhile large law firm manager with tours of duty as COO at Katten Muchin, Jenner & Block and CFO at Holland & Knight, among others. He’s currently president of 4L Law Firm Services which provides accounting, bookkeeping and related back office services to small/midsize law firms. His blog, Law Firm CFO, is dedicated to every law firm manager who has ever asked the question, “Why me?”
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