Common M&A Roadblocks Your Firm Can Avoid
Congratulations! You’ve determined that the succession planning solution or growth strategy for your practice lies via a merger and you’ve selected your affiliation partner. Now what?
Most firm owners and partners are confident they can execute a successful deal without too much difficulty, thereby keeping any collateral problems to a minimum. So, when they suddenly encounter a number of unforeseen roadblocks, that smooth path to transition they envisioned suddenly becomes riddled with potential pitfalls and often grinds to a screeching halt. But it doesn’t have to be that way.
If you know what to look for you’ll be prepared to sidestep any threat to the successful closing of your deal. This article will examine a number of common M&A roadblocks and help guide you through them.
Know Why You’re Merging
Mergers occur for a number of reasons – succession, growth, new markets, or to add new client niches. Have a clear and defined reason for your merger. Don’t enter into one of the biggest business decisions you’ll probably make in your lifetime simply because “everyone else is doing it.” Both parties should ask themselves “what does success look like?”
If you have very different goals, it’s better to find out now than at the contract signing. Also don’t fall to the common temptation of merging with a larger firm simply because they’re bigger. Remember, bigger isn’t always better. Better is better.
Poor Due Diligence
When considering any merger, it’s critical to remember the 4Cs, which are critical to any successful deal: chemistry, culture, capacity, and continuity. If, at the first meeting, there doesn’t seem to be any chemistry, then walk away. If you’re not comfortable with them why would you think your clients would be?
With regard to culture, envision what it’s like to be a partner or a client at the firm. What is the working environment? Does everyone appear happy and busy? If not, then again I recommend you look elsewhere.
Also, ensure the merger partner has the capacity to replace you or your partners in the near future if any are seeking a succession solution. If not, then you may actually be doubling any succession issues you have.
Also, have available a financial “schematic” of your firm containing all pertinent operating data and request your merger partner do the same. Our company has been called in after the fact to help unwind a few mergers that collapsed because of incomplete due diligence.
Emotions/Fear of Change
One of the greatest obstacles is fear of change. To many, merging/selling represents the giving up or at least a sharing of control, an increased amount of accountability, and the great unknown if and when everything will fall into place.
Be aware of the fact that many aspects of M&A deals are not based on financial or even professional criteria, but rather the emotional side. Be patient and understand in many cases, emotions may prove to be the toughest roadblock of all.
Sometimes, stakeholders in the seller firm who want to become equity partners in the successor practice don’t have enough equity to become a partner day one. Let’s take the example of a $2 million firm with four equity partners:
Two partners own 80 percent of the firm while the remaining two manage books of business of $200,000 each. They decide to merge with a $10 million firm. Chances are those with the $200,000 will not be admitted to partnership status day one. However, a strategy to circumvent this is to hold them out to the public as a partner but give them an eventual path to equity in the successor firm.
Time kills all deals. It’s as simple as that. Negotiations that trudge along at a glacial pace bring nothing beneficial to the process.
The 14th time someone reads the agreement, for example, the greater the chance of them spotting something that wasn’t there before. Also, when the process becomes protracted, the greater the chance that the staff or, worse yet, the clients learn of it and a panic subsequently ensues.
You may soon have a mass exodus of both staff and clients due to fear of the unknown. Also, you run the risk of your competition finding out and they may begin to entice your clients to jump ship. So, set a timeline beforehand to manage the process in an orderly and, most importantly, efficient fashion.