The M&A Repair Manual: Chapter 3

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Over the course of my career as a CPA firm owner, I have had a few mergers, retirements and de-mergers. 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 -- and from that idea, I introduced my concept of the Accounting Firm M&A Repair Manual for diagnosing and fixing any problems.

The first two articles (“Mergers are fun -- then the real work begins” and “The M&A Repair Manual: Chapter 2”) dealt with common issues and repairs that firms might need to make. Yet, at some point the product is just cannot be repaired anymore, based on age, use, or just obsolesce, and the decision becomes when to dispose of the product.

So the third and final chapter in the repair manual covers when it is okay for partners to discuss and implement a plan to de-merge.

What caused the merged firm to get to this point? It is normally some combination of:

  1. Personality issues;
  2. Silos versus firm-building struggles;
  3. Financial difficulties – or even success; and,
  4. Loss of client control and getting too far away from clients.

In my experience, when partners start thinking about leaving, there really is a difference of opinion and most likely the truth may not come out. However, my first concern is to allow time and openness for the firm to survive and all items to come forward to be dealt with. Before de-merger, hire an outsider to survey partners, get all the issues out, and explore common ground to ensure the firm is not salvageable. The worst thing to go through is years later to re-think all the ways the firm could have survived. Deal with all the issues in an open and explorative process.

The most important part of a de-merger is the client experience. Build a plan around keeping 100 percent of all clients for the surviving firms. De-mergers can be effective and successful when all clients stay within the group, even when partners can no longer work together. De-mergers expose clients to uncertainty and a sense of being with the wrong firm. Here are some steps and considerations:

  • Meet with all staff and inform them of the split up. Let them know that all jobs are protected and ask for their ideas on which firm they wish to move with. Getting all staff comfortable also helps clients feel comfortable.
  • Communicate to all clients and thank them for their business. Share a firm de-merger announcement as agreed by all partners.
  • Ask all clients to provide written confirmation of which partner/firm they elect to stay with.
  • Meet personally with all the “A” clients. Give them a personal positive assurance of the change.

Does it seem odd to allow your clients choose which firm they stay with? I think it makes sense. 95 percent of clients will go exactly where all partners would think they would. However for the other 5 percent, they may like a different partner. It is OK if they select a different partner to follow, and this must be acceptable to all. The most important de-merger goal is that all clients are retained.

The normal separation is based on the current firm surviving and a new firm created by the partner(s) leaving. Here a checklist of things to consider:

  • Create a working de-merger document and discuss all important considerations.
  • Agree to continued use of intellectual property and brand.
  • Your agreement has to include a communication timing plan and communication methods to be employed.
  • Review accounts receivables and allow those to follow the client movement.
  • Employees leaving should be terminated along with benefits and rehired by the new firm.
  • Consider non-solicitation agreements so partners cannot raid each others client lists for two years. Also consider non-defamation agreements.
  • If you have debt, talk to the banker or lender, and develop an allocation agreement. Debt can be split based on annual client fees or partner compensation by group. Since most debt comes from unaffordable partner compensation, consider splitting debt by a three-year average of partner compensation.
  • Agree to your plan and then have it reviewed by an attorney representing each side.

Mergers and de-mergers can be emotional rollercoasters. I have found mergers to be fun and de-mergers to be difficult and more haunting. Yet each time I have felt good decisions were made and all partners, employees, and clients ended up in the right place. The long-term future looks good and I am not driven by complacency, nor normalcy. I like change and change for the best. My goal of building, repairing, and moving on is alive and well.

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