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A perfect match: merging your practice. By Rob Lewis

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25th Sep 2007
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This year has seen a string of buy-outs and acquisitions but, as Rob Lewis finds out, the time could finally be ripe for a growth model based on a meeting of minds than a mountain of money.

“If bigness is what it takes to have any say in the accounting profession, why then we’ll concentrate on the first things first,” said Leonard Spacek, a senior partner at the late and not particularly lamented Arthur Andersen. “We’ll get big.”

That was in 1989. To judge from the attention big name mergers have been getting in the press since then, you’d think the merger was a matter for the major players only. Not so. All firms have to make the decision between internal or external growth, and while it can give you some tremendous leverage in terms of international expansion, merging can benefit everyone from the sole practitioner up, whether you’re looking to get on or get out.

Perhaps the real question about accountancy mergers is why they don’t happen more often. Outright sales are a far more common alternative to the long, painful odyssey that is organic growth. The trouble for the go-getters is that it’s a seller’s market. A practice recently sold in Burnlea attracted 55 would-be buyers. One in a village near Wolverhampton attracted 51, and those figures are not abnormal.

“About half of all the smaller firms I visit have had a ‘partnership divorce’ somewhere in their history, and it’s always been a traumatic process.”

Jeremy Kitchins, managing director, APMA.

“Out and out mergers are quite rare, comparatively,” agrees Jeremy Kitchins, managing director at Accountancy Practice Mergers & Acquisitions Brokers (APMA). “They do tend to happen with the larger firms because for the smaller firms it’s very much a matter of personality and those can be difficult to match.”

I never liked him anyway

Once you’ve merged your firm with another and you’ve informed your clients, it can be quite embarrassing when you find out that there are, as the divorce lawyers sometimes say, fundamental incompatibilities. It’s true that de-mergers do take place and not infrequently. There at least as many as domestic divorces.

“I’d say about half of all the smaller firms I visit have had a ‘partnership divorce’ somewhere in their history, and it’s always been a traumatic process,” says Kitchens.

The problem is often to do with why they merged in the first place. Usually, one partner will see the merger as an opportunity to redress their work/life balance, while the other considers it a springboard to future expansion. Sometimes partners have merged in the hope of escaping the administrative burden of running a practice, only to find both of them hate red-tape equally.

Hypothetically, it would work better if one party had defined seniority. However, accountants (especially sole practitioners) didn’t strike out on their own just so they could end up deferring to somebody else, making such relationships hard to find. Where it can work is if one of the partners is very much older and nearing the end of their career.

It is reasonable to assume that many accountants will end up spending more of their lives with their business partner than their spouse, so that’s another incentive for making sure you make the right choice. From then on, it’s a matter of logistics.

Due diligence and debateable dowries

Merging can be complicated but on the upside, it can be cheap. While money often changes hands, the process doesn’t necessarily involve a payment. It’s a common misconception that the ownership of goodwill has to be split in the same ratio as the share of profits, for example. Just guaranteeing an income stream can count for a lot.

Other practical problems include integration issues. Heavy contingent liabilities can be a real obstacle and long office leases on both sides have taken the shine off many a deal. Employment law is another bugbear.

Should you merge?

Reasons include increasing profits, to better structure workforce and establish value-added departments, dilute or shift practice administration, amalgamate offices, and solve succession problems.

Is everything equal?

No. Merged parties don’t always have equal equity or earn equal profits. Adjustments are often made to share the same voting rights.

Who should I approach?

If you don’t already have networking contacts, you can register with an M&A agent or broker to approach firms on your behalf rather than waiting for someone to come along.

Source: APMA

Under the Transfer of Undertakings Employment Protection Act 2006, it is illegal for a firm to make redundancies simply to become more attractive to a buyer. Similarly, the acquiring firm doesn’t have a de facto reason to wield the axe over his new workforce either.

If a merger does necessitate changes of personnel, you should be prepared to mount a full redundancy programme. There has to be staff consultation too; simply presenting them with a fait d’accompli could result in a tribunal hearing for constructive dismissal.

Apart from the obvious areas of investigation, like management accounts and projected fees, client demographics can be another important factor. Quite often, vendors will be near the end of their career and their client base will have matured alongside them, so they may be thinking of winding up too. A wave of retirements and those projected fees could be considerably diminished. Random sampling of the fee ledger should be able to throw up this kind of problem.

Finally, staff contracts need to be inspected and, ideally, include restrictive covenants. Mergers sometimes see unhappy rain-makers up and leave, taking a good chunk of the fee ledger with them.

“I know of one case down in the West Country where the two key employees left after circularising the clients and ended up taking 35% with them,” Kitchins says.

It’s nice when it works

Yet, for all its problems and all the associated work entailed, mergers can work. John Clarke, formerly of John Clarke & Co, Sheffield, merged with fellow accounting firm Wells Richardson this summer.

Clarke started his practice in Sheffield 32 years ago and some of his employees had been with him for almost as long. “Last year, I had gotten to the stage whereby I had an aging population of staff, approaching 60 years of age, and I knew I had to make something happen,” he says. “I do have three qualified staff with me, but there was nobody really that I felt could take over the practice.”

Happily, a golf club contact was the senior partner of Wells Richardson, a larger firm also based in South Yorkshire. After some informal discussions, Clarke made his decision in January. After a letter of intent and a few negotiated amendments to the contract, the two firms merged on July 1st.

Now Clarke and his old workforce benefit from in-house IT support, a wider client offering, and Wells Richardson also has an internal financial services department. The two teams are getting on well, although Clarke says in retrospect, an induction programme would have been a good idea.

The financial incentive was a sum based on gross recurring fees followed by a ratio dependent on those fees paid over a two year period, with a penalty clause in the second year for clients who have left. Despite the postal strike and the Sheffield floods, the merger appears to have gone smoothly.

“The additional support is a big comfort factor,” explains Clarke. “Every day I used to be the first one in and the last one out because it was my baby. Now I can just stroll up to my desk and get on with my work.”

Like Kitchins, Clarke knows of plenty mergers that have failed spectacularly. One of them, also in Sheffield, lasted just one day. Yet despite the long odds, Clarke sees more benefits than pitfalls. “It’s not difficult if you’re of the same mind,” he says.

Further information

APMA can set about finding suitable merging partners either at local, regional or national level. The parties are reviewed, valued and then it assists in setting up the new practice structure.

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