by L. Gary Boomer

Technology is generally not the driving factor in the merger or acquisition of an accounting firm; however, it may be a contributing factor. Firm merger and acquisition activity remains a story, but it has not been as exciting as in the days of the big consolidators.

While there are a number of reasons that firms are involved in M&A activity, there appear to be three key factors that determine whether a firm is an acquirer or a candidate for acquisition. The factors are:

● Technology;

● Governance; and,

● Retirement.

Technology is only a tool, but it is one that most partners are not trained to manage - and often blame for other management deficiencies. Some partners would like to ignore technology, but they can’t in today’s environment. Firms are spending increasing amounts on technology and are forced to provide end-user training in order to ensure a return on their investment, attract quality personnel and retain them.

Technology can be a distinct competitive advantage if properly managed and viewed as a strategic asset. If not properly managed and viewed as overhead, it can be expensive - and a point of significant disagreement among firm owners. Those with the least amount of knowledge tend to have the strongest opinions in this area.

Governance is an issue in many firms as they move from the old partnership to a chief executive form of leadership and management. Firms that have resolved this issue and can make decisions rapidly tend to grow and acquire, while those that still operate under the partnership form often become candidates for acquisition as partners age and retire.

Many firms simply have not developed people to take over the leadership of the firm, and it is difficult to bring outsiders into such a role because the existing partners generally won’t allow the “outsider” to do the job they were hired to do. Partners typically resist standards, policies, procedures and the required discipline to grow and operate as a firm rather than as a group of sole practitioners sharing overhead. Most small firm partners like the freedom and flexibility that is associated with a small firm, even though they desire the increased income that is associated with growth and additional leverage.

Retirement and security are powerful motivators in firms that have unfunded buyout agreements and lack the quality staff to take over the practice and pay off the retiring partners. Another issue plaguing many firms is how the first generation of partners to retire from a firm are often close to the same age.

This compounds the problem and often forces the firm to merge into a larger firm or simply sell to a firm that has the resources to both buy them and service the client base. The solution to this problem is planning and discipline at an earlier age.

These three areas are strategic. They require planning, significant resources and management skills in order for firms to succeed. The firms that have paid the price and have positioned themselves well in these three areas are in a great position to acquire the firms and practices that have not done adequate planning and execution.

It is too easy to get caught up in client service rather than spending time managing the firm. Most firms’ intentions are good; however, the majority of partners in today’s firms have not been trained to plan and manage in these areas. Even if they have the skills, they generally prefer to work in client service where they can maximize income based upon compensation formulas. Firms that ignore these issues will eventually lose staff, clients and income.

There are basic steps that a firm can take to better position itself:

● Elect a chief executive officer/managing partner;

● Develop a strategic plan;

● Develop a technology strategy that supports the firm’s strategic plan;

● Commit the necessary resources (dollars, time, people);

● Hire personnel with the skills to execute the plan;

● Implement a firm learning program for all personnel; and,

● Execute necessary agreements and fund retirement.

Based upon the previous information, is your firm in the acquisition mode or a candidate for acquisition? If your firm has strong governance, adequate retirement benefits and excellent technology, you probably have the culture necessary to win in a merger game. Even with these strengths, mergers are not easy due to the often different cultures. Developing a single culture in merged firms is a difficult task.

In my opinion, the consolidators have proven that it is difficult to profit from acquiring multiple firms and trying to fix problems associated with governance, retirement and technology. Look at the resources invested by the primary consolidators - H&R Block, the parent of RSM McGladrey; CBiz, also known as Century Business Services; and American Express.

Also, look at the resistance that they have encountered. At this point, none of them can be classified as successful models that have solved the governance, retirement and technology issues in a culture where people are highly motivated. There are firms that are successfully merging in smaller offices while maintaining the one-firm culture. Perhaps it is because they are taking smaller bites and giving themselves time to digest the meal.

Caution: Don’t go through all of the merger and acquisition checklists and due diligence forms without evaluating the cultures. Ask yourself, “Can the firms be merged into one culture?” Too often firms are motivated by the details rather than by the obvious.

Register or login for access to this item and much more

All Accounting Today content is archived after seven days.

Community members receive:
  • All recent and archived articles
  • Conference offers and updates
  • A full menu of enewsletter options
  • Web seminars, white papers, ebooks

Don't have an account? Register for Free Unlimited Access