the top 11 reasons cpa firm mergers fail

plus: four questions to self-assess your due-diligence efforts.

by domenick j. esposito
8 steps to great

even as mergers and acquisitions among cpa firms are moving at a hectic pace, many, if not most, are falling short of expectations.

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some are even winding up in divorce, with costly breakup costs as morale drops, go-to-market opportunities fail to materialize, and key partners and potential partners leave for other opportunities.

for every transaction that actually does happen, it is also apparent that handfuls of potential deals die at the altar.

“failed culture integrations are often at the heart of merger difficulties.”

– louis v. gerstner

so, let’s take a deep dive into the leading merger and acquisition difficulties.

the following summarizes my observations as to why many mergers and acquisitions fall short of expectations, and why so many more die at the altar:

irreconcilable culture clashes or differences between the two firms.
egos of senior partners.
different views on governance, autonomy, and accountability moving forward.
concern that it “may not work” so why take the risk.
the larger firm decides that the pain to integrate is greater than the gain to be realized. the senior partners are not willing to invest the time and effort to make 1+1=3.
lack of effective leadership taking partners through the decision tree from initial transaction identification to transaction consummation.
too many partners are willing and able to torpedo the transaction (in many cases simply because it wasn’t their idea).
disagreement among the merged-in partners on how to cut up the practice payment (deferred compensation).
amount of retirement obligations at both the larger firm and the merged-in firm or at either firm.
dissimilar retirement and compensation plans at the two firms.
valuation and other deal considerations outlined in the term sheet.

you notice that i identify irreconcilable culture clashes or differences as the #1 reason why transactions run into difficulties and that valuation and other deal considerations are identified as reason #11.

while many people believe deals fall apart because of economics, i have found that while economics are clearly important, this conclusion is a myth. here’s why. financial considerations in a transaction are usually flushed out quickly. if there isn’t a meeting of the minds, deal discussions shut down. little ventured; little gained. further, i have found that valuation and other deal considerations most times can be successfully negotiated if the two firms believe that 1+1=3 and that they can have greater success in the marketplace if they are together rather than apart.

on the other hand, culture clashes or differences usually take considerable time before they bubble up to the top of the “we have an issue” heap. this is why culture compatibility is so important and without it deals fall short of expectations or never see the light of day.

before we take a deep dive into culture compatibilities and what can be done to deal with potential clashes, culture needs to be defined. to sum it up, a firm’s culture is the accumulation of shared values, beliefs and behaviors that determine how partners and staff carry out day-to-day tasks such as managing and governing the practice, serving clients and attracting and retaining talent.

culture has three key prongs:

the behaviors of the ceo, senior management, and staff
the capabilities and decisions about where and how to compete
a firm’s operating and governance models that are core to how it functions on a day-to-day basis

i have found that when it comes to determining culture compatibilities, many firms talk a lot about a few cultural similarities as proof of compatibility but cheap culture talk fails to help firms navigate through the difficult task of dealing with potential culture clashes that will help improve outcomes and the probability that a combination will be a win-win.

an assessment of culture compatibilities between the larger firm and a merged-in firm should not be a gloss-over or an afterthought when considering a possible transaction. i believe culture deserves a lot more weight in the due diligence process as a potential transaction is evaluated.

my advice is:

give mutual culture due diligence the same type of timely priority as financial, operational and legal due diligence.
have the larger firm’s ceo and other senior management drive culture due diligence and subsequent integration. it’s that important! don’t delegate this important task to the human resources department or, worse yet, have it outsourced to an outside consulting firm.
observe different ways of working, particularly when it comes to quality control.
hold key interviews and small group dinners to determine how the other firm interacts among themselves and if you would be proud to hold out the other partners at the other firm as your very own. this is commonly referred to as the “beer” test.
determine the culture you want to see as a result of the transaction. the larger firm usually has two choices here. it can assimilate the merged-in firm into its culture or it can create a blend of the cultures at the two firms. depending on the facts and circumstances, either approach is viable.
develop a culture change plan.
sustain and measure progress.
be astute in developing transaction communications relating to cultural matters. both the substance and timing of messages are very important. senior management at both firms needs to be tuned in to managing expectations and anxieties while shaping workforce behavior in the desired cultural direction.
cut off further conversations and negotiations once you conclude that there are irreconcilable cultural clashes or differences. better to call off the marriage than divorcing or worst yet, living together in disillusionment and frustration.

