Magazine article The CPA Journal

There Is No Such Thing as a Perfect Merger or Acquisition

Magazine article The CPA Journal

There Is No Such Thing as a Perfect Merger or Acquisition

Article excerpt

There are many articles and publications that talk about a merger or acquisition's tangible considerations, such as insurance coverage, engagement letters, office procedures, personnel, compatibility of fringe benefits, etc. Although these are important, that's not what I am going to discuss with you. Instead want to tell you about the intangibles-that chemistry and comfort level between two parties that are equally important.

I have helped my firm, Michael Silver, merge and acquire five practices in the last seven years. Before I get into how we analyzed those important intangibles, let me offer a working definition of a merger and an acquisition. A merger happens when two firms combine their practices in order that each gains a new area of expertise. The end result is a broader range of services and talents for the combined firm's clients. Although an acquisition has some attributes of a merger, the acquiring firm usually is the larger one. The smaller firm has to conform and change its operating methods and may have less influence on the management of the practice.

In a merger or acquisition your most important consideration is whether the two practices are compatible in policies, procedures, and personnel. Although I can get positive or negative feelings within the first few minutes of meeting someone, it takes at least three meetings in various settings to get a real feel for compatibility.

In the initial meeting I normally spend two or three hours asking questions about the other firm's practice-management style. Do they have a strong work ethic? Do they insist on the highest quality of work being done? How do they handle fee problems? How do they handle billing? How do they collect past due receivables? Is the composition of their practice compatible with our practice?

I know it might be difficult to ask this next question, but it is a critical one if the merger or acquisition is going to succeed: What problems does the other firm have, and are they problems we can help them solve?

In many interviews with prospective merger candidates, I have found small practitioners do not know how much money they are making because they keep the books and records on the cash basis instead of the accrual basis. Many smaller practitioners don't use sophisticated computer programs for time and billing or to produce management reports to help them maximize their firm's profitability. The administrative part of their practice is an afterthought. From their standpoint an acquisition makes sense because the larger, more successful firms have managing partners who devote the majority of their time maximizing profitability.

After the initial meeting, I schedule a lunch or dinner meeting with all the partners so everyone can get together in a social setting to see how they feel about the prospective merger. If that second meeting goes well, and there is mutual interest on both sides, then we do our due diligence. If the due diligence doesn't uncover any major problems, then compensation is the topic for the third meeting.

Negotiating Compensation

There is one critical question you need to ask the merger candidates. How much money did they make last year and how many hours did it take to produce the revenues and profits? I test the information for reasonableness by reviewing the financial statements and tax returns, and comparing those numbers with our firm's numbers.

Next, I tell candidates, "If you do the same amount of business in the same amount of hours, I will guarantee you the same compensation for the first year." Then, I promise them-

* a percentage of their gross billings;

* payment for each chargeable hour they produce themselves; and

* a bonus if they exceed last year's realizable average hourly rate or a penalty if they fall below it. …

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