Accounting Firm M&A: Tips to Head Off Problems

Source: Accounting Today, March 20, 2018 

Mergers involving accounting firms present distinct case-by-case challenges, as well as some shared challenges, according to author Russell Shapiro, who is an M&A lawyer specializing in the accounting profession. He offers some common reasons why deals fall apart along with suggestions for avoiding these pitfalls:

Partner dynamics are critical. This is probably the number one reason why accounting firm mergers run into trouble, according to Shapiro. He emphasizes the importance of addressing any partner-related obstacles early on by getting partners on both sides of the transaction comfortable with each other and with the proposed deal. This process should help identify any dissenting partners who might later pose roadblocks.

On a related note, acquiring firms need to fully understand the rights and requirements of retired partners as well, especially founding partners. Often these partners require that significant retirement or other benefits be paid for deals to work.

Any lawsuits you need to tell me about? Prospective buyers don’t want to risk successor liability, and sellers may not want to give unlimited indemnity to the buying firm. The resulting standoff is often a deal breaker.

The seller’s role in due diligence. The buying firm naturally conducts more extensive due diligence than the selling firm. But selling firms may want to look at three key areas when it comes to prospective buyers: Financial statements, outstanding litigation, and retirement commitments to current partners.

The big reveal. Firms looking to sell often ask when they need to reveal client lists during the M&A process. It depends. When firms are in the same geographical area, sharing this information too early can be problematic. Shapiro suggests either sharing client lists without names, limiting disclosure to a small number of people, or both, depending on the sensitivity of the potential deal.

Merging of equals. When both firms are successful and feel relatively equal in status (even if one is larger), there are simply more issues to work through related to governance; retirement systems; and harmonization of compensation, billing rates, firm names, etc. As a result, completely new partnership agreements are often needed, which can bring added complexity and risks.

What about a ‘de-merger’? Whether Shapiro is representing buyers or sellers, he counsels against including a de-merger clause, which is a provision that allows one or both parties to reverse a transaction if the deal is not proceeding well. Shapiro says the clauses are difficult to negotiate and create “a lot of negative energy.”

The author concludes that accounting firm mergers are ultimately a balancing act. And as important as it is to consider these potential pain points in exploring deals, successful transactions are ultimately the result of mutual flexibility, focus, and diligence.

For the complete article, read “Key considerations and potential pitfalls in accounting firm M&A transactions.”