The dissolution of a law firm causes its leaders to be pulled in conflicting directions. Peter Zeughauser reports on the main responsibilities of a managing partner in a downturn

The role of every managing partner changes as his firm grows and evolves, but his focus is always on building a sustainable enterprise – except when the firm's future clearly becomes unsustainable. The notion of a firm's failure can be so disturbing that it escapes planning until the 11th hour.

As is the case with all unanticipated events, though, the conflicting interests that arise in a firm's failure are best managed with careful forethought.

In every firm failure there is a window – sometimes called the 'death spiral' – between the moment when a law firm leader realises that the firm will likely not survive and the moment the firm votes to dissolve.

During this window, the managing partner's role is fraught with conflicting interests. Commonly without a book of business, the law firm leader
has his own future to worry about. Unlike the chief executive of a failing company who can often find work as a CEO elsewhere, chairmen who preside over the demise of their firms seldom find work as the head of another law firm.

Also, the leader has a duty to disclose the firm's underlying weaknesses to his partners, but he is also responsible for maintaining the lustre of the firm's brand, which can make a big difference in the employment prospects of lawyers and support staff far into the future.

How the chair manages the firm during this window greatly affects the likelihood of a smooth transition. Here are four critical responsibilities.

Develop a plan

The chairman must lead the decision-making process during the death spiral. Topics to be addressed include:

• assembly of a team of internal and external advisers to guide the firm through the period preceding the formation of a dissolution committee;
• management of communications, both inside and outside the firm; and
• development of a timeline with 'fish or cut bait' dates for making key decisions, including whether to combine with another firm and whether to cut special deals with key partners.

The timeline should be based on a sober short-term financial plan that optimises the likelihood of an orderly dissolution, including managing creditor relationships. Most importantly, the plan should set a realistic outside date by which a dissolution decision must be made. This will ensure that the firm's liabilities are appropriately addressed, that key partners and staff understand that management has a realistic view of the firm's future, and crucially, that client work can be smoothly transitioned.

Mergers (and even more so, dissolutions) make clients nervous. When firms combine, clients worry about distraction, and when they dissolve, clients worry about whether the teams that serve them will stay together. In either case a well-crafted client transition plan that addresses the timing and content of client communications, file transfers, and staffing is essential.

Creditors are another crucial group to consider. Dissolutions empower creditors. They can drive merger discussions and influence staff and partner compensation. Open and candid working relationships between chairmen and creditors build trust and lead to greater cooperation. By proactively engaging the firm's creditors in a dissolution, a managing partner can gain greater flexibility in a merger talk.

Get help

As the custodian of bad news about the firm's future, it is often tempting for a law firm leader to shield his partners from an unpleasant reality. Indeed, if holding the firm together while seeking a combination with another firm or analysing the best path to an orderly dissolution is a priority, keeping it to one's self might seem like a good idea. That is a mistake.

Partners who have invested their careers in building a firm respond with anger when they are surprised with the news that the firm's practice is not sustainable. That anger clouds good judgement and results in self-centred decision-making instead of decision-making for the greater good.

Who needs to know what, and when they need to know it, requires careful thought and the balancing of self-interest with the interests of others. The chairman should call together the formal and informal leaders of the firm to develop and get buy-in for management's course of action, to keep them abreast of alternatives, and to seek their advice in evaluating the options.

In all likelihood, neither the chairman nor members of his kitchen cabinet will have previously dissolved a professional services partnership. Strong, independent, outside advice is critical during this time. At a minimum the team of advisers should include a strong bankruptcy lawyer experienced with dissolutions of professional service firms, a financial adviser experienced in dissolutions and combinations, and a consultant to help identify, prioritise and shepherd talks with other firms.

Make the big decision

Before the dissolution vote, the firm usually has two options: combining with another firm (this may be called something else, but it is basically an asset sale) or dissolving and letting the market set the price of the individual practices.

Selling is typically the better alternative and, to make it as attractive as possible, it is generally cast as a merger. Holding a failing firm together for a merger, however, is something of a Hail Mary.

Rather than having a shortlist of realistic candidates, managing partners can make the mistake of entering into a prolonged period of talking to numerous suitors. Often, many of these potential suitors are more interested in looking for star performers who might ultimately come onto the market in a dissolution than in genuinely pursuing a combination.

A chairman has to be disciplined about how long to stay in the market before opting for an orderly dissolution. Star performers can hardly be asked to turn down offers elsewhere as they watch their firm's assets, and their capital, dissipate.

Even in good times, a chairman must manage a firm around the performers, not the underperformers. But at a failing firm, this becomes even more crucial. Encouraging underperforming partners to leave (through appropriate pay packages), while demonstrating to the performers that staying together for a sale will enhance the likelihood of them preserving the firm's capital, should be one of the chairman's top priorities. This may involve making special arrangements with top performers to encourage them to stay.

If performing partners lack faith in the firm's ability to hold on to them and to eliminate underperformers, the chairman's goal must be to seek an orderly dissolution – one that takes best advantage of the firm's assets so that the liability of individual partners is minimised.

Manage the media

There is likely no time in a firm's life when managing the media is more important than when a firm is moving toward a dissolution vote. Giving media inquiries a low priority or ignoring them often results in highly inaccurate press coverage. On-the-record candor can be equally problematic.

Credibility with journalists is essential. It is the rare managing partner who can meet the firm's need to be discreet while communicating messages that satisfy a journalist's desire to promptly and accurately report the story of the firm's dissolution. It requires a mastery and trust of journalistic relationships and ground rules – something that does not come naturally to most firm leaders.

Leaders must recognise that when a firm is down, inaccurate press can be fatal. And there will be no dearth of sources for bad press, including headhunters, competitors and former partners.

Speaking with one voice is as important as mastering the rules and relationships of interactions with journalists.

No firm wants to enter a death spiral. But carefully planning to work through it to the best conclusion results in a far better end than the alternative.

Peter Zeughauser is chairman of the Zeughauser Group.