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by Marc Rosenberg, CPA
Author of “How to Negotiate a CPA Firm Merger”
After many of you read this, you may think I’m talking out of both sides of my mouth. But give me the benefit of the doubt and read on before making any snap judgments.
“Non-negotiables” (others call them “must-haves” or “dealbreakers”) are the terms that the seller of a CPA firm feels he/she must have in order to do the merger. The extent that the seller will insist on receiving his/her “must haves” is dictated by the way the overall negotiations proceed. Each side usually makes compromises; terms that initially were “must haves” often become “nice-to-haves” at the end of the day.
Deciding your “must-haves” can be both a good thing and a bad thing at the same time. Let me explain.
The good thing about “non-negotiables”
Selling or merging your firm will be one of the biggest transactions of your life and requires a good deal of advance preparation. Your game plan for merging your firm should include a list of terms that you feel you “must-have.” This way, as you meet buyer candidates, you can do some scorekeeping and compare each buyer vs. the other to see which one will satisfy the most “must-haves” on your list. Having this list also helps ensure that you don’t forget to discuss each “non-negotiable” with each buyer.
“Non-negotiables” fall into two categories: Major and Minor:
Major “must-haves” include the sales multiple, downpayment, payout term, retention clause, seller compensation during transition, compensation guarantees, buyer’s willingness to take over the seller’s office lease and allocation of purchase price between consulting and goodwill.
Minor (but still not unimportant) “must-haves” include the seller’s title with the buyer, sale of the seller’s office equipment to the buyer, the buyer’s commitment to hire the seller’s staff, finding a buyer that uses the same software as the seller, perks, etc. I’m sure you can see that any comprehensive list of minor “must-haves” is just short of infinite.
This is a good time to point out a cardinal rule of mergers: The No. 1 key to the success of a merger is the fit of the personalities and culture of the seller and buyer. The No. 2 key is… personality and culture fit. And the No.3 factor – you guessed it – culture and personality fit. Don’t do the deal if you don’t feel in your gut, that there is a good fit. Perhaps one should consider culture and personality fit as the ultimate non-negotiable.
The bad thing about “must-haves.”
The more “must-haves” on the seller’s list, the more firms are eliminated from the universe of potential buyers. Most of us are accountants, so we are quite familiar with the concept of debits, credits and how a T-account works. When a buyer sizes up the seller, he/she is visualizing a T-account of pluses and minuses of the deal. It’s reasonable to assume that the more “must-haves” named by the seller, the more entries are made to the “credit” side of the ledger. Any buyer will want to balance the account, so the buyer needs to find enough “debits” to offset the credits. The most common type of “debits” are lower sales multiple, longer payout term, lower down payment, lower compensation for the seller, etc. If there are more credits than debits for the buyers, they may walk away.
The moral of the story
If you’re a seller, be careful of over-committing yourself to getting your “must-haves.” There is a price to pay for every “must-have” you think you received. Also, by focusing too much on your “must-haves,” you may end up losing the forest through the trees and forgetting that the No. 1 key to the success of a merger is personality and culture fit. A wise seller should prefer the deal she feels is the best personality fit with somewhat less attractive terms over the deal with the best financial terms but an unclear match of culture and personality.
Marc Rosenberg summarizes effective merger techniques in his monongraph, “How To Negotiate a CPA Firm Merger.”