Networking, Mergers & Acquisitions of CA Firms

CA. N.K.Jain

The need for CA Firms to demonstrate consistent improvement in financial and operating performance prompts key decision makers to consider routinely adding to or subtracting from the portfolio of practice areas. Such activities stem from initiatives that include:

  • Extending the base of current offerings into new markets or territories
  • Securing new customers
  • Acquiring complementary capabilities
  • Leveraging efficiencies of scale
  • Streamlining operations

Whether applicable to the entire firm, a single operating unit, or a specific functional area, more of these efforts will be undertaken, and an increasing percentage of them will be completed as economic conditions improve. Therefore, CA Firms must ensure that the all partners are prepared to support and facilitate merger-and-acquisition (M&A) activities from inception through completion of requisite transition processes.

If the firm you are partner will soon be party to a merger or acquisition, what does that signify for you, the partner or the merging firm?

Here are some strategies to help you keep your status and sanity and, perhaps, even take you to a higher position in the new firm.

First understand that the key principle behind a merger or acquisition is to create value over and above that of the sum of the two firms. Two firms together are more valuable than two separate firms.

There is a chronic personality flaw that is seen in so many CAs, that unnecessarily impedes their true success — resistance to having partners. But the secret to success in profession is not to exclude people!Having partners is essential when you want to elevate your practice Story of Woodcutter titled “Strength in Unity” is well known to all of us

Not long ago, experience, expertise and efficiency were key requirements for advancement. Today's requirements include size, brand, specialization, innovation, creativity and resilience. Develop team leadership abilities and self-reliance and be ready to act on new opportunities.

Major Concernsof M&A

What it means for you

1+1 = 3 can be a great idea for your firm but, at the personal level, things can go awry. The merger or acquisition could meanchange in job profile and your current skills may become redundant in the new firm. New reporting system and dealing with a different work culture is also part of the package.

But when firms join forces, every person of the firm, from the Senior Partner to the new hire is affected. The hardest part of any acquisition is the initial part - the uncertainty and confusion.

Master of your domain: A potential clash in cultures

Fear of loss of autonomy and income are the primary concerns for merging small practicing firms. Although they know they need to address merging issues soon—and that clients and employees would benefit from their active involvement in the process—they are reluctant to give up being master of their domain. They are set in their approach to managing, accustomed to working on their own schedule, and unwilling to embrace a dramatically different role. In a merger, they would be right—the successor firm would expect all partners to adhere to its policies. That’s exactly where we need to address all issues relating to merger in a proper way.

Client’s Trust

Merging firms also recognize the need to properly transition the client base. Most clients don’t have a yardstick by which to measure their accountant’s level of competency or skill. They remain loyal out of affection and trust. That trust must be transferred from the merging firms to the merged firms and the merging partners play a critical role in making that happen. Trust is earned through a track record of experience, and transferring it is a process that can take months or even years.

Change of Environment

It can be very difficult to go from an environment in which you have no accountability to one where you do.

Loss of Brand and Staff

In most cases, the merging firm gives up a brand, location and sometimes even staff. Those changes can make the transition more emotionally and professionally charged.

Friction

Whenever you add additional personalities under one roof, there is always the potential for friction.

Difference in Pay Packages

If the successor firm retains staff whose compensation is different from their existing staff in a similar role, conflicts can occur.

How to overcome?

If your firm is merging or being acquired, don't expect the transition to be smooth. You'll have to contend with organizational chaos and your own emotions. To embrace a new firm and take ownership is difficult when no guidelines exist.

To make this type of arrangement successful, several considerations are important. For instance:

  • Because clients normally choose an accounting firm based on their comfort level with key members, personalities are important. Don’t do a deal with someone you don’t enjoy having lunch with.
  • Location and fees are important. Choose a firm that will maintain a comparable experience for your clients.
  • Work out all the terms in advance and put everything in writing. Agree on the roles of the individuals and the brand names that will be used. Never agree to agree later.

To survive, chart your assignment in the new firm and handle relationships with partners effectively by using these tips:

Take the initiative

Discuss with other partners what is most important now. An acquisition or merger can quickly shift priorities. Have a clear idea of what kind of work you want to do. There are many factors to consider, including your knowledge, skills, personality, values, work style and preferred environment. Discuss these openly with all the partners.

