7 Strategies for a Successful Merger

7 Strategies for a Successful Merger

When you start the planning to merge your accounting practice with another firm, there are many vitally important items to review. Below are 7 key things to keep in mind.

1) Identify Your Objectives

Have you clearly defined why you are pursuing a merger of your firm with another firm? Do all the key people in your firm, especially the partners, have a consistent understanding? You can’t properly execute a merger plan unless you know what you are trying to accomplish. There can be several reasons why you might undertake this strategy. The most common are:

· Improve your ability to serve clients by obtaining better support and resources available from a larger firm

· Create a larger client base in order to offer high value, specialized services to more clients

· Become more competitive in acquiring clients and staff through a stronger brand and larger presence in your market

· Obtain or expand specialized services or industry expertise to take advantage of market opportunities and strengthen the firm’s identity

· Increase profitability by taking advantage of the elimination of costs and economies of scale that can result from most mergers

· Expand the firm’s presence into more offices in the market or into new geographic markets

· Address concerns for the long term internal succession needs of the your firm by building a larger firm that offers more opportunities to younger partners

· Adding to the pool of talent in the firm

For example, if your objective is to obtain better support and more resources you should look for a merger candidate that has infrastructure, administrative, and management resources you don’t have now. If you are merging with a firm that has a niche practice you are targeting you need to make sure the people in the firm with that expertise will remain after the merger.

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2) Be wary of deal structure

The structure of your merger will likely include in the calculation of relative values an assumption that clients and staff of both firms will be retained. In reality, you cannot buy and sell people. Therefore, the terms of the deal must include some consequences if this assumption turns out to be materially inaccurate. Normally, it takes both parties utilizing the trust and goodwill they have with employees and clients to maximize their retention. Some clients will need to be reassured a couple of times before they are comfortable. The best deals have an incentive in the form of an adjustment in the relative valuations for client and staff retention to motivate both parties to continue to provide this reassurance.

3) Time kills all deals

If all the parties are aware of the goal and purpose of the affiliation, it should not take more than a 6 to 10 weeks to come to an agreement. The longer the negotiations the more likely bad things can happen:

· Staff and or clients may find out what is going on and feel nervous about their security and start making plans to leave the firm.

· The longer two firms negotiate the more adversarial it can get. It is very hard to consummate a deal with an adversary. If it does become contentious and the deal still closes, it can have negative ramifications later.

4) Reach a complete agreement before you close the deal

Do not fall into the trap of agreeing to agree later. Know the roles expected of everyone, compensation methods, and what name the firm will operate under. Have your transition plan for retaining clients and staff on a solid ground that is completely understood and agreed upon by both parties. Complete your due diligence and know what is ahead. Review staff, billing procedures, the treatment of accounts receivable, work in process, liabilities, and client service procedures, prior to executing the contract.

The best agreements are in writing. Your merger agreement will obviously be written. Put other important business plan items and commitments in writing as well to avoid future misunderstandings. If you have a question about an important aspect of how the successor firm will operate, it is worth reaching an agreement on the issue and putting it in writing.

5) Plan for a worst case scenario

Make sure you have a pre-nuptial agreement or de-merger clause (unless your deal is for a short term succession). Most firms spend all their time figuring out how the merger will work based on the single premise it WILL work. What if 6 months later the merger is a failure? Have a way of de-merging spelled out in advance. In the event for the need to dissolve a merger, there are enough difficulties without having to come up with a plan to de-merge. Draft in advance and be sure to include things relating to each firm’s original clients, new clients that come in after the merger, clients who insist on staying with the other firm, staff, facilities, and technology.

Make sure your plan is realistic. Both firms will have made significant investments in the combined operations. Unless the successor firm is still operating in the original facilities of both firms with essentially all the same staff and clients as before, the break up can be expensive (although necessary if it truly isn’t working).

6) Create a proper transition strategy

You and the other firm will agree that you have merged your client lists and that your employees will work for the successor firm. However, the clients and staff have to decide to stay in order to make this work. Experience tells us they will stay if the proper transition plan is implemented. It starts with how the change is communicated. Clearly, the clients liked the way they have been serviced by their original firm. They have come to expect certain procedures, fee schedules, staff and many other items they grew accustomed to. The staff like where they are working, their firm’s policies and procedures, and culture. There isn’t any reason that their experience with the successor firm should be less gratifying than their previous experience (if it will be, you may be merging with the wrong firm). However, don’t assume the clients and staff will assume the new environment will be as good or better without specific information. It is important to be very specific about new policies and procedures and not leave people to fill in the blanks for themselves. The key to a proper transition plan is emphasizing what the clients and staff will gain with the new successor firm, not what they might perceive they will lose of the old.

The outcome of a transition plan can hinge on the most minute details. Which firm’s envelope is used to send the letter notifying clients of the change can make a difference. The appropriate transitional strategies will help make the deal work for clients and staff which is the foundation of a successful merger.

Develop a plan for governance of the merged firm that is fair but also effective. Make sure you aren’t creating a environment that will lead to gridlock. You should have a specific governance system spelled out in the merger document, including naming people to specific positions. You should also have identified a means for modifying the leadership team if it isn’t effective.

7) Find expert and experienced help

Lawyers will say, “An attorney who represents himself has a fool for a client.” Accountants need to recognize the same thing. In merging two accounting practices, there are a voluminous amount of things to be worked out. Valuing the practice, structuring the deal, what to review in due diligence,

documentation of the deal, treatment of accounts receivable, WIP, liabilities, names, roles, transition strategies, staff, leases and so much more. This is not only a critical business decision it can get emotional. Having a professional, who has years of experience specific to accounting practice mergers, can be the most important step in obtaining a win/win deal for both parties.

Should you have any questions or comments, please feel free to call us directly or e-mail us at one of the addresses below.

Go to our website, www.transitionadvisors.com and click on articles for more FREE information on buying, selling and merging accounting firms.

Best regards,

Accounting Transition Advisors

Joel L. Sinkin ()

Terrence E. Putney CPA ()