here are four questions that might help you assess your due diligence efforts regarding culture:

do you pay lip service to the importance of culture in mergers and acquisitions but then routinely fail to back it up with effort and dollars? culture is the pauper when integration budgets are allocated.
do you gather culture data without a clear endgame in mind?
is your cultural assessment an afterthought that is ad hoc, unstructured, sketchy and haphazard?
do you turn cultural integration over to people who lack expertise in managing intense political dynamics and psychological complexities involved?

if you answered yes to any one of these questions, you need to pay more attention to the #1 reason why so many deals fall short of expectations and why so many die at the altar.

cultural integration isn’t something that can wait until after a merger or acquisition is consummated. the top 100 and other fast-growing firms usually flag possible cultural clashes or differences as an integral part of due diligence.

buyers and sellers beware! why did dillinger rob banks? because that is where the money is. why should the larger firm and the merged-in firm make culture due diligence a priority when evaluating a potential transaction? because that’s where most deals fall apart.

posted on january 10, 2018

dom esposito

about the author

domenick j. esposito was the ceo of grant thornton, vice-chair of bdo, and national growth director at cohnreznick.

he is the author of "8 steps to great: the eight essential strategies driving success at the world's largest cpa firms. and how to apply the lessons at firms of all sizes," published by 卡塔尔世界杯常规比赛时间.

a life in public accounting

in 2016, esposito, then a former ceo of bdo, moved from a 46-year career in public accounting into the next phase of his professional life – consulting to cpa firms, launching a boutique advisory firm, esposito ceo2ceo, that provides advice to ceos, managing partners and other senior partners of cpa firms focused on the mid-market throughout the u.s.

with the launch, esposito authored “8 steps to great," a guide for ceos, managing partners, and other senior partners on how to move their firm to the next level.

cohnreznick national growth director

esposito was one of the most qualified individuals in the country to advise cpa firms on growth and profitability. through 2015, he was national practice & growth director and an executive board member of cohnreznick, llp, a mid-market sustainable brand and the tenth-largest cpa firm in the united states. he oversaw cohnreznick’s go-to-market industry specialization and consulting and advisory service lines. he was also intimately involved in the firm’s mergers and acquisitions and strategic and tactical activities for its public company and capital markets initiatives. dom joined the predecessor firm of j.h. cohn in 2002 as the chief operating officer and executive board member.

dom was also an independent director of ethan allen interiors inc. for several years (through 2014), dom was a member of the nasdaq listing and qualifications committee to the organization’s board of directors. he formerly served as the leader of the new york state society of cpas committee for large and medium-sized firms practice management. he also was an adjunct accounting professor at c.w. post/long island university.

bdo and grant thornton

through october 2002, dom was vice chairman at bdo, a mid-market sustainable brand and the seventh-largest international accounting and consulting firm in the u.s., with almost 50 offices and 3,400 employees. during his brief time with bdo, he was responsible for the alliance distribution network (at the time consisting of over 80 cpa firms, 10 law firms, and 25 consulting firms). he was also responsible for attracting and servicing a number of clients.

from 1979 through 2001, dom was with grant thornton, another mid-market sustainable brand and the sixth-largest international accounting and consulting firm in the u.s., with over 50 offices and 4,500 employees. he joined grant as an audit manager, became a partner in 1981, led the long island office from 1984 to 1986, became assistant managing partner of the new york office in 1986, and from 1988 to 1999, led the new york office. in 1999, esposito became a regional managing partner and for two years, through 2001, was the firm’s chief executive officer.

cpa, partner, mba, leader, influencer, media celebrity

between 1996 and 1998, and while he was ceo, esposito was on the partner board and was also on the board of grant thornton international – the worldwide umbrella organization. in these capacities, he developed strong experience in strategic thinking and execution, international relationships, corporate governance, partnership matters, branding, expense control, client relationships, and new business development.

as ceo, he took grant thornton to record earnings, consummated the largest line-of-business sale in the firm’s history, developed a major joint venture with axa financial, and made the largest practice acquisition in the firm’s history. from 1969 to 1979, esposito was with price waterhouse (now pwc), servicing ibm when he was promoted to manager in 1976.

dom was a cpa, has been quoted in national and local media, and has appeared on radio and cable tv.

esposito also testified before the securities and exchange commission.

he received his m.b.a. from st. john’s university and his b.s. from ferris state university. accountingtoday, one of the leading trade journals for the accounting profession, named esposito one of the most influential people in the profession for two consecutive years.

he passed away in 2021 at the age of 74.

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