bonuses: smaller firm to larger, 25 questions to ask and 17 data points to request.
by marc rosenberg
cpa firm mergers: your complete guide
there are always three intangible factors that greatly influence the extent to which merger terms and issues are negotiable:
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1. negotiation ability of each firm. some people are “tough” negotiators, continuously trying to impose their will on the merger partner, while others are more malleable and tend to go along with whatever the other side wants.
2. how critical the merger is to one of the firms. felix dennis, the british publisher said, “you have to persuade the other person that you absolutely don’t care what happens. if you don’t care, you’ve won. i absolutely promise you, in every serious negotiation, the man or woman who doesn’t care is going to win.” so, conversely, the more you show the other side that you do care, the more likely that they will use this to their advantage.
here are a few examples of scenarios that could give one firm a negotiating advantage over the other:
advantage to smaller firm:
- larger firm wants to use the smaller firm as an entrée into a desired market.
- larger firm seeks a strong, younger partner with the seller.
advantage to larger firm:
- seller has health issues and needs to sell.
- seller has “old” partners with no partner-potentials among their staff; they have run out of options and are past their prime.
3. one firm’s leverage over the other. supply and demand is a fundamental rule of economics. if the buyer knows the seller has few options, the buyer gains the advantage. conversely, if the sellers know their firm is the only one being considered, they have the advantage.
telephone screening questions the smaller firm should ask
once the seller has created a list of firms he/she is willing to consider as a merger partner, the first step is usually to talk on the telephone with the buyer and ask some very basic questions that will enable the seller to decide if he/she wants to convene a first “get-to-know-you” meeting with the firm. the form that follows contains questions that can be asked by either the seller or the merger consultant that is retained.
this form is just an example. the questions to be asked are literally whatever the seller wants to know about the buyer before consenting to meeting with the buyer.
contact information:
| date | |
| contact name | |
| firm name | |
| address | |
| telephone | |
basic data:
| annual fees | |
| #partners/professional staff/total fte | |
| ages of partners | |
| practice breakdown
-a&a -tax -consulting |
|
| specialties or niches | |
| partner billing rates |
key questions:
| do they want to merge in smaller firms? why? what do you hope to get out of it? | |
| if so, what are your criteria? | |
| our partners are all generalists. is that ok? | |
| our firm does not have a specialty. is this ok? | |
| our partners want to work until 68. is that ok? | |
| our firm can’t seem to attract good, young staff. we need labor. can you supply it? | |
| how many mergers have they done in last 5 years? | |
| partner billable hours average | |
| tolerance of buyer for seller partners to work heavy billable hours (which we now do) | |
| software:
· tax prep · accounting · other |
|
| you are not located in our area. why are you interested in us? | |
| would you require us to move to your office or would we be a separate office? | |
| are you willing to pay at least the market rate for our firm? | |
| would you like to meet informally to move to the next step? |
data the smaller firm should request from the larger firm
sellers are sometimes intimidated by larger firms and feel that it would be out of line to request data. this is an unhealthy attitude. a merger is a huge decision that needs to be a wise one for the seller. both parties to a merger need to learn as much as they can about the other to properly assess the fit.
