Firm finances are getting a lot more scrutiny this year — including from potential lateral partners.
In good times, candidates tended to focus more on practice fit and compensation. Now they are asking more specific questions about the financial history, equity levels, borrowing habits and financing plans of the firms they are considering. And they are posing them earlier in the process, hiring partners and recruiters say.
Equity partners, in particular, have a lot at stake. That goes double in troubled times.
Former Heller Ehrman partner Michael Charlson, now at Hogan & Hartson, said he expects he and a number of Heller partners will lose between $400,000 and $500,000 in capital because the firm imploded this fall. On top of that, they won’t see any profit distributions that may have come at year’s end. The professional, personal and financial dislocation “was huge,” Charlson said, and he would not want to repeat it.
So finance questions were at the top of the agenda for Charlson, who said he interviewed with a handful of firms. “I’d be crazy not to ask,” he said. “You’re making a major investment — for most people it’s the largest except maybe their home — and the notion that you would do a little due diligence on the firm I don’t think is particularly surprising.”
Concern among lateral candidates has grown over the course of this year along with the increasingly shrill headlines from Wall Street and around the globe. Jones Day partner Joe Sims, who’s been hiring laterals on the West Coast since the summer of 2006, said that he saw a significant shift in attitudes in the early spring of this year, in tandem with the first signs of concern cropping up about Heller and other firms. Through the summer and fall, when the general economy took a sharper turn for the worse, people really started to home in on finances, he said.
“I’m seeing it from everybody,” he said. “I don’t have a conversation with a potential lateral partner where that subject doesn’t come up.”
Southern California legal recruiter Valerie Fontaine said it’s even more important to bring up now, because firms that didn’t appear vulnerable in good times have gone under. “We learned this lesson with Brobeck,” she said, referring to the 500-plus-lawyer firm whose fortunes rose and fell with the tech boom and bust before it dissolved in 2003. Fontaine said that her firm, Seltzer Fontaine Beckwith, has always asked clients to provide finance details and counseled candidates to ask whether and how retirement is funded, what the leases are and what the credit line is used for. Most law firm clients have been happy to oblige, she said.
Reed Smith partner Jack Nelson said that a couple of years ago, interviewees asked for a description of the capital requirements and a summary of the firm’s borrowing positions, including term debt. Now, candidates want to know more about leases, personal liability and the firm’s plans for capital and debt, “something that you rarely heard a couple of years ago,” he said. And they want to know that information earlier, long before an offer has been made, Nelson said. Today’s laterals seem to be using the information to weed firms out of consideration, rather than to make a final decision on a particular firm.
Pillsbury Winthrop Shaw Pittman Chairman James Rishwain Jr. agreed that in previous years, a firm’s overall health wasn’t front and center: Candidates tended to focus more on potential earnings, equity buy-ins and bonus structures, Rishwain said in an e-mail.
“But now all candidates, including those who may be coming from troubled firms, are being particularly cautious and delving deeper than ever before to ensure they are joining a firm on solid financial ground,” he said.
