plus thirteen questions to ask.
by marc rosenberg
cpa firm mergers: your complete guide
the smaller firm in a proposed merger should make an objective, realistic assessment as to whether or not merging upward is a good business decision.
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every small firm evaluating the feasibility of merging should consider these questions in as much depth as possible:
- a large firm has openly expressed interest in merging the smaller firm in. does the smaller firm find their “deal” attractive? why, specifically?
- the smaller firm feels it is a good firm that has been limited by its size from becoming a great firm. by tapping into the resources of the larger firm, will this enable the smaller firm to better realize its potential?
- will the retirement of one or more key partners at the larger firm over the next few years threaten the larger firm’s continued success?
- will the retirement obligation to one dominating partner be so large that the new firm cannot afford the payments?
- are the ages of the larger firm’s partners clustered such that they won’t be able to afford payment of retirement benefits to all the partners at the same time?
- are the larger firm’s younger partners capable of running the firm after the older partners retire?
- are the partners of the larger firm willing and able to write retirement checks to the partners of the smaller firm?
- does the larger firm have staff with partner potential? has the larger firm demonstrated skills at developing staff and helping them grow?
- does the larger firm have a retirement plan in place? if not, will it be difficult to agree on one?
- to the extent the smaller firm struggles with firm management, growth, finding staff, retaining staff, developing partner-potentials and/or profitability, does the larger firm really have the management expertise to “fix” these problems?
- the partner group of the smaller firm is not cohesive, and there is no accountability. does the larger firm have the expertise to resolve these issues and “whip these partners into shape”?
- one or more large firms are entering your market. does the small firm fear that the presence of these large firms will stifle or reduce its growth, profitability and ability to attract staff?
- one or more key partners at the smaller firm have an urgent need to leave, for health or other reasons. is an exit strategy needed?
how to make your firm attractive for an upstream merger
- have a niche or a specialty, preferably in a specialty shared by the larger firm. larger firms, however, are also very interested in niches and specialties they don’t have. generalist firms are less attractive, but since most small and medium-size firms are generalists, being a generalist is usually not a huge detriment.
- a major reason why larger firms look for mergers with smaller firms is to “buy” talent, both at the partner and the staff levels. if your firm has a number of bright, young, experienced staff, you will be much more attractive than the firm whose partners do “everything” and have never done well developing their people.
- have staff non-solicitation agreements in place, with both partners and staff.
- the better your performance in key areas such as profitability, billing rate, productivity, realization, etc., the more attractive you will be. two kinds of firms look to merge in smaller firms:
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- firms that are confident they can take an underperforming firm and transform that firm into a better performer with their superior management, marketing and systems talents
- firms that prefer to merge in firms with few glaring problems
if your firm is underperforming, the second of the two types above will not be interested in you.
- minimize your office lease obligation. if you just signed a 10-year lease in an expensive building where the prospects of subletting are minimal, the larger firm may not be willing to absorb this debt.
- if all, or most, of your partners want to retire shortly after the merger, the larger firm will be concerned about client retention. to counter this, it’s best to have younger partners who will help with client retention. on the other hand, if your partner group has older partners who want to continue being partners well past 65, this will be a turnoff to many larger firms.
- have plenty of corporate clients; they are much better candidates for cross selling. larger firms don’t like bringing in lots of low-margin work such as payroll taxes, small 1040s and low-level write-up work.
- better to have fewer clients with larger billings than many clients with low billings. on the other hand, larger firms can be scared away by overdependence on a small number of huge clients.
- be “clean”:
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- free of malpractice issues and glaring work quality deficiencies
- free of huge wip write-offs and/or bad debts
- current in billing out your wip and receivables
- have current records that are in decent shape (financials, time and billing, etc.)
- reasonably current in the use of technology
- be free of “weird” personal practices by the partners, such as regularly starting work at 11 a.m., refusing to prepare timesheets, insisting on working from home on saturdays during the tax season – practices commonly seen at small firms.
- resolve “dirty laundry” and “sacred cow” issues.
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- if your firm is carrying underperforming partners, many larger firms won’t want to bring them in as partners. they might not want to hire those partners in any capacity.
- if most of your partners are “lone rangers” (never delegate, work alone, no one else knows their clients, don’t tell anyone where they are going, when they are coming, etc.), you probably won’t fit well with the larger firm.
- have realistic attitudes about your roles in the new firm.
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- you may not have much say, or any say, in management.
- if a partner is responsible for a certain function at the current firm, he or she shouldn’t necessarily expect to have the same job at the new firm.
- be willing to be accountable for your behavior and performance.