plus 10 common criteria. how do they compare to your list?
by marc rosenberg
the rosenberg practice management library
in all industries, it’s always more difficult to find sellers than buyers. this is certainly true with accounting firms.
more: the managing partner’s role in mergers | how a great managing partner impacts firm growth | compensation is no way to manage partners | clarify partner expectations | exceptional managing partners offer their advice
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cpa firm merger consultants and brokers can do a great job finding buyers, but they are limited in their ability to dig up sellers. this is because the vast majority of all mergers and sales take place when buyers and sellers know each other and get together on their own without the help of a consultant.
here are the most common ways that managing partners identify seller candidates:
- active buyers constantly meet with potential seller candidates. only one of 10 merger discussions results in a merger. the other nine sellers either are not ready or don’t meet the buyer’s criteria. the key to finding merger candidates is having the proper mindset. serious buyers understand that doing mergers is all about planting seeds. a winning merger strategy must demonstrate patience and persistence. keep reaching out to firms. keep talking to firms. keep following up as time moves along. understand that a “no” may really be “not now.”
- telephone firms you know in your target market. invite them to lunch and see if they are willing to have a merger discussion with no commitments or obligations after the meeting.
- do a direct mail campaign to a mailing list that you compile of possible merger candidates. follow up with phone calls.
- hire a merger consultant. the cpa profession is fortunate to have a half-dozen or so savvy, nationally known consultants with many years of experience who help firms with practice management, including mergers.
develop criteria for a merger partner
the managing partner should begin a merger push like any other major business decision: it should be well thought out. homework and research should be done, and input from the partner group should be sought. some firms shoot from the hip with merger pursuits, but this can be a recipe for disaster.
here are common merger criteria that firms consider:
- which do you prefer: retirement-minded sellers or younger partners who will help drive your firm? or are both ok?
- if you are ok with retirement-minded sellers, how long will you allow them to keep working? it’s critical to decide this up front to avoid tremendous bitterness and conflict later.
- services provided and industries served by the seller:
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- how important is it for the seller to have specialties and niches? has your firm targeted some of these? have you identified areas you want no part of?
- are you ok with a practice that is heavily into 1040s and write-up work?
- must the seller provide wealth management services?
- under what conditions will you be willing to admit the seller’s partners as partners at your firm?
- many sellers may have some problems: low billing rates or profitability. underperforming partners. partner conflicts. is your firm willing to merge them in so you can fix them?
- should the seller’s staff have partner-potentials on board, or would you rather you merge in a firm where none of the staff has the potential to be a partner?
- what are the limits of the major terms you may offer? down payment? multiple of fees? years of payout?
- how would you define your firm’s culture? what are its high-level strategy and vision? how important is it for sellers to be a good strategic fit?
- are you ok with a de-merger clause in the agreement? (you shouldn’t be.)
- three or four years after the closing, what will be your criteria for evaluating the merger’s success?
stay with the process
the process for merging in firms is not cast in concrete, but there is a process that most firms follow. the managing partner should make sure that the game plan is followed. here is what we suggest:
- find merger candidates. identify and select the best.
- convene get-to-know-you meetings. usually two hours or so, perhaps over breakfast or lunch. no financials exchanged. no obligations. the two firms simply introduce themselves and ask basic questions about each other, including why each firm agreed to meet.
- exchange confidentiality and nondisclosure agreements (ndas) if both parties are ready to move to the next step – exchanging financial and operating information.
- each firm provides the other with a list of financial and operating information they wish to review. do this early in the process to make sure you’re not wasting time with a firm you will ultimately reject.
- the firms review each other’s data. if the firms still wish to go forward …
- convene a second meeting to drill down on a number of areas, both financial and operating. at this meeting, the buyer collects information needed to issue a letter of intent (loi).
- the buyer issues an loi to the seller. all lois are nonbinding.
- begin negotiations in earnest. this phase often requires more than one meeting.
