As couples prepare to marry, pre-planning for a divorce is traditionally not part of the process. Newlyweds looking forward to this next chapter of their lives optimistically try and abide by the marital vow “till death do us part.”
Sadly, in some cases things begin to sour as suspect personality traits that were absent during the dating phase surface and arguments flare up with alarming regularity over everything from finances to meal menus. Then, after a while, both realize that it’s time to unwind their personal “merger.”
The same scenario can sometimes apply to newly affiliated CPA firms.
During the negotiation stage, both the buyer and seller firms usually have their respective focus squarely on the synergies that would be created as a result of the union, i.e. more cross-selling opportunities, a larger platform of services, and of course, mutual growth.
But not long after the ink on the contract is dry, things can unravel, and quickly. One of the many danger signs of a potentially failing merger is when one or more of the seller partners can be heard saying, “We didn’t agree to that,” in response to a mandate of the integration process. Or some of the older partners become resistant to begin transitioning their books of business to the successor firm.
Unless something is done to correct the situation, the merger — like the marriage scenario described above — is in danger of falling apart. That’s when a de-merger agreement can become a critical part of the overall planning process.
Much like a pre-nuptial clause, a de-merger agreement can protect both firms in cases of “irreconcilable differences.”
While some critics of de-mergers correctly point out that for as long as the agreement remains in place (usually no more than two years), both firms will not be fully committed to the affiliation. Others will cite the dangers of not having one.
Why You Need a De-Merger Agreement: A Case Study
Recently, we were retained to help resolve a merger between a $2 million firm and a $9 million firm. On the surface the combination of the two presented an opportunity for growth and cross-selling synergies but things had spiraled downward barely six months into the union. Cultural differences and internal strife had emerged, and, failing to reach a compromise, each firm agreed to call it quits.
However, there was no de-merger agreement in place at the time of the official signing, and the situation rapidly went from bad to worse.
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