Here is What You Don’t Know About Firm M&As

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Face it, sooner or later you are going to either sell your practice or pass the keys on to someone who, hopefully, you trust. The reality is most of you don’t have a real plan for this.

The idea of selling or merging in with another firm is stressful, it’s a wonder so many don’t really know what to expect or how to plan for this type of succession.

In addition to running his own CPA practice, Chris Frederiksen has also advised on and assisted more than 300 M&A deals in his career. He will be speaking on best practices on transitioning your practice, be it M&A or passing on ownership, in a session entitled “Transitioning Your Practice – Buy, Sell, Merge or Stay” at the upcoming OfficeTools Accelerate conference in June.

Frederiksen had started at a small firm and ultimately grew a large enough firm to have been bought by what would eventually become one of the Big Four. He is engaged in more merger deals these days, helps write the agreements, and does what internal restructuring is needed to make the deal go well.

We recently spoke with Chris about what exactly can go wrong in a merger deal or sale – potential or otherwise – and what to expect when making such plans for your practice.

AW: What is the most common mistake firm owners make during (and possibly after) a merger/purchase event?

Frederiksen: If you are talking sellers, there’s the “mergor” and “mergee.” It’s rare that it’s equal. Usually for less dominant players, they focus on the wrong things. They focus on money and what the multiple is, whereas the real issue in a merger is all about culture and chemistry.

When you focus on culture, it has to be similar. If not, the deal will blow up on you. Also, do you genuinely “like” these people? If that’s not the case, the deal will blow up. If you have that [good culture], you can always work out the economics.

If the culture doesn’t work, that can’t be fixed. With a seller, they can make the mistake of trying to get paid up front. Any deal of any size doesn’t get done that way. In fact, the seller will always do better when they take a percentage of collections over time.

Also, the seller needs to stick around for at least 18 months after a deal closes. If they want to leave right away or the buyer wants them to go away right away, you won’t get the most desirable outcome.

AW: In the same right, how do you advise the above scenario(s) be avoided?

Frederiksen: If you’re being acquired, you better be up for doing things in the way the acquirer is up for doing it. Be flexible. When I work with firms, once I introduce them, if they haven’t found each other, they come to me and say they want to merge or be acquired.

We look for firms that want to merge upstream or want to be acquired. We get them in a neutral environment and ask them to have one lunch. Don’t talk deal points or money; talk practice, talk history, talk about the why of what you do.

The next step is if they do like each other, I try to make sure each partner in the firm goes one-on-one with the other partners in the other firm to get the individual relationships established.

AW: Many small firms still operate under the idea that their exit strategy is they’​ll be bought one day. What do you advise?

Frederiksen: I’ve done about 300 of these [M&A deals], and the reality is most firms will indeed be bought at some point. The exception is where we have family members involved, where you’ll have an intrafamily transition. The reason they work well is the family trust, in general.

If there’s an internal transaction with an employee or partner, you won’t usually get as much money. Someone who has been there a long time won’t pay as much; they can always walk out and start their own firm.

If someone wants to sell and is getting on in years, I advise them to be looking to sell out somewhere around three years before they want to completely step away [from the business]. You need to transition your client base intelligibly.

At a minimum, be there through a couple of tax seasons. One thing in the profession today that is different than it used to be is that there is far less face-to-face with clients. You want enough time to be able to introduce the buyer to them.

AW: What are the top considerations for a firm that is looking to merge in with or purchase another? Please explain.

Frederiksen: If you’re a buyer, ask “do I like the seller?” “Am I going to be able to work with them over a time period where they need to stick around?” “Will they be willing to turn their client base over?”

We can get a deal done, but often times firms will get possessive about their client base. Also, I look at what staff I will get and can hang onto. How do they interface with clients, and is it the same as me?

As a seller, I have to look and say “am I going to get paid?” “Am I confident the buyer will devote sufficient resources to make sure my clients are looked after?” I had a situation where that didn’t happen and clients were lost.

Also, you need to look to see if the location of the buyer is suitable. Will it make a difference? I’d also look at the technology they use. If you need to be on the same tax program, it’s often a huge issue.

If you move staff or clients [onto a program] too quickly, that can be a problem if they’re on different programs. At least run one season on two systems, then use the summer and fall to move over to one, agreed-upon system.

Due diligence usually isn’t that big of a deal if you know what you want to do. Agree on a name and who is in charge, too. If you can’t get past those, you’re wasting your time.

About Seth Fineberg


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