- assure a good personality fit. in cases where the sellers will be working at the buyer for a number of years, the nonfinancial issues are just as important as the deal terms in determining the merger’s success. one or more semi-social events should be held so that both firms have multiple opportunities to assess their cultural and personality fit.
- each firm does its due diligence review, including work quality review and legal issues. see the next section for some key details.
- buyer and seller agree to merge.
- a merger agreement is drafted by an attorney.
- closing.
- both firms announce the merger, internally and externally.
- implementation is more important for merger success than all the previous items combined.
a little more on due diligence
the above list is tried and true. don’t wait until the end of the process to explore the due diligence items listed below. as a merger consultant, when i begin working with a new seller, i ask the following right away. managing partners should, too.
- has the firm or any of its partners or employees ever been expelled, suspended or disciplined by any professional organization or regulatory agency, especially aicpa or state societies?
- for wealth management practices: are you properly licensed? has any disciplinary action been taken against individuals or the firm? any violations? are you in total compliance with all the regulations?
- has the firm or any of its partners or employees ever been indicted or convicted by any court of any punishable offense such as fraud, theft, embezzlement or other criminal acts?
- is the firm or any of its partners or employees currently engaging in activities that could lead to an indictment or conviction?
- have any of the firm’s partners ever been declared bankrupt?
- regarding professional malpractice cases:
- has your firm ever been involved in a case in which you were found guilty or settled?
- are you aware of any current situations that could lead to a malpractice claim?
- does the seller have malpractice insurance?
- can the seller obtain tail coverage?
- are the firm, its partners and employees in good standing with the state(s) in which they are licensed and registered to practice public accounting?
- do all the equity and non-equity partners possess a current, valid cpa certificate?
- are there any expenses paid by the firm for a partner that will not qualify as reimbursable by the merged firm?
- regarding peer reviews:
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- has the seller ever failed to pass a peer review?
- for all audits, reviews and other engagements that require peer reviews, was the seller peer-reviewed when it was required?
- if any staff decide to leave after the merger, is there any chance they will take clients?
- is the vast majority of time spent on client work recorded on timesheets posted to wip?
- if the top line of the seller’s p&l is billings, does this differ substantially from collections?
- is there anything unusual about sellers that, when discovered by buyers, might cause them to break off discussions?
merger pitfalls
if the managing partner does not have much experience in mergers, it’s harder to avoid mistakes. be on the lookout for some of the biggest mistakes managing partners have made in working on mergers.
- don’t fall in love. don’t assume anything. many mergers occur between firms that have known each other for several years. as a result, there is a tendency for the buyer to go easy on due diligence and fall back on trusting the seller and its reputation. don’t let this happen. do your due diligence as if you’ve never met the seller.
- don’t fail to ask lots of tough questions.
- don’t fail to assess the seller(s)’ ego realistically. if it’s so huge that it cannot be tamed (i.e., they refuse to comply with your policies, procedures and practices, in both their work and their behavior), it may be best to take a pass.
- find out if the seller has personnel who routinely fail to record all their billable time. this could disguise poor productivity or unprofitable clients. if the seller has staff who routinely fail to work enough billable hours, how realistic is it for you to resolve this problem?
- in cases where the seller’s partners will continue working for the buyer for many years, make the role and expectations for each partner crystal clear. pay particular attention to (a) the seller’s willingness and ability to comply with your client transition process and (b) the seller’s expectations for how long they will work, how much they will work and what they will work on.
- don’t carry over dirty laundry from the seller, such as partner conflict, unproductive partners and staff, sacred cows, perks and other personal expenses hidden as business expenses.
- make sure the seller doesn’t have staff who are plotting to leave the firm and take clients. get them to sign properly worded non-solicitation agreements.
- make sure you have enough staff to handle the seller’s business if the seller’s staff don’t stay as anticipated.
- manage the merger implementation process with tenacity. just because the merger looks good on paper and all parties agree to how it will take place, don’t assume that a smooth merger and integration will occur. success requires aggressive leadership by the managing partner.