Merging for All the Wrong Reasons

Jigsaw puzzle with pieces missing and word "incomplete" in gapFirst: Get your house in order; don't expect someone else to do it for you.

By Bill Reeb and Dominic Cingoranelli

For at least the past 10 years, the merger market among CPA firms has been pretty active. While the market volume has waxed and waned a little several times during this period, mergers have been a topic in almost every strategic planning retreat we have facilitated.

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In our opinion, there are many good reasons to merge, but there are actually more reasons not to merge.  We thought we would spend a little time going over those reasons.

For the sake of this post and a shorthand way of describing who we are referring to, we will reference the firm that is subsumed into another firm as the “mergee firm” with the firm that doing the subsuming as being the “mergor firm.”

Typically, mergees are looking for a lifeline for the operating decisions they have been making, or ignoring, for at least the past decade. While the root causes of these problems are clearly a reflection of choices the owners have been making and continue to make, the symptoms and rationalization for merger often fall into one of the following categories.

  1. We can get more for our retirement benefit from a merger than from selling our interests within the existing firm.
  2. We don’t believe that the remaining partners have the leadership ability for the firm to continue over the long run and pay us off.
  3. We don’t believe that the firm will stay together after we leave because the rest of the partners can’t get along or develop a common focus and strategy for the future of the practice.
  4. We have some partners who refuse to be held accountable and function as a partner by doing what’s necessary for the good of the firm, and we can let our younger leadership deal with them.
  5. We are short on talent, either at the junior partner level or the next tier down in the hierarchy of the firm, so we need to join in with someone else.
  6. Our financial results are not particularly shiny, and we want to join a firm that has good financial bottom lines for partners to help us with ours.
  7. We have a specialty niche and talent pool that needs a bigger client base than we can access.
  8. Our business processes and practices are somewhat out of date, and the new firm already has made the leap to new technologies and streamlined processes, so we can use their systems.

These are just a few common scenarios we encounter. Let me very quickly and curtly address each of these as they pertain to the senior ownership or controlling ownership of the firm:

  • Item 1 above: Wrong. You usually can get more in actual final dollars, in our experience, from your existing partners than through a merger.
  • Item 2: This is exactly what the current leadership built. You should reap what you sow. If your partners aren’t good enough, you shouldn’t have made them partners in the first place, or should have run them off after you decided they were not performing at the level necessary to sustain the firm.
  • Item 3: The firm probably won’t stay together because you wouldn’t deal with this dysfunction earlier when you should have. You were likely making too much money to focus on doing what was right for the firm rather than what was right for you.
  • Item 4: The only way this could be is because you allowed it to occur. Why didn’t you fix it?… Oh, that’s right … you were making too much money to care.
  • Item 5: How did this happen … especially since you have been controlling the hiring and development purse strings for the past decade? Oh yeah … it was easier to focus on short -erm profitability, requiring your top people to work longer hours rather than focus on the real problem – a growing talent gap. Efficiency over long-term effectiveness is our profession’s Achilles heel.
  • Item 6: Your financial results are exactly what you allowed them to be by not holding partners accountable, not developing people, not requiring everyone to follow policies, being unwilling to fire marginal clients, etc. Yes, you are right … the mergor will help you because the new leadership will make you do all of these things that you could have easily done yourself but you were unwilling to do.
  • Item 7: Maybe so. However, if you developed a strong niche marketing strategy and made the necessary financial investment, you might be the firm everyone wants to merge into. However, we can agree that this could be a legitimate reason, depending on the market you are in.
  • And item 8: You have exactly what you built. If you were not sucking all of the money possible out of the firm for the partners to take home rather than reinvesting back into your firm at the proper levels, this situation would not exist.

At the end of the day, the best way we can say this is, “The fish stinks at the head.” The reason these problems or challenges exist is because they are a direct reflection of the owners’ daily choices.

What surprises us is that these mergee firms truly believe that a merger will solve all of their problems when it is the owners of the mergee firm who actually are the culprits the first place. So, here is how we can best define what is truly being said by the typical mergee firm candidate:

“We want to merge our firm into another organization so they will save us from ourselves!”

Now, let’s take a quick look at the reasons we commonly encounter when someone wishes to grow through mergers, usually with smaller practices:

  • We can acquire more market share more effectively by merging this firm in than if we used a marketing strategy-based approach to growth.
  • We’d like to add some new services, or the mergee firm would be able to help us with a specialty niche.
  • We need to prop up a marginal office or expand geographically, so we’ll acquire a practice nearby.
  • We are short on talented people, either at the junior partner level or the next tier down in the hierarchy of the firm, so we’re acquiring this firm to get their talent.
  • We have too many partners around the same age, and we don’t think our junior partners have the leadership ability for the firm to continue over the long run, so we’re merging to augment our partner group.
  • We have some partners who refuse to be held accountable and function as partners, so we’re going to add some more owners to try to tip the voting scale so that we can make some governance changes.

I know that it will be a surprise if we have some curt responses to share regarding some of these points as well. They are:

  • Item 1: This is possible. In business, we always should consider the “build” versus “buy” choice. The “build ourselves” choice gives you more control over the process with a likely cleaner result (you attracted the clients and the work you wanted), but takes longer. The “buy” decision, which is also referring to mergers, gets you where you want to be much faster. But you usually have to do a lot of cleanup because of the potpourri of issues, work, people and clients that comes with the merger package.
  • Item 2: This is possible as well. The mergee might have a niche that they are well respected for that is synergistic to what the mergor firm already has. This is actually the same situation as Item 1 above … it is the “build” versus “buy” choice with the same strengths, weaknesses, opportunities and threats.
  • Item 3: This probably is the strongest of the common points raised. If you have a weak office or high overhead in an area with not enough work, merging in another small office to create the right balance of overhead to revenues could be a great solution. Notice, however, that this is the same “build” versus “buy” decision as covered in the preceding two points.
  • Item 4: Simply put, this is bunk. If you are short of talented people, or you have large gaps in talent, this simply is because your leadership has allowed this to happen. Looking for a smaller firm to merge into a larger one to shore up the talent gap rarely pans out as people hope it will. Typically, the larger the firm, the more formally it operates (through policy, processes, competency expectations, performance requirements, specialization, roles and responsibilities, etc.). The smaller the firm, the more likely they operate loosely with everyone doing a little bit of everything. Logically, this disconnect often delivers less than stellar results, especially when compared against the larger firm just hiring and training for the skills they need.
  • Item 5: Don’t look for anyone to be your savior. If you are not willing to fix your own problems, don’t expect someone else to do it for you. We always see the warts on the people we know, and put a halo on those we don’t. Trust us … those with the halos whom you don’t know have plenty of warts. You will see them soon enough and then come to the realization that your people were not nearly as dysfunctional as you thought now that you have someone else with whom to compare them.
  • Item 6: Shame on you for allowing your firm to get this way in the first place. It’s greed … it’s almost always greed that puts us in this situation. We make choices and then justify them with rhetoric such as, “I know partner X is not a good fit for us, but we don’t want him/her leaving and taking our precious clients. We can control him/her and make this work. Besides, partner X brings in a lot of work.” We hear it and see it all of the time.

In the end, stop looking to other firms to fix what you have broken.

There are a lot of good reasons to merge, but none of them start with “the other firm can fix our shortcomings.” Your shortcomings exist because of management policies, decisions and accountability. Get your house in order … and do the right things for the firm all of the time. When you make decisions, put more weight on what your choices will likely do to your culture and the long-term positioning of your firm, not what can spill out into your pocket during the short term.

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