1/10/13

Laterals as Investors or Mini-M&A Deals?

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Bruce and Janet of AdamSmithEsq recently published an article on ATL about the reasonableness of firms providing PPMs to in-coming laterals. I believe the idea is sound. Since in-coming laterals are effectively investing in a privately held company, they should have access to the full financial picture of the company. A PPM is a classic tool for making such a disclosure to a potential investor, giving revenue numbers, forecasts, risks and other key factors that reveal the value of an on-going operation..

Yet I would extend or broaden this analogy (which Bruce and Janet may do in the series) and suggest the in-coming lateral arrangement might be better treated as a mini-M&A deal. In many respects a firm is acquiring the lateral (or laterals) just a like a business would acquire a smaller company.

So why shouldn’t the party being acquired also disclose a complete financial picture to the acquirer?

It’s the old story of the cobbler’s kids going without shoes. Law firms would never advise their clients to make an acquisition under such conditions, yet they do it all the time. These people have a deep understanding of due diligence, yet keep a blind eye to it in their own businesses.

Typically laterals provide very simple revenue stats about their book of business. There is no profitability disclosed or any other risks associate with their practice and their key relationships. Some firms may ask these types of questions of laterals on an ad hoc basis, but I am not aware of firms requiring something along the lines of a PPM to document such claims. And you have to assume most of the answers laterals give in interviews are the 'sales pitch' versus full disclosure approach, since they are trying to get the firm to invest in them. That is why PPMs exist - to make sure a sales pitch is balanced by an objective documentation.

Here we go again. Law firms need to adopt basic business practices in this new environment or suffer the consequences. Given the typical track record of success with laterals, you might think firms would have picked up on this by now.


Here's my advice: Both firms and lateral candidates need to, "Look Before You Leap."

Well done to Bruce and Janet for bringing this topic to the surface.

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2 comments:

Karl Gruben said...

This is a great suggestion. One need only look at why Dewey Ballantine went down to understand that the "big books of business" didn't materialize, but the big draws did.

Dave said...

Completely agree, I think most of the time there isn't enough due diligence being done by both parties.

 

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