The Due Diligence You Should Be Doing Before Making a Lateral Move

Making a lateral move always involves an element of risk, but you can increase your likelihood of choosing the right firm for you by performing your own diligence on the prospective firm. Not surprisingly, lateral partners who take the time to do proper diligence on their new firm are more satisfied with their choice.

According to the latest data from Major, Lindsey & Africa's 2023 Lateral Partner Satisfaction Survey (the survey, https://bit.ly/3F8CWcz), those laterals who felt they had obtained "adequate and accurate information" regarding their new firm were more satisfied after the move. Of those laterals who requested detailed information on important details such as firm financials, met with recent lateral partners and reviewed the partnership agreement, 72% reported being satisfied — compared to only 58% who were satisfied and did not get this information.

While the notion of doing due diligence seems intuitive, many lateral partners are skipping this crucial step. The survey showed that only 20% of the respondents reported that they evaluated their new firm's financial statements, leases or loan documents prior to joining their firm. This number was down from 29% from the 2020 survey and 40% in 2014. The accompanying graph sets forth the breakdown of responses on various due diligence inquiries.

Source: Major, Lindsey & Africa's 2023 Lateral Partner Satisfaction Survey

Partners should be investigating the new firm by meeting with critical leadership, including the CFO and firm chairman, reviewing the partnership agreement, and meeting with recent laterals to the firm.

What you are looking for

Ideally, you will want to understand the workings of the new firm as well as your current firm before making the jump. Often partners are exploring a new firm because they have a frustration with their current firm. While ensuring that the new firm does not have the same challenges is important, you want to explore if there are differences that will be material to you as well.

Before making a lateral move, you want to understand the lateral integration process, the new firm's financial performance, management structure and style, compensation system, and practice support. All of these pieces will factor into whether this new firm is the right firm for you. The firm might be financially stable and thriving, but if you don't have the support you need to succeed, does that really matter?

Be proactive during the interview process

Firms often guide prospective laterals through the interview process with the goal of ensuring the candidate speak with all the firm's necessary decision makers. Some firms also proactively ensure that they arrange for the prospective lateral candidate to meet with those who can answer questions on topics such as the firm management system, financials, and practice support, but not all. A prospective lateral should take it upon themselves to ask these important questions to ensure they have all the necessary information before making a lateral move.

Questions on firm financials

Often you will be able to sign an NDA and be given a view of the firm's financials that is the same as you would once you join the firm. You may also ask who the right person is to direct questions to about the firm's financials; it may be the CFO or someone else in firm leadership.

Once you have access to the financial information, look at some of these key areas:

•The firm's performance over the past three and five years

•The three-year trend of both Profits-Per-Partner (PPP) and Revenue-Per-Lawyer (RPL). (Keep in mind that RPL is much more difficult to manipulate so it is a more trustworthy number than PPP.)

•The amount of debt the firm has on its books. How is the debt serviced?

•Has the firm skipped or deferred any distributions within the past few years?

•The firm's lease liability and the plan for space going forward.

•How much the firm spent on certain expenditures, including marketing, technology, and facilities.

•The overall compensation structure for associates and staff. How much money goes to the payment of salaries?

•The industry sectors of the firm's clients. Is there a good economic balance and financial stability among the client base?

•Recent departure trends of practice group leaders or partners who controlled significant amounts of business.

Questions on firm management

Understanding how the firm is structured will help you better understand how you fit into the overall vision and what the firm's priorities are.

Consider asking about:

•How partner compensation is set for both equity and non-equity partners. What are the factors that go into the formula, and how often do partners move up and down in compensation?

•What the differences are between equity and non-equity partners. What is the threshold for a non-equity partner to rise to equity?

•The overall compensation structure for associates and staff. What are the billing rates for associates?

•How is the firm managed? What are the important committees, who is on them, and how are they selected? Are there laterals on important committees such as the compensation and management committee?

•The firm's governance procedures and mechanisms.

Questions on lateral integration

For some questions, such as how the lateral integration process is handled, it is helpful to speak to the person responsible for your integration, as well as recent laterals who can speak to their experience.

•What are the goals of the lateral integration process, and what does it entail?

•How long is the formal lateral integration process?

•Who is responsible for the lateral integration process?

•How much input will I have into my integration plan?

•What are the expectations at the conclusion of the integration process?

During your interviews, you may also want to ask about the firm's strategic plans for the next five years. Is it planning to open new offices or strengthen certain practice areas? Where the firm sees itself going will be a good indication of how you fit into the overall plan.

What you may come to realize is that a more profitable firm may not be more profitable for you. The right firm may not be larger or may not currently focus on your practice area, but if the firm is stable and poised for growth, it may be the right home for you. Doing your due diligence will only help you make an educated move and arm you for success.

When making a lateral move, remember it is not just about getting the job, but about making sure it is the right firm for you. You should perform your own diligence prior to accepting an offer with a new firm, including meeting other recent lateral partners, reviewing the firm partnership agreement, and reviewing the firm's financials.