Partners in Practice: Due Diligence For Lateral Partner Candidates

Ed. note: This is the latest in a series of posts on partner issues from Lateral Link’s team of expert contributors. This post was written by Tricia McGrath, Senior Director at Lateral Link, who works with partner and associate candidates on law firm searches, most often in the New York, California, and Washington, D.C. regions.

When a firm is considering a lateral partner candidate, the firm will perform due diligence on the candidate. The firm will be interested in reviewing materials such as a partner business plan and a lateral partner questionnaire, and will investigate and evaluate the partner and their practice. It is equally important for a lateral partner candidate to conduct his or her own due diligence on a prospective firm. As an equity partner, you will become part owner in a “business,” and should verify that there will be an appropriate return on your investment of time, energy, skill, and capital.

Of course, neither the firm nor the partner can ascertain with 100% certainty that a lateral relationship will work. However, appropriate due diligence can minimize the risk of failure, as important facts are revealed and future expectations can be managed. While there are many areas in which you’d like insight, three top concerns are (1) the firm’s financials, (2) the firm’s management, and (3) the firm’s culture….

The Firm’s Financials

Law firms are businesses, and in the past year, we have seen increasing reminders of this. Many firms have ceased operations because of critical flaws in their operations. As a lateral partner candidate, there are many financial criteria that you should investigate. Admittedly, firms will treat financial diligence differently — some firms will be transparent and others will be opaque. Ultimately, you’d like to understand the overall fiscal health of the firm. Here are some suggestions on particular issues. This is certainly not an exhaustive list.

• Debt: What amount of debt does the firm have on its books? How is the debt serviced?
• Litigation/potential firm liabilities: Is the firm currently involved in litigation? Are there potential firm liabilities known to the partnership?
• Leases: Is the firm involved in long-term leases? Brobeck’s dissolution in February 2003 and forced bankruptcy seven months later has been largely blamed on expensive office leases that led to overwhelming debt.
• Client base diversity: From what industry sectors are the firm’s clients? Are they relatively recession-proof? Is there a good economic balance and financial stability among the client base? Firms heavily-rooted in the financial industry — particularly in structured finance and securitization — have taken a beating in the past year. Firms that continue to thrive have diversity among their client base (and practices.)
• Large upcoming costs: Is the firm purchasing a new building or anticipating capital improvements in the next few years? How is the firm’s capital being spent?
• Historical financials: Many firms have poor financials for 2008. How has the firm performed over the past three and five years?
• Compensation structure: Overall compensation structure for associates and staff. How much money goes to the payment of salaries?

The Firm’s Management

As a firm is guided by its management, it is important to investigate key management issues. It is important to assess these management issues from your individual perspective, but also from the perspective of your practice group.

• General management: Who is on the executive/management committee? In what offices are they located? Who are the firm’s key partners, and what are their practice areas?
• Selection of management and leadership succession: You might like the current head of the firm, but what about the next one? How are leaders selected and groomed?
• Partner compensation issues: Who decides compensation levels? On what bases are the compensation decisions made? Is it a transparent process?
• Tiered partnership: How many tiers? Equity v. non-equity? Can partners move from equity to non-equity? What requirements must be satisfied?
• Individual group standing in the firm: How many of your group’s partners are on the firm’s committees? How does the firm’s management perceive your group?

The Firm’s Culture and Operations

Many partners leave a firm because of cultural, not monetary, issues. As such, it is vital to understand the culture of a firm. I worked at two law firms, and I cannot imagine two more different firms and cultures. It is highly improbable that the partners from one firm would enjoy the other firm and vice versa. A “culture fit” is a very individual analysis — what works for you might not work for another partner. It is important that you speak to individuals at the firm and get a sense of the “feel.” A culture fit cannot be completely determined in advance but due diligence will get you to a certain level of comfort either way.

• Recent partner departures: How many partner departures has the firm had in the past year? Were these homegrown or lateral partners? What reasons were given for their departures? Where did they go? Is the firm comfortable with you contacting the departed partners?
• Associate satisfaction: How do associates feel about the firm? Does the firm have higher-than-normal associate turnover?
• Lateral partners: How are lateral partners treated? Are there any lateral partners in management roles at the firm? Is the firm successful at lateral integration?
• Additional staff: Would the firm welcome additional partners and associates to join you in your practice? Would your lateral associates have an opportunity for partnership?

Conclusion

Partners investigating a lateral partner move should conduct thorough due diligence on a potential firm. In-depth knowledge of the firm’s landscape will help you to make the decision whether or not to join a new firm with greater certainty. It will also help you to manage your expectations as to what will be waiting for you upon your arrival and beyond.