With hope for the end of this pandemic on the horizon, lately I have been thinking about this article I read on law.com. The article was called Warning Signs: How Big Law’s Greatest Failures Unfolded. Basically, the article analyzed commonalities from major law firms that went out of business. I wonder how the pandemic may impact firms with some of the traits highlighted in the article. To better service my candidates, I try to look at warning signs for firms that may be experiencing financial distress.

The Warning Signs

The article discussed the following warning signs were common for many law firm failures in recent history.

  1. Expensive leases on understaffed offices.
  2. Growing debt to fund partner compensation.
  3. Expensive expansion plans with falling profits per lawyer.
  4. A drop in head count, mass departures, a few years before collapse.
  5. Overreliance on one practice area or industry segment.
  6. Poor firm leadership.

What Does it Mean?

Obviously, any firm can have one or more of these traits. Does that mean the firm is on the verge of collapse? Of course not. However, by using data and history, this article does a good job of raising red flags. If a firm has too many red flags, I may steer my candidates away from it.

Likewise, if you are a partner at a firm with too many red flags, maybe you should look a little closer. There are a couple of reasons for a closer look. One, many firms in the article had huge debt. If your firm collapses, are you personally on the hook? Two, how will your future be impacted? Besides being on the hook for debt, will you lose money? Will you lose clients?  Will you have to find a new firm?

Again, I am not suggesting nor hoping for the failure of law firms. However, after living through more than a year of the pandemic, I do wonder if there are firms out there that will follow this historical pattern of financial distress. We will see what happens. In the meantime, please call me if you have any questions about this blog or the lateral partner market.