Who led the battle for your affections this Valentine’s Day? Your spouse? Your partner? An other?

With relationships front of mind this month, it’s perhaps no bad time for law firms to consider their own ‘perfect partner’.

As reported by the Gazette, a six-monthly survey has revealed a 69 per cent increase in the number of merger approaches made by, or to, firms.

Many firms recognise that they must get bigger, become more niche or get out.

However the average age of an equity Partner in a law firm is 59 years old, with many still practicing in their sixties and seventies with little hope of exit in a changing profession. What does the merger market hold for these practices and what value can they bring to the table?

Goodwill is often seen as a key feature. Yet the legal profession often conducts its business almost exclusively on the basis of transactions with the lifetime value of the client rarely considered; thus goodwill is virtually non-existent.

What we are sadly seeing instead is smaller practices, sole practitioners and two partner firms, being merged into larger ones with not a penny received. Run-off cover is absorbed into the larger firm’s professional indemnity premium.

At best partners of the "acquired practice" can look forward to a short term consultancy agreement to ensure the smooth transition of the merged practice.

Another unfortunate trend is the failure to recognise the key elements of a successful merger.

Two badly-managed law firms merging won’t be a recipe for success- it is simply a recipe for a larger badly-managed law firm. Having a clear strategy prior to any discussions is essential for success.

All Partners must be prepared to support and implement this strategy and this is often achieved with the help of an external facilitator who can help address the key issues within the practice.

Also prior to any merger approach all options should be considered. Is merger really the only option or could additional services be introduced to the practice to create generic growth?

If time allows, preparing your practice for potential merger or outside future investment will result in greater value being placed on it. Driving costs downwards, using technology to improve processes and thinking of new ways to deliver services will see greater value added to a firm.

If merger is the answer, partners may need to take a reality check ahead of any merger discussions Partners trying to negotiate their own path often find their potential transaction falls apart predominately due to unrealistic expectations on the part of the firm eager to merge.

Unfortunately many accountants and brokers tell law firms that their goodwill can be valued on the basis that they own their existing work in progress (WIP) and debtors and they can expect a third of their current turnover as a valuation for their practice.

We facilitate many mergers, yet see few valuations met by prospective purchasers. Instead many potential mergers fail because of intransigence on behalf of partners.

In law firms, profits are invariably quoted prior to partner drawings and most of these profits are removed by the partners leaving very little, if anything. In this situation the "multiplier" method employed by most sectors is irrelevant, as whatever you multiply zero by, it’s still zero.

The only way to calculate any multiplier is to use a calculation to identify what are commonly known as "super profits". These relate to the profitability of a practice and are based on the following calculation.

Assuming existing partners are retiring or leaving, the basis is to take profitability prior to any partner drawings and establish the cost, including employer’s contributions, of replacing them with either salaried partners or senior fee earners.

A multiplier can then be used to create a value for the acquiring practice - anywhere from one to four times the super profits.

Often, acquiring practices will only pay the agreed value over a period of time of several years and the contract is subject to ensuring existing turnover and profitability is maintained over that period.

As with our Valentines, beauty is the eye of the beholder and sometimes a more subjective view can be taken dependant on the disciplines of the acquired practice and the potential match between the merged practices, with the ability to integrate new services and cross-selling opportunities adding obvious value to such practices.

Examine every area of your practice before offering your business up for merger – clients and how you communicate with them, the motivation of staff and the need to deal with under-performing staff and partners, careful control of finance and targets, the relationship of partners and clients and whether these can be replaced by fee-earners, the embracing of technology, a website that attracts business, measurable and accountable marketing spend – all are areas to redress to gain the greatest value for your practice.

With genuine consideration of the other practice’s concerns and with realistic expectations of our own, that happy marriage may be just around the corner.

Viv Williams is chief executive, 360 Legal Group