owner agreements are seeing updates.
by terry putney
rosenberg map survey
the level of activity we’re seeing in m&a deals is unprecedented.
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many firms in larger markets are often approached directly by firms interested in discussing a merger. the days of discreetly pursuing an affiliation strategy appear to be waning.
we are also seeing larger firms that are persistently active as acquirers with more potential opportunities and deals than they can realistically consummate. as a result, those acquiring firms have become much more selective with the criteria they use to evaluate prospects. this sometimes results in lower valuations in deals where a sale occurs. it also means firms that were once considered top prospects in the past are no longer viewed that way.
a key issue that causes prospective acquirers to pass on a specific prospect is the need for too much succession of senior partners in the short term. this issue of capacity is exacerbated by the talent shortage most firms experience, especially among the mid-level to senior staff.
at the same time, we are seeing firms pursuing growth through m&a that find potential acquisitions (usually in the form of a merger) that are an especially good strategic fit become very aggressive with terms in order to differentiate from the competition. this is not the norm, but appears to be an emerging trend.
besides succession issues, the challenges we are hearing about most often are:
- talent recruitment and retention – particularly among millennials and those with three to eight years of experience
- obsolete owner agreements that are viewed as resulting in unaffordable buyouts and are unfair to younger partners
- keeping up with technology – firms that are behind in technology are also unappealing to attracting young talent and similar “high potential” candidates
- differentiating themselves from the competition – governance and firm leadership
the trends mentioned in my comments above are continuing. already this year we are seeing unprecedented levels of mid-size firms (generally five to 15 partners) that are pursuing upstream mergers. some are not finding as much interest from the market as they expected because the larger regional and national firms may have already established a presence in their market. as a result, potential acquirers are much more selective with what is now a “tuck-in deal.” we are advising the firms we work with that are considering an upstream solution to allow more time, rather than wait until succession issues make them desperate for a solution, and to consider that their best option might be a firm that is not in their market already.
we are also working with an increasing number of firms on finding creative approaches to owner agreement structure in order to present a more attractive upside opportunity to emerging owners. the rosenberg survey mirrors what we are seeing as well, which is that the equity method of allocating intangible value, which still remains the most popular approach with small and mid-sized firms, appears to be in decline. our experience is the method is inflexible and over time can result in an arbitrary allocation of value, which can lead to problems when senior partners are ready to get paid out.
we are hearing concern from firms that have significant audit practices about the future impact large technology shifts will likely have on their firm. indications from the aicpa and other sources are that technology such as big data programs, ai (artificial intelligence) and blockchain may lead to significant efficiencies in audit engagements in the near future.
the positive side of that is the potential decrease in the talent necessary to conduct audits. the fear is a reduction in fees and the inability many firms may have to remain competitive with larger firms that are better equipped to make the necessary investments in technology. this has actually led the lead partners in several firms we work with to consider if an upstream merger will keep them strong enough to face those impending challenges.