What is driving the sale? Is your firm ready?
By August J. Aquila
Price It Right: How to Value Accounting Services
The trend for small and midsized CPA firms to merge is accelerating as the competitive environment becomes even more demanding. While hundreds of firms merge every year, history continually shows that at some point in the future, things don’t always work out. Like marriage, some mergers are successful while a great majority fail. Many of the reasons for failure can be avoided if firms do their homework at the front end before entering the merger.
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The merger and acquisition drivers are constantly changing. Some of the drivers we see today are a constantly changing marketplace, the creation of megafirms beyond the Big 4, the sophistication of clients, the high demand for qualified people, technology, the cost of acquiring new clients, and finally, the accounting industry being in a mature market.
As we will see, most mergers fail because of non-financial reasons. Unlike the sale of the manufacturing company, mergers of accounting firms are a lot more difficult to accomplish.
Reasons include more emphasis on people and intangible aspects, the joining of two cultures, and the personal relationship with clients. In accounting firm mergers, there are three groups that the merger needs to be good for: 1) the partners or shareholders, 2) the professional staff and 3) the clients. If even one of these groups is not properly addressed, the merger is likely to fail.
So, let’s look at 11 pitfalls to avoid or overcome when contemplating a merger:
- Lack of profitability. Mergers are about making firms stronger and improving services. What does the future profitability of the new firm look like in years to come?
- Existing partner disagreements. Any partner disagreements in either firm need to be resolved prior to the merger. You don’t want to bring existing issues to the new entity.
- Lack of strong management. Two weak firms won’t make a strong one. You need to determine who and how the firm will be managed before you merge.
- Failure to assess cultural difference. Culture is perhaps the most important key to a successful merger. You will never mix water and oil. Make sure each firm understands how things are done at the other firm. Address the cultural differences early in the process so that there can be a meeting of the minds.
- Not spending enough time in the transitional phase. How will the transition take place? Post-merger activities such as orientation, training, procedures, etc., require a lot of time and patience.
- Failure to assess downsize risks. What could happen if key strengths (major clients or talent) disappear?
- Rushing through the process. Mergers take time. If you feel things are moving too fast, take a break and proceed with caution.
- Failure to integrate the two firms. Avoid an us-vs.-them atmosphere. Encourage creation of new alliances and relationships between the professionals and staff of each firm.
- Work-quality issues. If a difference exists, it must be examined thoroughly and then resolved. Work-quality issues with either the buyer or the seller must be resolved. No matter how high the fees the client pays, they will never be enough to cover a lawsuit.
- Compensation discrepancies. Whether you’re on staff or a partner, gain an understanding of how you will be compensated in the future. Superstars and superegos can create real problems.
- Difference in client size. Larger firms usually have larger clients and a team approach to client service while at smaller firms, one person often does all the work. Make sure most of your clients will fit the new firm’s client profile.
Successful mergers require many steps. I’ll list three of them here:
- Determine what’s really driving the reason for the merger.
- Package your firm for the sale or the acquisition. This may range from a cosmetic change to the facilities to improving profitability and cutting some deadwood in the firm.
- Do your homework on the firm you are contemplating merging with. This includes careful due diligence, checking references, testing the waters to assess the compatibility of the two cultures, and generally taking time to think things out, especially regarding all the intangibles of a merger.
A merger is something you just cannot rush, as it takes time for all the partners to fully understand and feel comfortable with it.
