everything from reporting to décor.
by marc rosenberg
cpa firm mergers: your complete guide
here we list 61 issues with mergers and acquisitions, and additional items will undoubtedly arise on a case-by-case basis.
more: why merging in smaller firms is fabulous | selling your firm? what to expect | merger? the 100 data points you need first | why do you want to merge? be honest.
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if a buyer pursued every one of these issues, it could take years to negotiate the deal and would ensure severe deal fatigue. so as you review this list, prioritize what issues are most important and customize these questions to the seller’s unique situation.
general issues
- what is the history and evolution of the seller?
- did the seller ever have partners who left the firm, except for retirement, death or disability? what happened?
- what are the firm’s culture and personalities of the team like? (no need where the seller is a small solo who intends to retire soon after the merger.)
- why does the seller want to merge? will the buyer be able to deliver on these goals?
- what does the buyer expect to get from the merger? will the seller be able to deliver?
- is there any characteristic, practice, policy or habit of the buyer that would cause the seller to be concerned about the success of the merger?
- ask sellers to describe their five biggest weaknesses. examples: slow growth, can’t find staff, staff has no partner potential, low profitability, inefficient processes, narrow array of services, low realization, partner conflict.
- does the seller have any skeletons in the closet?
financial and operating issues
- what does the seller feel are the best ways to increase its profitability?
- is the seller profitable enough, especially after being absorbed into the buyer’s cost structure? are there sufficient opportunities to increase the seller’s profitability by increasing rates, making the seller more efficient, selling new services to its clients, etc.?
- how similar are the seller’s and buyer’s billing rates and client fees typically charged to clients?
- how compatible is the seller’s level of partner billable hours with the buyer’s? for example, if the buyer’s partners average 1,100 billable hours:
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- and the seller works 1,700, will the buyer expect the seller to delegate more work to the staff?
- and the seller works 800, will the buyer expect the seller to be more chargeable?
- what is the extent of the seller’s tax-season work compression? if heavy, how compatible is this with the buyer?
- if the seller has a branch office with marginal profitability, succession challenges and other difficulties, the buyer needs to discuss this and gauge the seller’s reaction to possibly closing the branch office.
- after a review of the seller’s financial and operating data, how compatible is each metric with the buyer’s statistics? for the biggest differences, how will the gaps be handled? how will they be remedied?
- if the seller has debt on its balance sheet, the buyer needs to tell the seller that it will not absorb this debt. how will the seller react to this news?
partner issues
- the seller should describe its partners. what are their roles in the firm? what are the strengths and weaknesses of each? any bad habits or practices that might make them difficult to live with?
- to what extent is it a deal-breaker if some of the seller’s partners are invited to be non-equity partners at the buyer instead of equity partners?
- how long do the seller’s partners wish to continue working full-time and part-time?
- if the buyer has a mandatory retirement policy, the seller should be asked if its partners can live with it.
- if the buyer has older partners who will retire before some of the seller’s partners, will the seller be willing to write buyout checks?
- the seller’s partners may be asked to take a pay cut to make the cash flow work for the buyer. can the seller live with this?
- based on the seller’s review of the buyer’s partner agreement, does the seller have any specific concerns?
- the partners at many small firms have perks, benefits and privileges that would never occur at larger firms. examples include running vacation expenses through the firm and paying for extra cars or sports tickets primarily for personal use. are there any practices like this at the seller? how will they be addressed?
- can the seller’s partners successfully undergo an ego-ectomy? we have seen many merger negotiations called off when one of the merger partners, usually the buyer, concludes that their person-alities are incompatible.
- what are the seller’s partners used to producing? look at billable hours, realization, when wip is billed, when receivables are collected, total work hours, and activity in business development. are the seller’s production and performance levels compatible with the buyer’s?
- do any of the seller’s partners engage in outside activities that could present problems? examples: outside investment in clients; outside businesses they own; excessive vacations, including large blocks of time spent at second homes.
staff issues
- what is the seller’s overall assessment of its staff? will they fit in? are their technical quality and technology skills where they should be? (if the seller is small enough, each staff person should be described).
