keep your deal-breakers and must-haves to a minimum.
by marc rosenberg
cpa firm mergers: your complete guide
it’s important to understand the flow of the entire merger process. always start with the big picture before getting into the details.
more: why do you want to merge? be honest. | four reasons to fear a merger
exclusively for pro members. log in here or 2022世界杯足球排名 today.
every merger has its unique aspects. it’s impossible to choreograph from a to z exactly how the process for each merger will work.
the steps in the process listed below appear in the order of how they commonly occur.
- decide on your merger strategy: why you want to merge and what must happen for you to consider the merger successful.
- decide how you want to search for candidates:
-
- call partners at firms that you or your partners are friendly with.
- hire a national cpa firm consultant with substantial merger experience.
- call all your referral sources – bankers, lawyers, insurance agents, wealth management professionals – and ask them to introduce you to firms they know who might be worthy merger partners.
- send an invitation letter (email or snail mail) to a database of merger candidates. the letter can be from either the firm or a consultant.
- place an ad in a professional journal or on social media.
- join a roundtable group and target member firms who seem qualified. caution: the worst thing you can do is overtly and obnoxiously pursue fellow roundtable members, making it clear that the only reason you joined the group was to merge in fellow member firms. the correct approach is to be an active participant in the group, forge strong relationships with fellow members and then, when the time is right, broach the merger possibility.
with all these tactics, the key is to repeat the activity. persistence pays off. don’t give up after trying a tactic once and failing.
- decide what parameters of a firm are important to you.
-
- size (revenues, number of people)
- age of partners
- do you prefer retirement-minded owners or not?
- talent and youthfulness of staff
- profitability
- location
- services provided and type of work performed
- specialties and/or niches
- billing rates
- work ethic
- office lease situation
- technology systems compatibility
- decide what the deal-breakers and nonnegotiables will be. these are traits of merger candidates or terms they seek that will cause you to reject the firm fairly quickly.
- initiate the merger search.
- telephone-screen candidates who respond.
- convene an initial get-to-know-you meeting with short-list candidates. during these meetings, reps from each firm informally describe their firms, share why they are interested in merging and asks questions of each other. at this stage, there is no exchange of financial information. the meeting is very informal.
- if the firms wish to enter into discussions, each firm signs a confidentiality and nondisclosure agreement (nda).
- exchange financial statements and production statistics. it’s important to do this relatively early in the process instead of waiting until the final due diligence stage. numbers aren’t everything, but numbers don’t lie. in your review of the firm’s financials, you might see something that rules them out, which will save you from wasting a lot of time in further merger steps.
- convene second meeting, if needed, before the letter of intent (loi) stage.
- letter of intent is issued by interested buyers.
- select one firm with whom to begin negotiations.
- begin negotiations in earnest. two or more meetings may be needed to address all issues because it takes too much time to address all issues in one meeting. there is a wide variety of issues to address. examples:
-
- deal terms, including compensation
- how the firm will be managed
- how many of the seller’s partners join the buyer as equity partners
- expectations of each partner of both firms
- how long the seller’s partners will work
- operational and administrative issues, such as policies, processes and technology
- how the seller’s staff will mesh with the buyer
- throughout the process, partners from the firms should meet socially and get acquainted. this greatly helps each firm assess the culture and personality fit.
- both buyer and seller conduct due diligence, by including workpaper review, compatibility of work standards and work product formats.
- after all the prior steps are completed, the two firms make a handshake decision on merging.
- prepare a clearly written “english-language” document summarizing everything the two firms agreed on. it may be simply an amended, slightly more thorough version of the loi. give this letter to the attorneys.
- attorneys prepare the proper, legally binding merger agreement
- make internal announcements.
- make external announcements. talk to larger clients, especially those of the smaller firm, face to face.
- close the merger.
- implement the merger.
deal-breakers and nonnegotiables
the potential deal-breakers and nonnegotiables, or must-haves, listed here are based on actual merger discussions we have observed. merger partners, especially sellers, are well advised to keep their list of must-haves to a minimum because the longer the list, the more merger partners will be quickly, perhaps unnecessarily, eliminated.
- specific merger terms that many would consider unreasonable (two times fees, 50 percent down payment, etc.)
- a say in the management of the firm
- all partners having some say in partner income allocation
- seller’s compensation demands
- a say in tech apps used for tax, write-up, time and billing, etc.
