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Mergers: The questions to be answered

14th Dec 2009
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Jeremy Kitchin outlines the key considerations for firms considering undergoing a merger.

Most accounting firms never do more than one merger in their lifetime, so it's not unusual for the merger to fail. The following checklist will help partners/directors with their review before merging with or acquiring another firm. All of them should be considered before you start down the merger path. Know what your non-negotiable items are and stick with them. It’s also vital to pinpoint your primary reason for entering into a merger – is it to acquire talent? Increase profits? Expand services? Or expand geographic coverage?

Financial considerations
How will this merger help you achieve your strategic vision? You need to give careful consideration to this question. If you can’t answer it, there is no reason for the merger.

  • Strong leadership skills are essential - once you have merged your firm, the larger practice will need a good and effective leader. This is not the same as a good manager. If you yourself are not a good leader, then one should be found at the outset. If the other firm’s managing partner is not the right leader then by merging the two firms you are putting together a recipe for a disaster.
  • Where is the new enlarged firm going to put down its roots? Is there the physical space in your offices or the other firm’s offices? If not, you must consider moving to bigger premises. Does either firm have a heavy contingent liability in the lease? That alone can take the financial gloss off the deal.
  • How will you integrate the new people with your existing staff? What is the name of the new firm? This is the number one deal breaker for many mergers. Make sure this is discussed at the very beginning of the process.
  • Have you and your opposite number agreed on which of you will lead the firm? Power sharing does not normally work.
  • Will there be an executive committee? Who will be on it? What are the terms? What powers will it have?
  • How will the firm be structured (departments, teams, etc)?
  • How will the ownership of the goodwill (or shares) be addressed? You must make sure that all parties understand the ownership structure. Be sure to pay particular attention to whether the new firm’s system motivates all the owners of the new business, both now and in the future.
  • Is one of your firms more profitable than the other? How does that impact upon profit shares? How will this issue be addressed within the new larger firm?
  • Will the larger firm be more profitable in the short- and medium- term? Frequently the first year represents a drain on earnings. Productivity usually falls while everyone gets used to the new systems and responsibilities – so be prepared for this and consider and appropriate counter-measures.
  • Will the owners of the merged practice be required to increase their capital contributions? Make sure all the owners understand the funding philosophy and are in agreement with any impact on their earnings.
  • It is important that you inform all employees of the merger in a timely manner. Have you considered how this will be done? Once rumours of the merger leak it will have an impact on morale. You need to communicate with key personnel as soon as possible. Pay particular attention to the key personnel who you want to hold onto and take them into your confidence as soon as possible.
  • How will employee issues be addressed? There will always be some discrepancies when it comes to salaries and benefits between the two firms. Other than the financial aspect, the main concern that every individual has is ‘how will this merger affect me?’ One way to hold on to people is to offer them a ‘stay bonus’. This is a bonus that is paid at the end of the first year.
  • Have you developed a forecast to show the effects of the merger over a 12 month and 36 month period? Whatever you think the first year's results will look like, take the most conservative projection. Savings that you thought were there will disappear or take longer to materialize.
  • Finally, are there any deal breakers? While a deal breaker can pop up at any time, it's best to keep asking the other party if they see any deal breakers. You need to get them out as soon as possible because, as the name implies, a deal breaker does exactly that.

Human considerations
In order to make sure your merger has a better than average chance of succeeding, here are some key items to get you thinking and which you should be concerned about:

  • Has a merger team with senior leaders and staff from each firm been created?
  • Have the senior leaders agreed how the new firm will operate?
  • How will you receive feedback on what is and is not working?
  • Have you got a system for monitoring the morale amongst both sets of employees?
  • Have you identified which groups or departments in the new firm will feel ignored or even threatened by the merger? Have you considered how you will address their concerns?
  • When employees have questions about the merger, is there someone or a team to whom they can go for answers?
  • Do you have a facility in place for ensuring consistent information is distributed about the merger to head off rumours?
  • How will you deal with those employees (new and existing) who are negative about the merger? You will need to set and define the limits clearly. Act quickly so any negativity does not spread.
  • Merging your firms will create a new entity resulting in both firms losing some things. How will you reassure your employees? Can you offer a replacement for what is lost?
  • Productivity usually decreases after a merger. What will you do to make sure that it does not spiral out of control?
  • New and/or existing partners may try to make power plays or protect their ivory towers. How will you handle these events?
  • Some of your employees may have to be made redundant. Have you got a procedure in place which complies with current employment law?
  • Key staff that you want to retain may decide to leave. How will you communicate your intentions to these important members? You don't want to lose key people because you haven't told them how critical they are to the future of the firm.
  • What new training will be required? You will need to make sure that everyone is following the same procedures and policies.
  • Benchmark employee attitudes soon after the merger and then again at the end of the first 12 months. This will tell you what still needs to be worked on.
  • Have you clearly articulated the new firm's mission and communicated it to the firm?
  • What are the key strategic opportunities that need to be addressed during the first 12 months? Develop specific objectives in order to implement these strategies.
  • What systems will you need to change in order to integrate the two practices so that they are using the same procedures as each other? Take the best of the best from each firm.
  • What hourly information should obtained and given to the partners/staff?
  • What type of internal and external communication systems should be developed?
  • What will be your procedure for resolving internal conflicts?
  • How do the two client bases fit together? If you have niche markets make sure that the appropriate members of staff from both firms are reviewed with a view to servicing those markets using your best talent.
  • Are there new products/services that should be developed right away to service your niches?

The human implications of undertaking a merger are just as important as the financial implications. It is vital that the impact upon your employees and colleagues is carefully considered before embarking upon a merger. The spectre of a merger is enough to send a chill down the spines of most employees – with good reason. Mergers always carry a risk of redundancies: On average 10 – 15% of employees across both organisations lose their jobs in commercial mergers, sometimes as many as a third. Even those who keep their jobs are likely to be fearful of the change to the status quo.

Jeremy Kitchin has over 30 years' experience as a leading expert in the field of accountancy practice mergers and acquisitions, consolidation and the valuation of goodwill. His firm, APMA, was instrumental in the creation of Vantis plc in 2002. (With thanks to August Aquila).
 

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