| checklist of items needed | |
| 1. financial statements for the last 2 years; most current financial statements for current year. | |
| 2. each partner’s compensation for the previous year. if they balk, request income numbers from high to low. example: $600,000, $570,000, $520,000, $480,000, etc. | |
| 3. explanation of the partner compensation system. obtain a list of the performance attributes that are considered in subjective systems, with weightings. | |
| 4. explanation of how the partner retirement plan works. | |
| 5. organization chart (if one exists). | |
| 6. personnel headcount, stated in full time equivalents:
equity partners non-equity partners managers supervisors seniors staff admin total |
|
| 7. professional staff turnover for the last two years. |
| 8. average billable hours for all personnel, including partners and admin personnel, for the previous year. | |
| 9. firmwide realization rate and for each partner. | |
| 10. software used for the following applications:
accounting and write-up tax preparation tax research audit document management time and billing |
|
| 11. age of work in process as of december 31 of the prior year, expressed as number of months. | |
| 12. age of accounts receivable as of december 31 of the prior year, expressed as number of months. | |
| 13. for tax returns processed:
number of returns avg fee per return individual $ corps & partnership $ estate and trust $ |
|
| 14. breakdown of annual fees by clients:
number of clients under $5,000 per year $5,000 – 20,000 $20,000 – 50,000 over $50,000 total |
|
| 15. list of all industries that comprise 5% or more of the firm’s annual fees. | |
| 16. last two peer review reports. | |
| 17. malpractice claim history, both past and prospective. |
questions that partners of smaller firms should ask large firms
when a small firm considers merging upward with a very large firm, they’ll likely be required to accept the terms offered by the larger firm. in these cases, the “negotiations” take the form of the smaller firm simply learning what the merger terms are and deciding whether it can accept those terms.
some of the questions that follow are similar to the telephone screening questions. but when merger partners are face to face, it’s usually a good idea to reconfirm some of the information that was obtained over the telephone.
- are you interested in merging in a local practice in a city where your firm is located? why?
- are you interested in merging in a local practice in a city where your firm is not located? why?
- do you have any specialties or niches?
- do you do much business in our market?
- are there any minimum parameters that must be met before you will merge in a local firm (fee size, age of partners, income per partner, partner billing rates, etc.)?
- what’s the largest firm you have merged in?
- have any of your mergers not worked out? what were the problems?
- at our firm, there are a few partners who are two to three years away from retirement, and there are partners who are quite a bit younger than retirement age who intend to work for many more years. what can you tell me about the typical buyout that a merged-in partner can expect to receive?
-
- how do you typically handle the buyout for partners who are close to retirement?
- how do you typically handle the buyout for “younger” partners who are truly merging into your firm and have no timetable for retirement?
- in either case, can our partners expect to benefit to some degree from the growth of their client base that will be made possible by a merger with your firm?
- do you have mandatory retirement? how does this work? how rigid is this policy for merged-in partners?
- what guidelines will you use to determine which of our partners become equity partners? is there a minimum size of book that an incoming person needs to have to become a partner at your firm?
- for those partners who do not become equity partner, what position might they expect to be given? manager? non-equity partner? director? other?
- must a firm have a specialty to be of interest to your firm? would a generalist firm be of interest to you?
- if most of our partners are generalists today, will they be expected to specialize as part of the larger firm?
- what can you tell our partners about what life will be like for them as partners in the larger firm? what can they expect? how will their ways of doing things change?
- what capital, if any, will be required of our partners?
- how does your retirement plan work? would we be grandfathered in?
- how will our partners be compensated? how does your system work? to the extent that your management expertise raises our firm’s profitability, how will our partners share in that profit?
- what policies do you have for retired partners wishing to work part time after retirement?
- how would our firm be managed?
-
- would you move a pic to our office?
- who would manage our office?
- who would we report to?
- would our partners have formal goals?
- are there performance evaluations for partners?
- what measures of partner accountability exist at the larger firm?
- what will you do with our clients?
- keep them all or cherry pick the better ones?
- eliminate clients below a certain threshold (realization, dollar value, services rendered, age of receivables, location, etc.)?
- raise billing rates? if you do, how quickly will we be required to get our rates up to target rates? how much discretion will be given to our partners in determining when to raise rates?
- tax returns:
- do you have minimum fees for 1040s? what are they?
- do you outsource 1040s? do you plan to?
- can you give us examples of the tactics and strategies that will be used to:
- improve our revenue growth and help us with marketing?
- hire more and better people than we do now?
- be more effective in training and leadership development?
- what are your overall plans for our firm? in five years, what will your target be for us in terms of annual fees, profitability, number of people, services offered, etc?
- will you be looking to merge in other firms in our market?