7 Key Questions When Thinking About An Accounting Firm Merger
February 26, 2015
Reprinted by permission from AccountingWEB
Is it time to merge your firm? How do you know? And if it is, how can you be sure you’re doing it right and not making mistakes that could doom the new entity? Mergers are complex, but if you consider these seven questions, you’ll greatly increase the chances of making the right decisions and moving along the correct path.
In the past three years, Russell Shapiro, a partner at law firm Levenfeld Pearlstein in Chicago, has structured and negotiated more than half the mergers among the 200 largest accounting firms. In 2014, Shapiro advised two of the industry’s five largest transactions by revenue (BDO’s acquisition of UHY Texas and SS&G’s merger with BDO). In the following Q&A, Shapiro shares his unique insights.
AccountingWEB: How does a firm know if it should merge?
Shapiro: The tell-tale signs are if it is losing revenue, profits are declining, it’s having difficulty recruiting—and its own people are starting to leave. A firm in trouble has stopped investing in growth, by that I mean new services and technology.
I had a situation where a fairly big group left a firm, while others were desperate to jump ship. The partners had to ask themselves, are we going to survive? Will we make money next year? Such situations almost always mean trouble—you have to do something. So, basically, the market tells a practice when it’s time.
AccountingWEB: How can a firm find a partner to merge with?
Shapiro: The best way is to engage an intermediary. Allan Koltin is well-known for this. So a good rule of thumb is to secure a consultant. Another avenue is to talk to others in your area, managing partners you already are acquainted with. I worked on two deals recently—one on the West Coast, one on the East Coast: the two managing partners were in the same town and already friends, so decided to merge.
AccountingWEB: What kinds of questions should a firm ask if another firm approaches it about a merger?
Shapiro: The most important factor is that the merging firms be culturally compatible. Just like a marriage, it won’t work if nothing is the same. Why? The partners have to be able to work things out, to be able to talk together on things. You have to see if the practice fits. Don’t make the mistake that a lot of smaller practices do—thinking that the larger firm has a better grasp on how to do things, so you don’t ask the important questions. Don’t be dazzled. You still should find out if the bigger firm is relatively clean, meaning, is there any litigation pending? So, work to understand its retirement policies and learn about any excess liabilities.
AccountingWEB: How do you break down the finances, especially if firms are of different sizes?
Shapiro: There are several aspects to consider: Look at the current income the partners are making; it usually remains as it was in the old firm. Sometimes, a one-time goodwill payment is offered, especially to a founding partner. Also, firms should consider what the other practice’s retirement benefits look like and compare them to your firm’s. Most of the time, a small firm is merging with a bigger practice, but when two similar-sized practices combine, they may wish to redo the structure of benefits.
Special retirement benefits can be discussed, but it’s typically not done.
Sometimes, there are capital requirements when a smaller firm is being merged into a bigger practice—the partners are asked to buy stock, to buy an interest in the firm.
AccountingWEB: What are possible pitfalls?
Shapiro: Don’t wait until it’s too late—then, it’s like a shotgun wedding: You are being forced into it. And to continue using the marriage analogy, there are times when everything goes so wrong, it’s like a bad marriage—the partners want out. So, sometimes after the merger, the two parties find out that they just don’t get along—the companies are just too philosophically or culturally different.
Merger disputes occur. I’ve been called as a witness when two firms are suing each other. My part is to say whether the merger was handled correctly or incorrectly. Then, there are mergers that start, but don’t finish: the deal breaks off just before the merger. Mostly this happens because of management conflicts and not due to financial considerations. It can be as simple as the two managing partners find they just don’t get along.
Often, financial factors are not a big deal, but the merger never gets past emotional roadblocks. There’s got to be a chemistry between the managing partners because you’re merging the emotions of the smaller firm. It’s a tough process, even when each side is happy with the idea of the merger. No matter how you look at it, some folks are going to lose some autonomy.