Ed. note: The Aspiring Lateral, a new series from Levenfeld Pearlstein, will analyze a variety of issues surrounding lateral moves, drawing on the firm’s experience in the lateral market as well as the individual experiences of LP attorneys. Today’s post is written by Angela Hickey, LP’s Executive Director and a member of the firm’s Executive and Compensation Committees.
There’s a point in budding relationships where things get down to brass tacks. You put away the flowers and candles, and find out whether you have a long-term future. You have full and frank discussions about kids, religion, finances, and how those troublesome in-laws might fit into your future life. It may not be as romantic as your weekend in the Berkshires at that place with the clawfoot tub, but it’s necessary. Because you just might find, away from the clean mountain air and raspberry scones that the bed and breakfast served each morning, that you’ve got a serious issue or two. You might in fact . . . have a dealbreaker. And that, in a word, is why prospective laterals should take the due diligence process as seriously as firms do.
The due diligence process — some version of which all respectable firms will have in place — is the offering firm’s last and best chance to closely examine the lateral before extending an offer. (In the case of fast-moving lateral hires, the hiring firm may even give a conditional offer before or simultaneous with due diligence.)
Because of its timing, there is a temptation to think of due diligence as a mere formality before the lateral picks up stakes. But it is a rigorous process, and one that laterals can and should use to perform their own final checks…
For its part, the offering firm will ask for detailed information about the prospective lateral’s practice, such as:
- A list of the prospective lateral’s clients over the last three to five years;
- A breakdown of the prospective lateral’s origination credits;
- Reports on hours billed, value, and realization over the last three to five years;
- Any locked rates, contingency fees, or other special billing arrangements the lateral has in place;
- An aging report for the lateral’s work-in-progress (WIP) and accounts receivable (AR), and a description of the lateral’s billing and collection practices;
- Any malpractice claims filed against the lateral;
- Any board of director positions, financial investments, or other activities that could give rise to conflicts of interest; and
- Current compensation and compensation expectations.
Obviously, the offering firm uses this information to suss out potential conflicts and get a look at the financials of the lateral’s practice. But for the firm, due diligence is about more than seeing the size of the lateral’s practice — it’s about getting behind the numbers.
In most if not all cases, after a prospective lateral has delivered the above information, the firm will interview them about it. If something is funny about the lateral’s WIP and AR reports, they will get asked about it. If much of their work is for a single client, they will get asked in detail about their relationship with that client. This is the firm’s chance to learn the full story of the lateral’s practice — and as such, it isn’t unusual for the interview to last three or more hours.
In responding to the firm’s questions (and compiling the information in the first place), lateral prospects should be entirely forthright. This is not the flirtation stage of the relationship, where a bit of puffery can go overlooked in the name of making oneself attractive. This is where you lay your cards on the table, and with good reason. Even if it were possible to get through the due diligence process on a photoshopped portrait of your practice and a dollop of charm, it’s not a wise move. Eventually, the firm will see your practice for what it is, and your lack of candor will have only forestalled a breakup certain to be more painful after you’ve already made the move.
To return to the original analogy, you want the firm to love you for who you really are.
And that candor requirement is a two-way street. In the due diligence process, laterals should expect firms to return their transparency in full. They should expect to see, for instance, the firm’s current balance sheet and income statement — and should request those documents if they aren’t offered up voluntarily.
Here are three things for lateral candidates to think about as they approach the due diligence stage of their search:
- Records collection: As the bullets above suggest, due diligence requires lateral prospects to compile quite a bit of information about their historic billing practices. This is something laterals want to think about and get in place long before their search gets serious; among other things, it will avoid the kind of last-minute compilation of old time reports that can ruin weekends and raise suspicions at one’s current firm.
- References: In addition to the information identified above, laterals will be asked to provide references in the due diligence stage — and for obvious reasons, will probably not be comfortable identifying their current partners. Former clients, co-workers who have left the prospect’s current firm, or co-workers from a previous firm where the prospect worked often make good references. Identify them and prepare them as you begin your search.
- Final questions: As laterals approach a due diligence interview, they should spend time identifying specific information they would like to receive from the firm. When their list of potential “dealbreakers” has been addressed by the firm, they can feel good about accepting an offer.
Disclosure: This series is sponsored by Levenfeld Pearlstein, which is an ATL advertiser.
Chicago-based Levenfeld Pearlstein (LP) was born of the desire to create a different kind of law firm. While many firms promote a “value proposition” of high quality work, responsiveness, efficiency and reasonable fees, to LP, those are just the basics of doing good work for clients. LP’s focus is building business relationships with clients as trusted strategic advisors who understand their clients’ business and industry inside and out, seeking legal solutions that support the client’s long-term business strategy as well as short-term needs. LP’s top talent and entrepreneurial setting translate into the sophisticated skills and resources of a big law firm in a more manageable environment.