Facing reality when a firm's survival is at stake

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Published on 7/21/08

In times like these, the old cliché about the economy hits home: If other people lose their jobs, it's a recession; if I lose my job, it's a depression. In a recent column I discussed how law firms can deal with recession. But what if the situation is more serious — business has slowed to the point where the firm's survival is at stake. No firm can ignore such a drastic possibility or be ignorant of the three unpleasant alternatives it will face.

  • Downsize
    In a past column I've warned about the danger of cutting muscle as well as fat. But sometimes surgeons have to cut to save a life, and law firms can face the same hard option.

    Some of the cuts can be financial. Begin with planned capital expenditures, progress to current expenses for maintenance and facilities, and as a last resort reduce compensation (in order: bonuses, partner income and staff/associate pay).

    Beyond this, cuts unavoidably involve people. Two rounds of staff layoffs could be attempted before eliminating associates, with de-equitization or forced retirement of counsel and partners as a final step.

  • De-merger
    Law firms that have grown by merger or acquisition may be required to reverse the process if the firm can no longer support its expanded size. A merged practice can be split up into pre-merger units, especially if the internal cultures of the groups are still largely intact.

    Other de-merger alternatives are cutting loose an area of the practice that is not profitable, or dramatically scaling back those areas of nonessential practice hardest hit by the economic decline — which today might include structured finance or some aspects of M&A practice.

    Segments of the firm, or even individual lawyers, may be encouraged to leave and form boutique practices to which the parent firm can still have access (without adding people) if it survives the business decline.

  • Liquidation
    When the law firm's survival is doubtful, and it's not possible to find a buyer at a reasonable price, it may be time to consider liquidation. While the firm will cease to exist, individual lawyers will go on. They can join another firm (many Chicago and Houston firms expanded by adding lawyers from Altheimer & Gray and Jenkens & Gilchrist when those firms expired) or start a new firm.

    The trickiest aspects of liquidation require the division of both partner financial assets and firm clients.

    All law firms must provide value to their clients. And they must be profitable in order to open their doors the following day. The point when cash stops coming in the door is much too late to start wondering if there is a problem. The seeds of the problem were undoubtedly sown weeks, months or even years earlier. At this point, recognizing harsh reality is the only real option.

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