- inclusion of a de-merger clause
- expectations for bringing in business
- a generalist seller who doesn’t want to be restricted to just audit or tax or any other limited role
- refusal to do any name change whatsoever
- a certain type of business (for example banks, investment advice) that one firm wants absolutely no part of
- office lease challenges, especially the seller’s lease
- when the merger takes place
- one-stage vs. two-stage deal
- how long the seller wants to work, both full-time and part-time
- requirement for client transition by the buyer
- degree that buyer wants sellers to delegate more than they have
- hiring seller’s professional staff and admin staff
- one firm must have a specialty/niche in the same specialty/niche as the other
- nonsolicitation agreements for partners and staff
what to expect from a good merger consultant
we all know that people develop a higher level of skill with more experience performing a task. this applies to changing lightbulbs, performing knee surgery, mowing the lawn, playing an instrument, preparing a tax return and, yes, doing a merger.
in his blockbuster book outliers: the story of success, malcolm gladwell posited that it takes 10,000 hours of practice to achieve mastery of complex skills and become truly successful. well, you don’t have to do 10,000 mergers to be good at it, but a firm that has done 10 or 20 will be better at it than someone who has done only one or two. that’s where the merger consultant enters the picture.
most sellers sell their firm only once, the barest of experience. most buyers do only a small handful of mergers over a period of many years. again, not much experience. the better-known merger consultants in the cpa industry have worked on dozens of transactions; a few have worked over 100 deals.
because of this experience, merger consultants provide tremendous value to buyers and sellers.
- they’ve seen just about everything and know how to deal with it.
- they make sure all the right questions are asked and answered.
- they provide a sounding board to bounce things off of.
- they help merger candidates address sensitive issues that one party is reluctant to ask about for fear of offending the other.
how good merger consultants help their clients
- some firms are initially puzzled by one of our most revered practices: in most mergers, one firm engages us to assist them and pays our fees. but we tell both buyers and sellers that we are available to both firms to assist in any way we can. our goal is for the merger to be super-successful, and the best way to achieve this is to help both firms.
- at the initial meeting between the consultant and the firm, discuss in detail how mergers work, what the steps are in the process and what to expect. help everyone understand the big picture.
- determine the parameters of acceptable merger partners: size, location, partner ages, services provided, etc.
- review the firm’s basic data to become familiar with what it does, how it operates and how it performs.
- prepare a brief written description of the firm, without disclosing confidential information. this is given to merger candidates to confirm oral discussions and to show their partners a document that is authoritative.
- assess the firm’s (a) strengths and drawbacks and (b) value in the eyes of a merger partner.
- review merger terms the firm has in mind and provide an honest assessment of the reasonableness of those terms.
- identify merger candidates that meet the firm’s parameters.
- select two or three firms with whom to convene get-to-know-you meetings. the consultant often attends these meetings, especially if the firms reside where he or she lives.
- counsel the firm in deciding which firms to continue having discussions with.
- if neither the buyer nor seller has a nondisclosure/confidentiality form they prefer using, the consultant should provide one.
- provide a checklist of data that each firm should request of the other. of course, each firm is free to devise their own list.
- after the data is exchanged, the next major step is for buyer candidates to submit a letter of intent to the seller. depending on the firms’ desires, the lead-up to issuance of the loi is commonly done in one of two ways:
-
- some buyers are comfortable issuing the loi without any further face-to-face meetings.
- other buyers prefer to convene additional meetings to review questions on their data review and discuss additional matters before issuing the loi.
the merger consultant should be available as a resource to buyers in writing a proper loi. this advice has nothing to do with deciding what specific terms to offer. instead, the consultant makes sure that the buyer includes all pertinent points in the loi.
- the consultant reviews the lois and counsels the seller in selecting one buyer to negotiate with in earnest.
- additional negotiation meetings are convened, as determined by the merger partners. the consultant may or may not attend them.
- as the merger process moves along, the consultant continuously makes both parties aware of upcoming steps.
- the consultant performs shuttle diplomacy on modifications of terms, as necessary.
- throughout the entire process, the consultant should be constantly communicating with both firms.
- the consultant should review the merger agreement drafted by attorneys.
- the consultant provides any other assistance needed.
if your merger consultant doesn’t enthusiastically and proactively perform these tasks, you’ve hired the wrong consultant.
major steps in the merger process
- decide on your merger strategy.
- decide how you want to search for merger partners.
- decide what parameters are important to you.
- decide on your deal-breakers and nonnegotiables.
- initiate the merger search.
- telephone-screen firms responding to your search.
- convene initial get-to-know-you meetings.
- to go to the next step, each firm signs an nda.
- exchange financial and operating information.
- convene one or more meetings to get to the point where buyers can issue letters of intent (lois).
- interested buyers issue lois.
- select one firm to negotiate with.
- convene two or more meetings to negotiate the deal.
- each firm continually assesses culture and personality fit.
- the firms conduct their due diligence.
- if all goes well, both firms arrive at handshake agreement.
- finalize everything agreed upon in writing; give to attorneys to prepare.
- attorneys prepare the final, legally binding merger agreement.
- make internal announcements.
- make external announcements.
- close the merger.
- implement the merger.