The growth and health of national and big regional firms and the fallout from Sarbanes-Oxley has made mergers upstream increasingly attractive for smaller firms. "There are very few situations where a merger is not a good idea from the viewpoint of the smaller firm," says Marc Rosenberg, president of the consultancy The Rosenberg Associates. Adds Cono Fusco, managing partner of mergers and practice integration in the New York office of Grant Thornton, "The firm that makes the truly strategic decision with a merger can instantly get into a league that otherwise it could 20 years to create." Bruce Bauman and Larry Gray, principals at Misceo, a consulting firm that helps small and medium-size businesses with M&A, stress that getting one's own house in order is among the very first steps, with particular attention to understanding and documenting key operational processes, and the operational culture.

"Merging can be a fabulous way for a firm to improve profits as well as service deliverables to clients, but it also comes with some risk and sleepless nights," adds Allan Koltin, president and CEO of the Chicago-based consultancy PDI Global.

Critical Self-Evaluation

Fusco says that before a firm begins to groom itself as a merger candidate, "they really need to focus on what they're trying to achieve. What's the vision, the goal, what do the partners want their firm to be or be like? If they want their future to be like their present, maybe they don't have to do anything. If they want to serve different clients, different markets, with different skills and services, then that difference requires change."

Marguerite Mount, managing director and principal of The Mercadien Group, cautions that a merger shouldn't be considered to "fix" a problem. Merger partners, she says, look for candidates that enhance existing skills or create synergies, or who offer new opportunities for the merged entity. "If a firm wants to be a good merger candidate they must first perform a solid and honest evaluation, identify strengths and weaknesses, and develop strategies to address problems. The evaluation process can also help identify the right partner."

Bill Hermann, managing partner of the Southfield, Mich., office of Plante & Moran, and George Cumpata, managing partner for Illinois, and former head of Chicago-based Gleeson, Sklar, Sawyers & Cumpata, which merged with P&M last year, say the best way for a firm to position itself as a prime merger candidate is to build, in depth, a specialty niche, "one appealing to your marketplace, and sought after. Then find the best, talented people to bring into your firm at all levels." They also confirm that often the markets and geographic interests of the acquiring firm are major factors in would-be mergers.

"The best thing a firm can do is take care of any major problems it has internally," says Koltin. "Often, this is much easier said than done, and the actual merger is sometimes what's necessary to fix a problem partner or a dysfunctional group of partners. The number one issue is for the majority of the partners to be on board with merging, whether that is with an equal or merger upstream. I find firms significantly down the merger track only to find out that a group of partners hasn't bought into it. When I'm called in to talk to a firm, it's because they have been approached by a larger firm and are evaluating the merits of the deal. More often than not, I have to take a step back and ask the million dollar questions, 'Do you really want to merge and, if so, what are the compelling reasons for doing so?'"

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