Develop a plan

You'll weather the transition better if you have a strategy for managing your future assignment. The plan should include goals for short term as well as long-term success. Explore different assignment options. Developing an action plan to guide you through the ongoing process of mergers is imperative.

Define a Position

Successful mid-size firms should seek to differentiate themselves by establishing a clearly defined position in certain sectors of the profession. For example, a firm may opt to

  • As an industry specialist, focusing on a few select industries (e.g., Builders, Exporters, Film Industry, info tech etc.)
  • As a practice specialist, offering expertise in a specific practice area or limited areas
  • Service tax
  • VAT
  • BPO
  • Risk Management
  • Raid cases
  • Appeals
  • International Taxation / Transfer Pricing/ WTO
  • Management Consultancy
  • Excise & Custom, Export -Import etc.
  • Mergers & Acquisitions
  • Project Finance
  • SEBI
  • FEMA
  • USGAAP and International Standards
  • With a geographic focus, taking a regional, national or international approach.
  • By client type, offering a wide-range of services to clients that fit a specific profile (e.g., start-ups, middle-market companies, private clients, Fortune 1000).

The firms that have already moved in this direction have been very successful. They do not try to offer all services to all clients and maintain focused practices. Because they are more successful, specialized practices are also in demand as acquisition targets. Mid-size firms will continue to be absorbed by larger firms positioning themselves to go after a specific industry focus. Many of the local mid-sized firms that have shocked the community with merger announcements merged at their peak, not because they were in turmoil. They realized that in order to maintain a sophisticated practice and client base, they needed to increase the platform from which they compete dramatically to continue to recruit top associates, attract laterals and serve key clients.

Self-Evaluation

The strategic planning process is critical for mid-size firms. Although a firm may consider several strategic initiatives to enhance its position in the marketplace, merger is one of the strongest and more expedient means to accomplish this. Merger is not the goal of any strategic planning process, but rather the means by which to achieve strategic goals. However, many firms approach merger without prior planning or a clear sense of the desired end result.

Firms that consider merger should spend a significant amount of time up front evaluating their current market position before examining potential merger candidates. Partners can properly plan for their firm’s future only after they are in agreement about the firm’s present state. An in-depth evaluation should address the firm’s present market position, strengths and weaknesses, clients, competitors, market trends and firm goals. At the end of the self-evaluation, firm management should be able to discuss the “business case” to justify the firm’s exploration of merger. This will need to be communicated clearly to the partnership and support for merger will need to be established. The self-evaluation should consider the following areas:

  • Practice: Analyze a history of representative matters and transactions over the past two to three years. Look for commonalties that will help you spot the strengths and weaknesses of the firm’s practice. What are the trends? Are the deals growing in size? Is the volume of deals increasing or decreasing? Does the firm have a greater market penetration in a particular industry sector or is it scattered? Is there an unmet need in the market for a particular service that your firm could offer?
  • Clients: Review your historical relationships with your top 25 clients over the past three years. Analyze the trends and speak with key clients. How do your clients view the firm’s professional services? What do they perceive to be your firm’s strengths and weaknesses? Ask about their future professional needs and make sure you are building relationships that will ensure additional work from these clients should you decide to expand. Find out the other firms that service their professional needs. Are your clients currently using other law firms that you may want to consider as possible merger partners?
  • Competition: Who is your competitor? It may not necessarily be the firm you think it is. Analyze how these firms have been successful and identify key factors that differentiate your firm from the competition. Be able to strongly articulate these differences to potential merger suitors.

A word of caution: do not expect a firm’s existing structural flaws to be resolved by merger. It is better for a firm to address these issues before initiating any merger discussions. Depending on the issue, merger discussions can stagnate and both sides will lose enthusiasm for what could have been a very wise combination. It is better to rid the firm of its “warts” while in the self-evaluation process than in the midst of merger negotiations (or later) at the behest of your new partner. Fix that formula compensation system, the unfunded retirement plan, and get rid of the under-performing partners first. Carrying this baggage into discussions will only hurt your firm’s negotiating position and will tarnish your marketability for future conversations.
The Ideal Partner

Once the self-evaluation is complete, your firm should develop a profile for the ideal merger partner. The criteria for the ideal merger partner will differ for every firm. Much of this profile should be based on your firm’s assessment of its present position today and its long-term potential. Finding the ideal merger partner also depends on identifying your firm’s weaknesses and knowing how to deal with them. For example, should weaker practice areas be integrated better into the rest of the practice, or should they be eliminated? Depending on the practice, your firm’s weaker practice may be attractive to a merger partner.

