if your people matter, show it.
by marc rosenberg
cpa firm mergers: your complete guide
when a cpa firm acquires or merges in a smaller firm, it is common for the seller’s staff to be employed by the buyer.
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in this situation, there are two very important documents to be executed between the buyer and the seller’s staff:
- written offer letter. this is the same letter any firm should issue to prospective hires. it outlines the salary and bonus arrangement, commission opportunity for bringing in business, major employee benefits, starting date, position or title and duties. it should also include a confidentiality agreement and a statement that employment is at will. the offer letter may also address how differences in employment matters between the buyer and seller will be addressed (e.g., health care coverages and premiums, paid time off, flexible or remote work policy). some firms require new employees to confirm in writing their agreement with an employee policy manual.
- nonsolicitation agreement. the nonsolicitation agreement may be embedded in the buyer’s employment letter or a standalone document. it states that the employee is prohibited from taking clients or staff of the buyer when leaving the firm, whether or not the clients and staff are solicited by the departing employee. the agreement typically specifies liquidated damages for violations. the enforceability of employee nonsolicitation agreements is determined by state, not federal, law. most states uphold reasonable post-employment restrictions, but some states are more supportive of employees and their ability to pursue their careers. most states are more likely to enforce nonsolicitation provisions against partners than rank-and-file employees.
best practice: employee nonsolicitation agreements
for decades, it has been a best practice for cpa firms to require employees to sign a nonsolicitation agreement as a condition of employment. in the early years of most firms, it’s common to neglect having employees sign this agreement. the reasons are that (1) when firms are small and/or less sophisticated, they simply never think of it (until advised by a cpa firm consultant i know who is a big cubs fan) or (2) they thought it was beyond comprehension that one of their employees might have the wherewithal and foresight to leave the firm and take clients and staff. consequently, many firms that today require employees to sign such an agreement changed their policy and started requiring existing employees to sign an agreement.
attorney peter fontaine says, “generally speaking, there should be a meaningful event attached to the signing of a nonsolicitation agreement with existing employees. for example, a substantial raise, a promotion, a new position, significant training, etc. because the employee is giving up a right – taking clients and staff – they should receive adequate compensation.”
the amount to be paid is subject to debate. not too long ago, paying employees a nominal amount was acceptable, but says fontaine, “in this day and age, a nominal amount doesn’t cut it like it used to. telling an existing employee that they must agree to a fairly significant restriction on future employment for a few dollars or get fired is generally viewed by the courts as draconian.”
when a buyer employs the seller’s staff
good news: in this case, the buyer need not remunerate the seller’s employees. “the offer of employment is usually sufficient,” says fontaine. one firm we talked to that has made several acquisitions in recent years said because their compensation and benefit package is always better than the sellers’, it is sufficient remuneration.
if the seller had signed nonsolicitation agreements from its employees, it is advisable for the buyer to have the seller’s employees sign their own (new) agreement, as the terms are probably different and the enforceability less certain.