Mergers & Acquisitions of CPA Firms: Understanding the Roadblocks to Successful Deals

Article excerpt

EXECUTIVE SUMMARY

* A potential merger or acquisition should ideally result in a significant upside or solution to a major problem, Merging to merely reduce overhead in one or both firms (for instance, to fill empty office space, spread technology costs, or utilize excess staff) is often a poor foundation for an affiliation.

* A properly structured deal is one in which both firms win. If one party negotiates a tremendous package strictly to its benefit, this may potentially disenfranchise the other party and cause the deal to break down.

* Some deals struggle because changes are made too soon in the way one firm operates. The successor firm in a merger should recognize in advance that staff and clients liked the way the other firm's practice was run.

* The critical notion of firm "culture" can take many forms, such as the level of services provided to clients, the formality of how a firm operates (think dress codes, rigidity of staff schedules and office hours, and whether socializing is promoted in the office), and expectations regarding the roles of partners and supporting staff.

* The agreements for most mergers should include the ability to de-merge if the deal is not succeeding in either's eyes.

**********

Despite the best intentions of all involved parties, some CPA firm mergers and acquisitions are not as successful as originally planned; indeed, some end as failures. When viewed in perfect hindsight, it often seems that simple common sense, or lack thereof, was the reason for the success or failure of a deal. Unfortunately, there is no specific formula for structuring a perfect deal, but a good understanding of the potential hazards relating to the variables involved and planning for the unexpected can help your firm prepare a better deal structure and business plan.

[ILLUSTRATION OMITTED]

This article highlights some of the major reasons deals fail to meet the original strategic, financial, and professional objectives of the combining firms. A companion article in the April issue of the JofA will take a closer look and offer guidance for client and staff retention in mergers. The minutiae of certain details have purposely been eliminated as it is rarely the numbers (such as the size of the firms' revenue) or a merger's financial terms that cause the failure. The lessons apply to firms of all sizes, whether a small one- to two-partner firm or a national firm.

WHY SOME DEALS FAIL

1. Affiliating for the wrong reasons

A merger or an acquisition has a major impact on the partners, staff and clients of both firms. The potential M&A transaction should ideally result in a significant upside or solution to a major problem. Merging to merely reduce overhead in one or both firms (for instance, to fill empty office space, spread technology costs, or utilize excess staff) is a reason for many mergers, but is often a poor foundation for an affiliation. It would be much less traumatic to just shed the excess costs or to set up a space-sharing arrangement between the firms.

Sometimes, the misconception that "bigger is better" can lead to a deal failure. In many cases, bigger will be better only if the combined firm understands and is prepared to take advantage of the benefits of scale, but realizes the efficiencies and efficacy of a larger firm is not automatic. On the other hand, some excellent reasons to merge, sell or acquire are planning for the succession for the owners of one firm, increasing a pool of talent, opening access to new marketplaces, and adding niche services or expanding the reach of existing specialties through cross-selling.

2. Deal structure

A properly structured deal is one in which both firms win. If one party negotiates a tremendous package strictly to their benefit, this may potentially disenfranchise the other party and cause the deal to break down.

For example, in an acquisition or equity buyout, the seller naturally wants to maximize the value of years of sweat equity But if the buyer is literally losing money during most, if not all, of the payout period, the acquiring firm could lose enthusiasm for the deal. …