Is Your Firm ‘Merger-Ready’?

Over the past several years, there have been roughly 1,500 mergers of CPA firms, and those are just the ones that have garnered headlines in the consumer and business press. There are probably hundreds of affiliations between small firms that flew under the radar, and that frenetic pace of unions is not likely to wane anytime soon. 

But whether you are a firm looking to merge upstream or one that is currently shopping for a practice to “tuck” into an existing office, it’s critical to determine whether you’re ready to merge and, perhaps more importantly, when you’re not. 

Mergers occur for myriad reasons. On the seller side, it is most likely a succession strategy, as perhaps the firm’s stakeholders are looking to slow down, and their “bench” isn’t deep enough to pass the torch to the next generation of leaders. If you are in an acquisition mode, you may have targeted new geographic markets or added a new client service niche. Perhaps the fallout from the COVID-19 pandemic has swayed many to exit the profession sooner than they’d planned.

But whether you are on the buy or sell side, it’s critical to have a clear and defined reason for merging. Do not enter into one of the biggest business decisions you’ll probably ever make in your lifetime simply because “everyone else is doing it.” I once advised a client who insisted on facilitating a merger simply because he had a surplus of unused office space and computer terminals to simply sublet the space. 

Both parties should ask themselves, “What does success look like?” If they have different views of an ideal affiliation, it’s better to find out early on in the process than at the contract table.

A Seller Checklist

There are critical questions that need to be addressed before you decide to seek a merger partner. For example, have any of the partners’ career or retirement goals changed over the past year, or are there any current partners who want to reduce their time commitment over the next several years? Have any partners left the firm? How about staff – particularly those with heavy client interaction – are any closing in on retirement? 

And more critically, does your firm have the current capacity to fill the void in any of the above scenarios? If not, then a merger with a larger firm may be your only option. In the event you have already begun the search process for an affiliation, below are some things to remember when meeting with potential successor firms.

1. What is their staffing situation – do they have the excess capacity to take you on? This is particularly true in a merger of firms of equal size. If partners in both firms plan to slow down, then you’re actually doubling your succession problems instead of solving them.
2. Do they have the space and financial strength to take you on? What about technology – is it current and up to date? 
3. Look around and ask yourself, what’s it like to be a partner here? An employee? A client? If you don’t get a good feeling about the firm’s culture, it’s best to walk away sooner rather than later. Remember, if you’re not comfortable with someone, then why would you assume your staff and clients would be? There’s an old M&A axiom, “if you don’t want to eat lunch with someone then don’t do a deal with them.”
4. Don’t fall to the common temptation of merging with a larger firm simply because they’re bigger. Remember, bigger isn’t always better. Better is better.

Buyer Guidelines

Whether you’re a first-time buyer or an experienced acquirer, firms looking for merger targets nevertheless need to determine their state of “acquisition readiness.” For example, you’ll need to measure your firm’s capacity to undertake a merger or acquisition including organizational strength in key management (partners) and client service teams, not to mention infrastructure and facilities. 

Identify the firm’s strategic objectives including top-line growth to improve profitability, addition of talent, reaching into new marketplaces, developing service and industry niches, geographic expansion and strengthening management and succession capabilities. You’ll need to define the population of potential target firms in terms of size, geography and characteristics.

As there are several ways to structure a merger, it’s critical to consider the range of possible deal structures and the ramifications of each – particularly the tax treatments. Consider any potential roadblocks that may be encountered, such as leases, outstanding debt or violations. 

After the contracts are signed, outline the roles the key personnel in each firm will play and establish achievable timelines for post-merger goals and targets. Too often firms think that once a merger agreement is signed, the transition process of bringing two practices together will naturally fall into place. 

In any affiliation it’s critical to remember that if there are 50 things to think about, the smartest of us will only think of, at most, 35.