Art of Accounting: Merging your practice
Mergers take numerous forms. They can be buyouts where the practice continues but the owners leave. The owners can stay as employees and become partners in name only. The firms can merge together and form a new practice with the partners fully engaged.
Merging where there is a full integration and the owners remain can have them become equal or unequal partners. The percentages will depend on many criteria but usually are based on the gross revenues each brings into the new firm. Exceptions can be made where there is a particular expertise, specialization area or brand that one of the new partners has. In addition to ownership percentages, base salary or draws need to be determined. These are usually based on earnings prior to the merger or the relative talent, experience and new business development abilities of the partners. There are many other criteria, but these seem to be typical.
Assuming the merger is an integration of the practices, someone should be designated as the managing partner. Some firms have a committee since not everyone wants to give up “authority.” I’ve seen both situations and variations of them and feel the best way is when there is a sole managing partner. I believe someone needs to run the business. The other partners, or some of them, would become members of a management committee. This can be likened to a board of directors appointing a CEO. When this is not agreed upon beforehand, then the success of the firm is doubtful, and I recommend passing up on the “opportunity,” which becomes more of a “I wish I never did it.”
When a managing partner/CEO is decided upon, the duties and responsibilities need to be determined and under what circumstances the management committee would need to be involved. Further, the client responsibilities of the managing partner need to be spelled out. Where the client load would be reduced, there should be a contract with the partners to compensate for the loss of their client relationships should they be terminated prematurely. Also to be decided would be the frequency of partner meetings and whether there would be an annual retreat.
Merging creates a new firm that should have an aligned culture, vision, mission, processes, work procedures, staff hiring, review, training and development protocols, marketing, client services, profitability and cash flow goals, infrastructure and investment. The partners would also need to agree on a name. Reviews in the form of due diligence should be done of recent clients, largest clients, size and age of the prospect pipeline, accounts receivable and billing work in progress policies, amount and type of professional liability insurance and whether there have been any lawsuits or insurance claims and engagement letter policies.
Without satisfied clients, nothing will work out. The merging partners must be united in the desire to offer responsive client service and need to understand what each feels that entails. This is a must for the success of the new business.
Merging is a major step where independent practices and owners come together with each giving up some of their identity to form a new identity that offers a greater opportunity for growth, a more complete client service, a better work-life balance and added income.
I have seen all of the above and much more. This column provides a checklist of sorts for what needs to be considered before taking the final step of signing the merger and owner’s agreements for the new business. If done right, it can be very exciting and profitable for everyone. Good luck.
Do not hesitate to contact me at email@example.com with your practice management questions.
Edward Mendlowitz, CPA, is partner at WithumSmith+Brown, PC, CPAs. He is on the Accounting Today Top 100 Influential People List. He is the author of 24 books, including “How to Review Tax Returns,” co-written with Andrew D. Mendlowitz, and “Managing Your Tax Season, Third Edition.” Ed also writes a twice-a-week blog addressing issues that clients have at www.partners-network.com along with the Pay-Less-Tax Man blog for Bottom Line. Ed is an adjunct professor in the MBA program at Fairleigh Dickinson University teaching end user applications of financial statements. Art of Accounting is a continuing series where Ed shares autobiographical experiences with tips that he hopes can be adopted by his colleagues. Ed welcomes practice management questions and can be reached at (732) 743-4582 or firstname.lastname@example.org.