Entering a New Market: The Law Firm Expansion Playbook

At some point, successful law firm partners think about entering a new market.

But as they’re drafting plans to expand their reach, they need to keep some guideposts in mind.

To do this successfully, they’ll need enough client-driven reasons to justify entering the new market, the right practices to match that market’s economy, and solid financial counseling to ensure a move generates profits.

Do Your Due Diligence

It wasn’t always as necessary to deploy a calculated strategy before entering a new market. Ten-plus years ago, law-firm leaders were less cautious about encroaching upon a new city.

Consider this headline from the legal profession publication Of Counsel, which ran in the last quarter of 2007: “Firms Continue to Break Ground in New Markets, Apparently With Little Fear of Failure.” The accompanying article cited a survey in which managing partners and other firm leaders placed expansion troubles far down on their lists of management concerns.

It’s as if they said: “A new market? No worries. We’ll just elbow our way in.”

But that was before the economic meltdown. Many of those new branches closed during the Great Recession, often because the expected work dried up — and because they failed to perform adequate due diligence on the financial front before opening their new office doors.

When Expanding, Remember …

Today, prudent law firm leaders understand that poorly planned expansions can sap resources and profits. They also can strain relationships with clients who worry they’ll be neglected, and stress out hiring partners looking to staff the new branch.

Consider the following when expanding:

• Profits matter: Law firms face increasing competitive pressure to grow their lawyer ranks and open new offices so they can deploy “boots on the ground.” Ego sometimes drives expansion, and that’s often a recipe for failure. The first concern should be to serve a range of clients while putting cash in the partnership’s coffers. “The primary goal of entering a new market needs to be profit generation,” said Tom Clay, a law firm consultant with Altman Weil.
• Practices must align: An important client might ask you to move closer to, say, help with labor and employment matters. But what if the firm doesn’t have a large L&E practice or long-term plans to grow one? “Firms need to ask themselves: Are the areas of practice they’re featuring in that office really areas they want to build on, or are they simply short-term practices that only serve one or a few clients?” said Robert Denney, who runs his national law-firm consultancy from the Philadelphia area.
• Find the right leader: Someone who’s the right cultural fit, knows the people in that market and can bring them together, and understands the idiosyncrasies of the local economy.
• Be careful with cash: A new branch is like a startup company. You need capital reserves and financial guidance. “It’s always a good idea for firm leadership to bring in an outside team of financial advisors to offer unbiased analysis about the business foundation and potential of that new market,” Denney said.
• Talk to your people: Entering a new market will affect the entire partnership. The move often presents tax ramifications. Partners need to know whether they’ll likely have to pay taxes in the state into which the firm is expanding. The right advisors can provide that counsel and help lawyers get their financial ducks in a row.

Summary

Regardless of your practice’s focus and goals, a move into a new market could be a smart move.

Gather your management team and seek the right opportunities to consider.

And do your homework before you make the move.

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