Many firms find it productive to assemble a merger committee charged with the compilation of voluminous in-depth research on firms that meet the profile of the ideal merger candidate. The committee should develop a manageable list of target firms, and then contact the firm’s managing partner. By taking control of the expansion process, your firm will gain better insight into the pro’s and con’s of various merger partners, each offering a slightly different set of practice strengths, cultures, management styles and future plans.

Early conversations with any merger suitor should explore each firm’s self-evaluation and business rationale for merger. If a potential partner cannot present a similar rationale, it may not be necessary to explore further discussions. If one firm is uncomfortable with what the combined firm would look like, then it probably is not the right match. But firms should not get discouraged and dismiss the possibility of merger on the basis of one or two unsuccessful initial discussions.

Get the big picture

Volunteer to lead a new project: Use your time and energy wisely. If you are part of a project that may soon dissolve as a result of the merger, volunteer for a transition team and be willing to assume new responsibilities. This shows initiative, puts you in a visible position and builds new skills. It also gives you the opportunity to showcase your leadership skills.

Build cross-cultural consensus and capability

As practicable, CA Firms should engage business partners to identify likely impacts that may result from various M&A activities. Such discussions should be based on multiple likely scenarios so that key requirements can be surfaced and evaluated across initiatives. They should also serve as advocates for constructing and incorporating integration activity plans into the overall planning process to stage activities, resources, and timetables as required to complete M&A.

Build a flexible workforce

Due to cutbacks in staffing and the lack of critical skills (for example, International Taxation, Service Tax, FEMA), CA Firms should strive to ensure that Partners are technically and functionally cross-trained. Methods to accomplish this include job and duty rotations. Analysis of the staffing mix (e.g., in-house versus selectively sourced) should be broadened to verify that key pools of knowledge are balanced and capable backup personnel are made available as required to respond to business opportunities as they arise. Individuals qualified to serve as an "M&A readiness team" (such as, two to three persons who collectively know the industry trends and risks, business practices, and processes, technical strategy, IT trends, and risks and nuances inherent in the technical environment) should be routinely engaged via actual and test cases to leverage their experience and skills to provide a rapid response to M&A initiatives.

Business Impact

The ability of partners to anticipate and react quickly to M&A activities will directly influence the costs, pace, and quality of the efforts required to undertake and complete such initiatives.

Relocation or transfer

There may be a need for partners to relocate to the new firm’s location. Informing about your location preferences in advance will minimize the potential for gossip and spread of misinformation.

Watch what you say about the merger

You'll receive subtle and pointed questions about your future from co-workers, friends and family. Decide how to respond in advance. Know what information you can share and don't divulge details that breach confidentiality. State confidently that you hope to be in a new routine soon. Don't make negative or cynical comments about the merged firm, since judgmental statements may hurt you in the future.

Speaking to Human Resources

The degree of HR participation is directly linked to the success of mergers and acquisitions, therefore your HR team may have a lot to offer. Ask your HR manager about the organisations' plan to merge people assets. You could even ask them about the functions or job profiles that are likely to go in the new structure.

Stay current in your field

Be aware of changing trends and position yourself accordingly. Use this knowledge to your advantage by taking a course in an up coming area or specialty that will benefit your organization and give you an edge over competition.

Be friendly and tactful with peers

Invest in relationships and make sure you don't pick unwanted arguments with your partners during this phase. Mergers test work relationships. Your dealings with others will take on a new dimension as job descriptions change. Offer encouragement and suggestions.

Excel in your current position

Exceptional performance speaks for itself. You won't get ahead with average performance, regardless of how many other steps you implement. With firms keen on expanding, the chances are good that the number of mergers and acquisitions will only increase. That makes preparing yourself imperative. Be ready.

Maintain your professional integrity

Knowing how to satisfy your current clients while preparing to work for another is an acquired skill. Make decisions carefully to avoid jeopardizing your relationship with either regime. Even simple choices may be complicated by the layers and layers of clients.