Most firms are pursuing mergers either upstream, (i.e., looking for a firm to merge into, usually a larger firm) or looking for mergers as a means to expand their firms. The difference between a merger and an acquisition or sale is generally determined by whether some or all the owners of both firms acquire or retain equity in the combined firm. Normally in an acquisition, the owners of one of the firms do not acquire equity in the combined successor firm. Many mergers are a combination of a merger and an acquisition providing an exit strategy for the senior partners and a long-term growth strategy for the younger ones. The two most common mergers are upstream mergers and mergers for growth.

Upstream Mergers

• Succession. Most often the number one reason firms pursue upstream mergers is that they have partners who are closing in on the end of their careers and are not comfortable that they have a viable internal succession solution. Most of these firms also have younger partners who will remain on for longer periods of time, will not be seeking succession and actually desire growth, but lack the capacity to take over for the partners seeking role reductions and therefore find it easier to achieve this growth and continuity with the support of a larger firm.
• Quality of life. Partners in the firm, especially the managing partners, may think that their daily responsibilities are too burdensome. An upstream merger will allow them to focus on the things in their careers they enjoy doing and less of what they do not. A classic example is a firm wherein the managing or senior partners are tired of the administrative side of their firm and through an upstream merger can relinquish those responsibilities to concentrate more on clients relations and growth.
• Professional and financial growth. Merging into a larger firm often affords the partners an opportunity to improve their long-term prospects.
• Risk management. Larger firms are not as vulnerable to the loss of specific staff or clients and can compete better in the increasingly dynamic marketplace for CPA firms.

Mergers for Growth

The reasons practitioners pursue mergers as a means of growing their firms include:

• Create or strengthen niche areas. The quickest way to open new practice areas is to acquire a firm that already offers those services. A merger can result in acquiring the talent that is necessary to pursue special service offerings or industry segments. An example is a firm that has a substantial amount of high-net worth individuals that merges with one that provides financial services. Another is a practice that has many law firm clients that merges with one that does a lot of litigation support work, valuations, and estate and trust work.
• Enter or strengthen new geographic markets. Access to new clients may require proximity to them. Firms that are growing are increasingly doing so through creating multiple office networks.
• Strengthen internal succession teams. The talent a practice needs to successfully transition its senior partners may be found in a merged-in firm.
• Bigger is often better. Larger operations often have higher income per partner, better brand recognition in the market which leads to more organic growth and can take advantage of cost synergies resulting from a merger. Larger firms can frequently attract qualified staff, a critical objective of many mergers.
• Absorb excess capacity. Although this is a common objective, the long-term benefits of this strategy can be elusive. Mergers are a good way of absorbing excess partner capacity. It might be better to sublease space than merge only to fill up empty offices.

A common reason firms pursue mergers instead of acquisitions is to acquire the partner level talent. An acquisition normally is an exit strategy for the partners who are bought out of their equity. The key thing to consider is the role of the owners of the acquired firm after the deal. If a practice is expecting a long-term role for the partners of a practice it is pursuing, a merger is often a better approach than an acquisition.

More information on mergers: 

• Roles Of Partners, Equity And Compensation Stand Among The Top Considerations When Mergers Serve As Succession Solution. Inside Public Accounting, c2005 
• When Should A Small Practitioner Merge Into A Larger Firm? Small Firm Solutions