and eight ways to tell that one was successful.
by marc rosenberg
cpa firm mergers: your complete guide
as a generation of aging baby boomer partners continues its relentless march toward retirement, thousands of firms are seeking the only exit strategy available to them: merge into another firm.
more: 12 shifts to ensure firm success | eisneramper ceo explains the firm’s private equity deal | why it’s time for an acquisition | are you overthinking an m&a deal? | the 9 biggest merger pitfalls | will new taxes push you to cash out? | the managing partner’s role in mergers | inside a partner comp committee | making partner: the essential metrics | want to be a partner? meet these 17 expectations | five reasons not to make someone a partner | do you really need another partner? | six big mistakes in succession planning | new non-compete laws don’t affect cpa firms | evaluating the managing partner | what a firm needs from its leaders |
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thus has a voracious appetite for mergers been created at all size levels, particularly:
- sellers who are very small firms – sole practitioners (remember, 30,000 of the u.s.’s 44,000 cpa firms are solos, and a huge percentage of those are at an advanced age) and multipartner firms under $3 million
- buyers with annual revenues of $3 million and larger
do mergers work?
ask a partner from a smaller firm that merged upward whether the match has proven successful, and the likelihood is you’ll get a less-than-enthusiastic response. why isn’t this partner jumping for joy? is it because the merger didn’t work? rarely.
albert einstein famously said, “if only i could think of the right questions” (i.e., not the right answers). well, that’s what doing a merger successfully is all about: asking the right questions.
look at the reasons why the merger was done in the first place and see if those goals were met. here are some of the right questions a partner could ask after a merger is completed to determine if it was successful:
- did you solidify your buyout?
- did your clients react well to the merger and were they retained?
- did your staff react well to the merger and were they retained?
- did the firm you merged with provide you with younger partners and bright young staff you didn’t have before the merger?
- has being part of a larger firm given you more ways to satisfy your clients and attract new customers?
- will the merger get you closer to achieving your growth objective?
- are you making more money?
- do you have fewer headaches now than when you were independent?
if the answers to most of these questions are “yes,” then the merger was a success. but don’t conclude that the merger didn’t work simply because you are not jumping for joy.
here are some reasons we’ve heard over the years why firms are reluctant to pursue upward mergers:
reason #1: we fear a loss of control.
response: what do you fear? name one thing. i have yet to talk to a “hesitant” firm that can name even one specific valid fear. the loss of control issue is usually a mindset or fear of the unknown that dissipates once the merger takes place. however, if you fear being held accountable for things you know you should be held accountable for (like collecting your receivables, billing your wip on time, getting your timesheet in on time), then the fear may be valid.
reason #2: we’ve been independent for so long, we’ve gotten used to it. we won’t be happy at a larger firm where they “tell us what to do.”
response: if you are productive, manage a decent-sized client base, have acceptable technical skills, maintain good relationships with clients and firm personnel and have no skeletons in the closet, the buyer isn’t going to tell you what to do. at least not in ways that will cause you unhappiness.
reason #3: we feel like we’ve failed the firm by merging out of existence.
response: what’s the alternative, dying in your chair? seeing the firm deteriorate to a shadow of itself while the partners hang on in their dotage? by merging, the partners are being proactive about preserving their clients, providing jobs for their staff and giving themselves a way to retire gracefully. there’s no shame in merging up. you’ve got lots of company: 80 percent of all firms never make it to the second generation. it’s been done before and will be done again and again.
reason #4: we hear from a lot of other firms that mergers just don’t work.
response: our experience is that mergers do work … if you do them right. doing mergers “right” means:
- carefully assessing the extent to which the reasons for doing the merger will be realized.
- examining the fit of the two firms’ personalities and cultures.
- doing your due diligence, really thoroughly.
- getting crystal clarity on what will be expected of you at the new firm.
your merger will work if you do your homework! ask the right questions.
when a smaller firm merges up, that poignant “end of an era” feeling is to be expected. it’s a natural emotional response. but merging with another firm is no reason for remorse. when done right, it’s a courageous step forward.
of course, when a merger is done wrong, just as with any decision made poorly, you are bound to be unhappy with the outcome.
some definitions of terms
there are three merger types:
- smaller firm merging into a larger firm (upward merger)
- larger firm merging in a smaller firm (downward merger)
- mergers of equals or close to equals (rare):
- two firms close in size merging together (sideways merger or merger of equals)
- two firms of different sizes merging together when the gap in size is small enough that the smaller firm can negotiate terms freely
though there are obvious differences among the mergers above, there are many similarities as well.
negotiation
“negotiation” can take on two different meanings in the realm of cpa firm mergers:
- full-scale negotiation in the true sense of the word: most or many aspects of the merger are open for discussion. neither firm enters the negotiations with the intent to stubbornly impose or force the other firm to do it their way.
examples of issues commonly open to negotiation in the true sense of the word:
- deal terms
- partner income allocation method
- partner agreement, including partner buyout plan
- how the firm will be managed
- tax prep application that will be used
- format of client financial statements and workpapers
this type of negotiation is the less common of the two because most “mergers” are acquisitions in substance, if not in form. accordingly, terms are, to a large extent, dictated by the buyer.
- minor negotiation, where the smaller firm won’t have much ability to influence the terms. this is the most common negotiation scenario. the partners of the smaller firm are under no illusion that they will be able to get the larger firm to change its policies and practices. instead, the smaller firm goes through a process of learning what the larger firm’s practices are and assessing whether it can live with them. it’s possible that a few minor items could be compromised on.
merger vs. acquisition
- a true merger is a transaction where two companies join forces to form a new company. cash is rarely paid to the owners of either firm.
- an acquisition occurs when one firm purchases a smaller firm for cash, with payments paid over a fixed period of years.
in reality, the vast majority of “mergers” are really acquisitions in substance, though not necessarily in form. in these mergers, there is no doubt that the larger firm is the “surviving” firm and the smaller firm will cease to exist.
buyer and seller
the larger firm is considered the “buyer” and the smaller firm is considered the “seller” even though legally in a merger there may be no sale or acquisition.
partner
there are two kinds of partners at cpa firms: equity and non-equity. some firms prefer the term “income partner” instead of non-equity partner; the two terms are synonymous. equity partners are owners of the firm. non-equity partners are partner in name only and rarely have an ownership interest in the firm.