A mergers and acquisitions checklist for firms

Activity has never been greater in the merger and acquisition arena than today.Firms of all sizes are faced with the fact that they must grow to maintain quality people and profits. Growth can come organically or through mergers and acquisitions.

Typically, the first question partners ask focuses on practice values. There are important considerations, such as the quality of the practice, leadership, location, client base, talent and culture, that determine the value of any practice.

From experience, there are three important criteria (other than size) that generally differentiate firms and whether they are acquiring or looking to be acquired. Those criteria are:

* Leadership and governance;

* Succession - buy-in/out and retirement formulas; and,

* Technology.

Since everyone is interested in price, especially those acquired or merged into the larger firm, let's talk about that first.

* There is little or no cash available. Typically, the cash comes out in the form of retirement benefits. There are unusual situations where a firm may acquire a small practice with a cash payout based upon client retention. Value is typically placed at 50 cents to $1 on revenue, although most firms will tell you that they base the value on factors other than revenue. Occasionally, there has been a small deal where the value has been at 1.25 times revenue.

Just remember that terms are as important as price, and much of what you hear in the rumor mill may not be true in the market. Value is determined by several factors. The following are some of the more important components: Talent, location, quality of clients, type of services, firm profitability, firm culture, ownership structure, existing obligations/litigation, vision and strategy, and technology and processes.

Don't expect to get top value for a firm that has partner problems or for a firm where all of the talent wants to retire. Good firms are looking for quality talent and leadership, not the challenge of fixing firm problems.

* Clean up your problems first. Don't expect someone to offer top value for a firm when they must come in and clean up the problems. If you have partner problems, fix them. If your technology is deficient, invest in systems and training. If you don't have future leadership, hire and invest in quality people rather than mediocrity. The firms that are looking for merger candidates can and will solve these problems, but the price may be higher than doing it yourself.

Two strategies that are often forgotten but have significant impact on culture are the use of psychological testing and technology. To heal your firm you must know your people and your culture. Communication is a primary key to the success of any merger. Communication must be consistent and frequent. In order to communicate, you must know your audience and how to communicate with them. People are different and relate differently to various types of communication. Typically, the people putting the mergers together are more entrepreneurial than the other partners and staff. They have also been involved since the inception of the process and may tend to communicate at a high level.

* Develop your team. The majority of people (including partners) in a CPA firm are those who lead instinctively with their ability to find information and put order to that information. They don't tend to act quickly, but are more comfortable with their ability to be thorough. They like to do their own research and have all of the details in order before making a decision.

Another type of person is essential in the "mix" in order for the deal to go through with the most benefit to the firm - the visionary and "big picture" person for the firm.

Someone whose strengths lie in these areas is important to keep the project going forward and not let it get stuck in the research stage for an extended length of time.

This "team" approach is critical to a successful outcome. By knowing who these people are, you can structure a communication program that meets their needs, yet doesn't squelch the deal. The process will take time, especially with many partners on both sides of the deal.

A team-building and communication tool being used today is the Kolbe Index (www.kolbe.com). It is based upon cognitive skills and can be used for many applications in the CPA firm. Everyone has unique abilities, and job satisfaction is directly related to those unique abilities. Synergy is also very important in the development of a growth culture. Synergy is the ability to build a team in which everyone is using their individual strengths and talents to support the overall team. When you build a team in this way, you will be more successful in the M&A market.

* Don't forget technology. Generally, technology is forgotten until too late in the process, and it has a significant impact on culture and the ability to scale in size locally or to multiple locations.

Many managing partners don't see how standards such as e-mail, tax preparation, practice management and audit software can be that big of a deal in a merger. Don't kid yourself: These are cultural issues and everyone who has done a merger will tell you that culture and communication are the most critical factors.

The acquiring firm should have established standards and a well-thought-out technology strategy before acquiring other firms. They should also insist that standards and systems are adopted on Day One. Allowing firms to continue with their existing applications is both dangerous and detrimental to the one-firm approach and culture.

Some refer to this as a "rip and replace" strategy. While it may sound ominous, it is the best strategy. The hardware and software is the inexpensive part. Establishing standards, policies and procedures, and training and adherence are the difficult parts. It requires management and communication time.

In summary, if you want to improve the value of your firm:

1. Deal with existing people problems (partners and staff).

2. Get your agreements and firm documents in order.

3. Develop a three-year strategic plan.

4. Test your people and determine their unique abilities.

5. Improve your leadership, talent and culture.

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