- how does the seller think its staff will react when told of the merger? are there any staff that are likely to leave? are there any key staff who need special attention?
- what are the seller’s staff used to producing in terms of billable hours, total hours, billing rate, realization, etc.? are these acceptable levels? if not, can they change?
- it’s generally not a good idea for buyers to inherit a seller’s dirty laundry. examples: staff with long-standing bad attitudes or consistently unacceptable work quality. attendance problems. egregious personality conflicts. is any of this present at the seller? if so, how will it be addressed?
- a common redundancy in cpa firm mergers is the office manager or firm administrator. if this issue exists, how will it be handled? how adamant is the seller that its administrator be retained?
- what is the seller’s thinking regarding integration of its staff with the buyers? is this something the seller wants? doesn’t want?
- have the seller’s staff signed nonsolicitation agreements? is there any risk that staff will leave and try to take clients or staff?
- will there be any challenges when the seller’s staff joins the buyer’s staff in terms of titles and compensation?
clients and services issues
- does the seller have any clients that the buyer wants no part of? does the seller provide services the buyer doesn’t want?
- the buyer should review the seller’s client list carefully, especially the 20 percent or so of its clients that comprise 80 percent or so of its revenues. for each client, what types of services are provided? annual fees? how frequently are services provided throughout the year? clients’ owners’ ages? how long have they been clients?
- for the 20 percent block of clients above, the buyer needs to have a clear understanding of the likelihood of retaining them after the merger. each client should be discussed.
- what opportunities are there with specific clients of the seller to cross-sell the buyer’s services?
- what is the seller’s thinking about intermingling clients? is this something the seller wants? how might it be handled?
- if the buyer has more rigorous, formal standards for work quality, workpapers and product appearance, are the seller’s partners willing and able to conform to these higher standards?
- the seller’s partners may never have had their work counter-reviewed by anyone. at the buyer, this may be required. how does the seller react to this?
management issues
- what role in decision-making and administration does the seller want? is this acceptable to the buyer?
- sellers are rarely allowed any say in the buyer’s management. does the seller understand this? is it ok?
- partners at small firms may not have reported to anyone for decades. this will change. the buyer should describe how this works and gauge the seller’s reaction. are the seller’s partners willing to be accountable for their performance and behavior?
- larger firms have more sophisticated management practices than smaller firms. examples: goal setting, accountability, partner performance appraisals, and partner requirements to formally mentor staff. the buyer should review these practices with the seller and gauge their reaction.
administrative issues
- if the seller will work in an office separate from the buyer, how will this office be managed and controlled? who will be responsible for managing the seller’s office?
- if the seller’s remote work policy and practices are different, how will this be resolved?
- technology and systems:
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- are the seller’s systems compatible with the buyer?
- does the seller anticipate any problems converting to the buyer’s systems?
- discuss the timing of the changeover.
- what is the seller’s current office lease situation? is the buyer willing to absorb the rent? how will this be worked out?
- how do the two firms’ benefits and personnel policies compare? will adjustments or changes be needed for the seller’s staff?
- what is the seller’s malpractice history? what past claims were settled, are there any pending claims and current situations that have exposure, but the client has yet to sue?
- the neatness, orderliness and décor of small-firm offices are often considerably lower than at larger firms. if the seller maintains an office the buyer considers undesirable, how will this be resolved?
terms
- there are some solos whose profitability is off the charts and is much higher than the buyer’s income per partner. they achieve this with minimal investments in their firm: outdated technology, low staff compensation, mediocre offices, zero marketing and other measures. if the buyer’s compensation offer to the solo is considerably less than he or she was previously earning, these reasons need to be made clear.
- what will be the effective date of the merger?
- are there are any issues regarding the name of the surviving firm?
- what are the seller’s deal-breakers and nonnegotiable items?
- the buyer should confirm that the seller will take out malpractice tail insurance.
a few last items
- is there anything at all that the seller still needs to explore and review about the buyer?
- as of now, does the seller want to do the merger and continue negotiations? if so, why? if not, why not?
- what is the next step?