Buyers Beware ~ Merging In Sellers: What You Need To Know
Marc Rosenberg, CPA / Nov 4, 2019
Dramatic changes have swept the CPA firm merger market in the past few years. Due to the avalanche of sellers in the market, as well as the changes in strategic direction many buyers are taking, buyers are being much more selective than in the past. This means that sellers who always thought that their fallback exit strategy was to sell to a larger firm may be in for a rude awakening.
But when buyers do identify an attractive seller, here are several tactics and strategies that should be followed.
- Buyers: Don’t do a deal unless it excites you AND you are convinced that it will make your firm better. If so, you should be reasonably flexible on terms to get the deal done and avoid “deal fatigue.” It should be clear how the merger will make you a better firm, including profitability. If the excitement is lacking, read no further.
- When to do a one-stage vs. two stage deal.If a seller wants out in 2 years or less, do a one-stage deal; start payments right away. Reduction in seller’s comp should help buyers cash flow considerably. If a seller wants to work 4-5 years or more, do a two-stage deal, starting payments when sellers approach retirement age.
- If a seller wants to work many years and purchase payments start right away, the cash flow math won’t work for the buyer. The only way it would work is to give sellers an excessively large salary reduction, which they probably won’t accept. Sellers who want to work for several years look at the purchase price as having two major components: the price for their firm and their compensation during their work years. Over the period of the seller’ tenure at the buyer, the compensation piece is much larger than the sales price of their firm. Buyers must keep this in mind.
- Sellers who want to work for several years should be committed to growing their practice and plan to actively cross-sell buyer’s services. Buyers should be less interested in sellers who simply want the status quo throughout the years they work.
- Stage 2 sellers who have to take a compensation haircut will want to know how they can increase their comp each year, thereby “earning back” their initial pay reduction. The buyer must be prepared to respond to the seller’s concern.
CPA Firm Mergers: Your Complete Guide addresses ►the keys to successful mergers ►the 21 steps in the merger process ►how to assess cultural fit ►benefits of merging upward ►why buying a firm for one times fees is a stea, ►what larger/smaller firms should expect ►how to negotiate a merger – from both buyer and seller view ►14 items the letter of intent should address ►data that should be reviewed, ►due diligence
- Sellers should understand that their jobs cannot be guaranteed throughout the several years they work for the buyer. Good performance is the only guarantee. But it’s reasonable for them to know what they need to do to keep their jobs and what they need to do to perform well in the buyer’s eyes.
- After being their own bosses for 30 years, sellers will want to know what will be expected of them and what will change. They want to know the basis upon which their performance will be evaluated. Sellers aren’t expecting precise guidance on this that will never change. Instead, they merely want to know what the general framework will be.
- Buyers often have mandatory retirement policies, often rooted in succession planning concerns. They reason that if their partners stay around forever, clinging to their client relationships, younger people will leave, client retention will be threatened and the perpetuity of the firm will be in jeopardy. But sellers often want to work well a few years past the buyer’s mandatory retirement age.
Why should buyers treat the seller differently than they treat their own partners?
- In the eyes of a 1-3 partner seller whose partners have been together for decades, the notion of mandatory retirement is unconscionable. Buyers who merge in sellers in their late 50s or early 60s must understand that they have all along planned on working past 65. Buyers’ failure to “bend the rules” on this is a likely dealbreaker for the sellers. Caveat: Buyers should make it clear when the seller will actually retire. Buyers don’t want acquired sellers to work forever.
- Keep in mind the buyer’s owners are equity partners whereas in most cases, the sellers will not be equity partners. Many rules that apply to equity partners don’t always need to apply to non-equity partners.
The merger market is in frenzy, yet few firms have experience with mergers. Our step-by-step guide provides the keys to implementing successful mergers: assessing cultural fit, critical negotiating terms, pricing strategies, due diligence and legal issues.Learn More