and sellers’ 13 top worries.
by marc rosenberg
cpa firm mergers: your complete guide
merging up or selling a firm is one of the biggest life milestones that a cpa firm goes through.
more: merger? the 100 data points you need first | one times fees isn’t the only way | thinking merger? first ask why. | why do you want to merge? be honest. | four reasons to fear a merger
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you’ve toiled long and hard to build your firm. it’s your life’s work. adding to the anxiety is the element of facing your own mortality. when people contemplate big personal or business decisions, it’s common to need to move through several stages mentally. merging your firm is no exception.
stage #1. not sure. the vast majority of sellers at this stage end up either consciously or unknowingly putting off a merger decision. it’s too scary. mentally, the seller simply is not ready. the irony is that there’s no better time to merge than at this first stage.
- the firm will command a higher selling price from buyers because their clients and staff are younger and they will be around longer for transition.
- the buyer’s management know-how will increase the seller’s income during the first five years or so, meaning the seller will financially benefit from the merger before the buyout kicks in.
- the seller has an enviable negotiating advantage because it can approach the deal with the mindset “i don’t have to do this deal.”
stage #2. seller has danced before but still isn’t ready. at this stage, the seller is about 58-65 years old. he or she decides it’s time to revisit the merger option and meet with one or more firms on a very informal basis, maybe even getting a few offers. nothing comes of it because the seller still isn’t ready. but at least the seller has confirmed that buyers are interested, learned what deal terms might be and has an idea of what life might look like as a member of a larger firm.
when we meet with firms at this stage, a common refrain is “i wish i had met you five years ago.” we have just (1) shown them how low their billing rates and fees are compared to similar firms and thus, how much money they left on the table and (2) shared with them the attractive deal terms that buyers are willing to give. but if they’re still not ready to pull the merger trigger, we persuade them to make their firm more attractive for a future sale by raising rates, tightening up their time records, collecting old receivables, upgrading personnel and firing clients that should have been dismissed years ago.
stage #3. let’s get this done. after going through the first two stages, the seller is mentally ready to do a deal. the partners are at least in their early to mid-60s, and their office lease likely has less than two years left. while it’s still possible to get good deal terms, at this stage the seller is most vulnerable because (1) the seller needs to do the deal and can’t afford to walk away, (2) the attractiveness of the seller’s firm has diminished from its peak value of five to eight years ago and (3) it’s unlikely that the seller will participate to any great extent in the improved profits made possible by the buyer’s superior management knowhow and diverse services.
a word about negotiations
there are always two factors that greatly influence the negotiation of merger terms:
- negotiating ability of each firm: some people like to think they’re tough negotiators, kind of like bluffing poker players or bullies trying to impose their will on the merger partner. others are more malleable and will usually consider fair compromises.
- 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. conversely, the more you show the other side that you do care, the more likely they will use this to their advantage.”
here are a few scenarios that could give one firm a negotiating advantage over the other.
advantages to the smaller firm
- buyer wants an entrée to the seller’s markets.
- buyer seeks a strong, younger partner.
advantages to the larger firm
- the seller has health issues and needs to sell.
- the seller has “old” partners with no partner potential among their staff; they’ve run out of options and are past their prime.
- supply and demand. if there is an abundance of sellers, the buyer has the edge. but if there are quite a few buyers, the seller gains the advantage.
how to prepare to search for a buyer
when sellers ask us to help them find a merger partner, this is the game plan we use to get them ready. this includes getting their ducks in a row and helping them clean up and position themselves to look as attractive as possible without misleading anyone.
- assemble a package of financial and operating data. all buyers will request one. it’s better to anticipate the buyer’s data request instead of struggling to react afterward, a process that can delay the negotiation process by weeks. our experience is that data requests are quite similar from firm to firm.
- create a written description to give to prospective buyers. this avoids mistakes that buyers may make in analyzing sellers.
- define the parameters of an ideal merger partner. list items that are really important to you. keep your must-have list as short as possible.
- decide what is important.
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- deal terms
- compensation arrangements, full- and part-time
- being an equity partner at the buyer
- how long they want to work
- the willingness of the buyer to employ the seller’s staff
- services to be provided
- are there any firms the seller knows that it wants no part of?
- determine deal-breakers and nonnegotiables.
- decide how merger candidates will be identified.
- develop a relatively short list of firms to contact, probably no more than five.
- develop a set of quick, basic questions to ask prospective buyers. these should be suitable to ask in face-to-face, telephone or video communications.
why sellers worry about merging up
- loss of control, loss of control and loss of control.
- loss of their job or a substantial reduction in their role. it’s possible that some of the seller’s partners may not be invited to be equity partners in the buyer.
- being forced to market when you haven’t done so in the past.
- being forced to work more billable or total hours; higher performance expectations.
- loss of clients.
- bureaucracy.
- bad experiences with large firms when the partners were younger.
- sellers have always been doers (some like to call it being hands-on) and they fear the buyer will make them delegate more.
- the seller’s ego can’t handle not being the undisputed king (tyrant?) anymore.
- sellers’ management style has always been loosey-goosey. they fear, quite rightly, that they may not be comfortable working in a firm with more formal policies and practices. they may be held to a higher level of accountability than they have been.
- currently, the seller partners get to come and go as they please. the new firm may make them clock in. in our experience, this fear is totally unfounded.
- the buyer has a mandatory retirement policy. the sellers aren’t sure when they want to retire, but they don’t want to retire when the buyer says they must.
- sellers may fear that the larger firm will lose the small-firm feel. relationships could be less personal, resulting in the exodus of staff who prefer a smaller firm culture.
benefits of merging up
here are some of the key advantages of merging with a larger firm.
1. better ability to attract staff;
2. more proficient management and leadership;
3. more money to be made;
4. an exit strategy;
5. larger firm better positioned to attract larger clients;
6. more diversity of services; clients’ needs served better;
7. larger firm size makes it easier to afford high-level support professionals, such as a firm administrator, marketing director, hr director, it director, etc.;
8. more advanced technology;
9. larger firm will be better at recruiting than a smaller firm, though it’s never easy at any size;
10. better staff training;
11. more advancement opportunities for staff;
12. more technical backup; and/or
13. a better age spread among the partners.