Mergers: Potential Pitfalls

Many mergers are pursued for reasons that are not adequately justified including:

• Overhead Reduction. Some firms consider merging for the single purpose of reducing overhead. There may be better ways to use up excess overhead, including getting rid of it. The benefits of overhead reduction are short-lived and will probably not sustain a merger if the combination of the firm cultures does not go as smoothly as hoped.
• Bigger is Not Always Better. There are many advantages to being part of a larger operation. But bigger is not always better. Some clients choose a firm because they like the size. Some partners of smaller firms may find it difficult to accept the stricter accountability often required by a larger firm. If "bigger is better" is the primary objective for a merger, make sure "bigger" helps the partners attain personal, financial, professional, and lifestyle goals without sacrificing clients and staff. Otherwise, some key people will not be retained. A proper transition plan can also alleviate much of the attrition risk.
• Post-Merger Activities Not Matched to Pre-Merger Goals. A firm pursuing a merger to acquire talent should be certain the target has the capability and willingness to execute the intended strategy. Consider, for example a $2 million firm that was targeted for a merger in part because it had two excellent managers with a lot of upside potential. To take advantage of that potential, some of the managers' existing duties would need to be passed down to senior- and junior-level CPAs. However, after the merger, management of the combined operation failed to create the necessary lower level staffing capacity. Furthermore, the managers were not coached on how to make the necessary changes in their duties. The managers soon became frustrated and both left within one year of the merger.
• Speed and Communication. Two of the major reasons why some mergers are not successful are 1) the speed with which the changes are made and 2) the lack of communication. Change is a scary thing for clients, staff and partners. Change is often necessary but wholesale changes enacted immediately post-merger are usually not conducive to client comfort and continuity. Slow and methodical change is more palatable for both clients and staff. Communicating the advantages of changes and instituting them in a time frame that makes sense (although some do need to be accomplished day one) can be critical to the success of your merger.

Joel Sinkin, president of Transition Advisors, has been involved with and consulted on 900+ transaction closings of accounting firms since 1990 and was named one of the Top 100 Most Influential People in Accounting in 2012, 2013, 2014, 2015, 2016, 2017, 2018 and 2019 by Accounting Today. Join us for Joel’s upcoming webinar on Sept.22, 2020, “The 4 W’s of Mergers: Who, Why, When, and What is Success.”