If we follow all the instructions to build a larger firm based on a plan and it does not work right after the merger, then we need to think about how we can fix it — we need a repair manual.
Over the course of my career as a CPA firm owner, I have had a few mergers, retirements and de-mergers, and in an earlier article (“
Another one of the chapters in my repair manual for accounting firm mergers would be called, “Firm Goals, Cash Flow, and Capital.”
During the merger talks, I hope all the partners had the opportunity to discuss goals and build some strategies to achieve those. Better yet, I hope they documented those ideas and agreements for future use. I find the initial letter of intent is a great place to list and review the true goals of the merger and offer insight after the merger.
Now the firm is in full operation. Life is busy, clients need services, and the merging of ideas and work methods continues. We need to review and deal with several issues that continue to come up and need to be addressed. Oftentimes, stress begins to set in and a quick review of the source can be found in cash flow, longer engagement completion times, and inconsistent engagement documentation, and the even-larger future issue of equity and ownership.
Goals are important. We may need several different types of goals; we need partner goals and firm goals. These may not be the same, but they will overlap. The partner group is made up of partners and maybe the managers. The firm goals need to encompass the entire firm and every firm member. There should be relatively few of them, and each goal needs a finite time to complete so that the firm can develop and move on to other developing future important goals and strategies. The timeframe should include measures to pull teams of people together to accomplish strategies — think about meeting and feedback timelines.
Partners need goals
Issue: After the merger, partners need to get focused on achieving goals and implementing new strategies. They must develop new opportunities, plan budgets and cash flow, and deal with new partner development and retirements. But many firms find that clients demand so much of their time that they lose a sense of goal priorities and achievement.
Checklist:
- Set up a partner calendar with meeting dates and retreats.
- Develop a purpose for each meeting.
- Review the goals and strategies with constant attention to prioritization. All goals need to be accomplished; however, focus on accomplishing the most important ones.
- Set an annual meeting for two days and go as far from the office as you can. This will allow the opportunity to reset the mind and stay focused on the retreat.
- Take out the merger goals and review them to see what is going in the wrong direction.
- Start with a personal insightful exercise so all partners learn a little more about each other.
- Build the retreat around developing strong relationships and plan a fun event.
- Tackle a new goal important for the upcoming year, setting steps and an implementation schedule
- Establish goals for three years out and develop a plan on reviewing and implementing each step.
- Spread the work and assign a partner to each goal, keeping all partners focused on goal achievement.
- Allocate a budget for partner compensation for meeting the goals.
Firms need goals
Issue: When we merge, we are working together with new people, great new ideas can occur. Old ideas are hit with new ideas and what worked before no longer works. But newly combined firms may find they don’t have the time for new ideas to be fully thought-out and explored, or for employee groups to explore new ideas.
Checklist:
- Conduct a complete firm retreat. Close the office and get everyone there.
- Start with a survey two weeks before to get staff thinking about the new firm and how the merger is going.
- Get diversified teams of employees working together on assigned goals, allowing time to meet, create and resolve goals.
- Make sure that partners, managers and other staff members are creating positive work experiences around goal-setting and development
- Share some of the partner goals that affect the entire firm. Review financial performance to the extent all partners are comfortable – especially changes in year to year.
Goal fear
Issue: After the merger, partners have agreed to so many goals and strategies that none of them get accomplished. Maybe 40 percent of all of them have a little movement – but no goal has the sense of accomplishment! No one is yelling, “Yay, team!” There is no sense of agreement on priorities and goal fear is setting in.
Checklist:
- Choose three goals. Provide for times and commitments so that over a year all goals can be completed.
- Prioritize goals and get the most important ones done first.
- Schedule short weekly meetings to assess completion and set tasks for the next week. Keep weekly strategies simple and move the plan forward.
- Consider an early morning coffee to meet each week.
- Assign an independent party to push the teams to move the goal forward – this could be the managing partner or an outside board of advisers/directors.
Cash flow
Issue: Immediately after mergers, cash flows drop. The task of merging has changed cash flows and there is a combination of higher immediate expenses, converting billing and AR systems, initial client projects dragging out and taking longer due to system conversions and new staff learning new procedures.
Checklist:
- Develop and follow a cash plan and budget. Review seasonal deficiencies.
- Do not wait to lay off excess staff — better to reduce staff count and save money sooner than later.
- Plan a visit with your banker to expand your seasonal line of credit. Most short-term borrowings are just related to timing issues of the merger.
- Hold off partner pay increases until the merger expense and client transitions are done.
- Review procedures to make sure client projects are getting out the door and invoices are sent timely.
- Develop new procedures to collect fees up front and bill large projects quarterly.
- Develop pricing models that price out engagement value, not just time — payable monthly or quarterly.
- Form a team to review work product procedures with a goal of shortening the time from when a project comes in the office to the day the cash is received by the office.
- Have administrative staff follow up with clients on aging invoices, as partners should not be tasked with this job.
- Never pay out more than 10 percent to 15 percent of firm profits to retiring partners. Notify them if cash flow is restricted.
Current partner agreement & capital
Issue: Like many small-firm mergers, the combination was completed with no partner agreements or legal operating structure. Voting rights, firm ownership, and partner retirements, replacements, additions and terminations weren’t discussed and documented while all partners still liked each other. With no agreement, some partners are talking about leaving and taking clients, while others are acting outside of authority. Partners do not understand firm capital, ownership, and how partners should operate the firm together in unison.
Checklist:
- If you do not have a partner agreement, make it a priority to complete.
- If you have a partner agreement, review it with partners and your attorney to update it for the current firm needs.
- Understand and document how your firm currently defines capital and who owns it, along with who owns voting control and the percentages of voting and how majority voting works.
- Discuss among the partner group how a new partner buys in.
- Discuss among the partner group how a retiring partner gets paid out.
- Review the current market of partner buy-ins and retirements — it might be noted that lower buy-ins are occurring – and that is lowering partner retirement payouts.
- Develop ideas on how the value of the firm gets handed down — what is the current value and how would the existing partner group calculate its value.
Future partners and capital ownership
Issue: Firms in mergers and transitions need to think about the firm 20 years out. Most small-firm mergers deal with the older generation looking to get out and sell. The new firms don’t want to get in that circumstance — they want to plan the future transition now. Firms in motion do not prepare enough for the future as an independent firm to fend off the necessity for merging up. They want to build in ease of transition and adding partners. I have also witnessed client stress over aging partners not talking about their future with the firm.
Checklist:
- Have a retreat to discuss future partner transitions and timing.
- Plan a 20-year future as the firm operating independently with partners coming and going and a commitment to client development and loyalty.
- Work on a plan to transition ownership to future partners calculated by giving them equal interest in the growth of the firm in ownership type units. Several transition advisors reference growth units as a way to transition overall firm ownership.
- Meet occasionally with the selected individuals that you want as future partners. Bring them into the plan and get their feedback to merge their ideas.
- Review how the transition affects individual partners’ income tax issues.
- Work on a document that explains your plan in simple terms so all staff can see how the firm transition will work.
- Communicate the plan to key clients so they see how they fit into the future and transition relationship early.
- Revise voting interest and ownership interests to reflect new equity calculations based on new methods — not just on client book ownership.
- Keep the plan fair and simple.
