Small and Medium Size Firm Mergers

Source: The CPA Journal

Mergers and acquisitions are increasingly popular because of the shortage of people, but there are other benefits.

The smaller firm being merged in should have fewer equity partners than the acquiring firm, and the fees being absorbed should be around one-third of the combined fees. The goal should be to achieve enough scale economies to permit all partners to increase their books of business. More income will be generated if clients of the smaller firm are turned over to the partners of the larger firm with higher billing rates.

It is possible for a smaller firm to acquire a larger firm. If the larger firm is less profitable because its partners control smaller books of business, profits will increase if the larger firm adopts the more efficient model of the smaller firm.

If the partners of a smaller merged-in firm are retiring, its younger partners and staff may be not only a significant resource for the combined firm, but a source of successor management.

When the acquired firm has overpaid partners or staff with longevity, profits can be increased by retiring them.

Although partners in the smaller firm may relinquish autonomy and importance, this may be offset by the opportunity for higher income, more security, and more opportunity. Higher income can result from: 

• Spreading the cost of technology
• Higher level talent
• Cross-selling opportunities
• Synergies
  • Staffs that complement each other
  • Elimination of high paid staff/partners
  • Acquisition of expertise
  • Possible leveling of peak seasons

From The CPA Journal, November 2005. For the complete article, click on the following link: http://www.nysscpa.org/cpajournal/2005/1105/essentials/p66.htm.