We find firms seeking to grow using mergers and acquisitions often start the process with too little advance preparation. This can lead to many false starts. In the worst case scenarios it can lead to: 1) failing to close a deal your firm would have benefitted from or 2) a failed merger. This blog summarizes the steps you should take before pursuing this tactic to spur growth in your firm.

Clearly develop what your M & A objectives

Is this strictly a top line growth strategy or are there other strategic objectives you are pursuing? Perhaps you are seeking to obtain new niches or clients that are prone to need specialty services you already offer. Are you looking for geographic expansion into certain target markets? You need to make sure you are pursuing the right opportunities that will meet your strategic needs. Often we see firms chasing the next target they happen to run into without filtering that through a succinct strategic plan first.

Think about what will meet your objectives

What sorts of firms should you be talking to? Size, location, client mix, service mix, fees and rates are obvious attributes. But also think about the status you want the selling partners to have with your firm. Keep in mind most sellers have a succession issue they will want you to solve. How important will their staff be to you? Do you have excess staff capacity you want to fill? Or will you need all the staff resources you can get to absorb the acquired firm? What are your must haves? What are your can’t haves? What kinds of obstacles are you likely to encounter? Ideally, you’ll have the experience or have access to the expertise to know what kind of issues you may encounter so you can plan how you will overcome them before they come up.

Assess how attractive your firm will be and the market you will be targeting

Identify the trends in pricing and deal structure in the market you will be targeting. You should assume with the level of activity in the profession now that you may not be the only one a target firm is talking to. How will you approach a merger versus an acquisition? Chances are the deal you find will have elements of both if the target firm has more than one owner. Think about how your partner compensation system will work for the acquired firm’s partners. Is it competitive? Same for your owner agreement if you plan to bring in new partners. What will be your standards for admitting new equity partners? How will you deal with partners in the acquired firm that don’t measure up or for whom equity status is not the right solution? For instance, selling partners that want to leave in three years or less often are not admitted as equity partners. What status should they have?

Align your partners that will be involved in the decision process

We see far too many deals reach a verbal agreement only to fail to garner the support of the acquiring firm’s partner group. It is best to identify what some of the stumbling blocks are likely to be in advance of starting the process so they can be discussed generically before an actual deal needs to be vetted. Do an economic analysis of the effect a merger or acquisition will have on your firm. How much capital are you likely to need? At what point should you start seeing positive cash flow? How will deal structure affect that analysis?

Lay out your execution plan

Develop a timeline for the deal process. What should you be discussing in the introductory meetings? What information should you obtain up front? What will you need to know before you make an offer? When should you perform field due diligence? Do you have a good source for documenting the deal in final agreements? Should you employ the assistance of a consultant or lawyer experienced with M & A for accounting firms?

Always keep the end goal in mind

Very few mergers and acquisitions are considered successful if a lot of the acquired firm’s clients and staff are not retained. You may have other important strategic goals in mind as well. We have found that if you keep in mind what will be best for “retaining” what the acquired firm brings to the table, the rest of the business plan will have a good chance of succeeding.


About the Author:

Terrence Putney, CPA (tputney@transitionadvisors.com) is CEO of Transition Advisors, LLC, www.transitionadvisors.com, which exclusively consults on succession and growth strategies for accounting practices nationally and ownership transition. He is also the immediate Past-president of CPA Consultants’ Alliance. Terry can be reached at tputney@transitionadvisors.com or 866-279-8550.