what to negotiate, plus key operating and financial issues.
by marc rosenberg
cpa firm mergers: your complete guide
the approach to orchestrating a merger differs depending on the nature of the transaction. is there a true survivor? in substance, not form, is the deal more an acquisition than a true merger?
more: 23 questions for mergers of equals | 61 things buyers should explore with sellers | thirteen ways to woo potential firm buyers | one times fees isn’t the only way | four reasons to fear a merger
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when a sole practitioner is the seller, virtually all deals are true acquisitions. solos intend to retire in just a few years. their primary focus is on the negotiation of financial terms, such as the purchase price, payout term, down payment and compensation for the time they work. issues related to the operation of the buyer are generally of minor importance to the solo. in other words, when a buyer acquires a retirement-minded solo, the transaction is fairly simple and straightforward.
the bulk of this post addresses deals where the solo is not retirement-minded. the larger firm will clearly be the survivor, but the intent of both parties is for the solo to play an integral role in the new firm. in these types of deals, how the new firm will operate is of paramount importance to the solo.
the key issues:
- what will be the name and location of the firm?
- who will be the managing partner? how much say will the solo have in decision-making? what will the firm’s management structure be?
- will the solo become an equity partner?
- what about the office lease?
let’s take a deeper look at the issues that must be resolved when a sole practitioner mergers with the intent to remain active.
operating issues
- what will be the name and location of the new firm?
- what will be the new firm’s strategies and vision? growth? 1040 focus? generalists vs. specialists?
- will the firm operate as one firm or as a group of solos practicing under one roof, sharing expenses? will the firms operate together, sharing clients, staff and admin duties?
- how will staff mesh? will staff from both firms work on each other’s clients? or work separately? titles of staff? compensation of similarly experienced people? personnel policies and benefits?
- what will the partners’ roles be? what will be expected of each of them?
- what will be the expectations for partner accountability? if there will be accountability, how will this work?
- what will the partner agreement look like? will the agreement have noncompete and nonsolicitation covenants?
- what quality control standards and policies will be adopted? this includes appearance of work products, consistency of workpapers, requirements for counter-review of projects, etc.
- client acceptance procedures. should there be any restrictions on the type of work the firm will accept or the type of clients the firm will accept and retain?
- what firmwide work processes will be adopted? process for 1040 preparation. will the partners be consistent in how they perform the same work? will they be consistent in how they expect staff to perform their work?
- what about investing in client deals? if a partner has non-attest clients that allow him or her to participate in legitimate deals (usually real estate), should that partner be required to give the other partner an opportunity to participate in that investment?
- how will technology issues be resolved? from software incompatibility to the design of the entire technology system, various tech problems will crop up.
- how will malpractice issues be avoided? make sure your merger agreement has a provision for absolving each other for work done prior to the merger.
- what will be the basic policies for areas such as the following?
- billing rates for all personnel
- when timesheets should be submitted
- when wip should be billed
- collection of receivables
- how client invoices will look
- whether to do work for clients with delinquent receivables
- remote work policies
- should partners and other firm personnel be required to record all billable time worked on clients, even time they know won’t be billed?
- should partners and other firm personnel be required to record all nonbillable time worked?
- guidelines for pricing of tax returns, especially minimums
financial issues
- how will the solo get value for his or her firm? will it be an immediate purchase or a two-stage merger? will cash be paid up front? will the solo receive a buyout when he or she retires? what will the major terms be?
- what system will be used for allocating partner income? keep in mind that if you devise a system that essentially makes each firm a profit center, it will tend to discourage the two firms from working together as one firm.
- what about partner business expenses? for client entertainment, club dues, auto expenses, health insurance premiums and a host of others, will these be expenses of the firm, just like paper clips, or will they be charged individually to the partner incurring them?
- will there be a partner buyout plan? should there be a plan for one partner to buy out the other in the event of retirement, withdrawal, expulsion, death or disability? what if one partner decides to retire and gets bought out by the other? this is especially important where there is a big age gap and the younger partner retires first.
- what will the ownership percentage be for each partner? what will ownership percentage determine? (hopefully not much.) what systems will be used to determine: compensation? voting? retirement benefits?
- what will the capital contributions be for each partner? by when should the money be deposited? how will you handle wip and a/r of each firm as of the merger date?