CPA Firm Merger Deal-Breakers

My good friend Terry Putney, CEO of Transition Advisors, made a presentation to my Chicago roundtable group and used a term that resonated with me: “Must-Haves.” These are terms, often identified early in the merger process, that buyers and sellers feel they must have to do the deal. Examples are a sale price, downpayment, compensation, a title, etc. The more “must-haves” a firm has, the more likely that there will be no deal.

A similar term that I use is “deal breakers and non-negotiables.” All life is like that fundamental accounting concept, the T-account: decisions are almost always the net of the debits and credits. The decision to choose one merger candidate over another and ultimately, the decision to do the deal or walk away, is the result of analyzing all pros and cons.

I advise all of my merger clients to create a list of deal breakers and non-negotiables, but to keep the list short. After multiple meetings and negotiation sessions with a merger partner, an item you may have thought was non-negotiable is offset by benefits and features the other firm offers.

Here’s a short list of deal breakers and non-negotiables that we regularly encounter:

A big downpayment. Sellers often feel they are entitled to this. It’s a show of faith by the buyer. It’s a form of security in case the deal “blows up.” Financial people understand the present value of money: cash today is worth a lot more than cash tomorrow. But big downpayments increase the buyer’s anxiety. What if the clients don’t stay? How can we keep the deal no worse than cash flow neutral in the initial years if a big downpayment is required?

The actual price of the practice. Buyers need to understand that purchasing a practice at one times fees, or anywhere near that, is a financial steal. Paying a premium for an attractive practice is an investment worth making. Sellers must understand that there are 10 or 15 major factors that go into the ultimate price that is offered. If a seller bargains hard for a shorter payout term or a larger downpayment, that usually causes savvy buyers to adjust the multiple. It’s a trade-off.

A say in management. The smaller firm that merges with one much larger must understand that the surviving firm is going to call the shots. The name of the firm. How the firm is managed. Software used. Allocating partner income These are all the domain of the larger firm. Seller’s efforts to have a say in management are usually a deal-breaker for larger buyers.

Buyer agreeing to hire seller’s staff. This is often one of the key deal-breakers for sellers, and a very valid one. Hiring the seller’s staff is often critical to the seller’s ability to service and retain clients during the first couple of years that clients contemplate the effect of the merger on themselves.

Non-solicitation agreements. It’s common for smaller firms in a merger not to have this covenant in their partner agreements. If sellers won’t agree to refrain from taking clients if they leave and the deal blows up, buyers will walk away from this deal in a heartbeat. This is a valid deal-breaker for the larger, surviving firm.

Unusual privileges of the seller. The smaller firm in a merger, many of whom are sole practitioners, are understandably used to giving themselves certain perks and privileges because, after all, it’s their firm. Examples: Taking in excess of 10 weeks of vacation a year, working from home on Saturdays in the tax season and playing a lot of golf with clients during normal work hours. If sellers feel so strongly about these privileges that they won’t give them up regardless of the buyer’s offer, this is a legitimate deal breaker that should be explored with the buyer very early in the merger process.

Everybody’s talking merger these days – including a great many firms who have never entertained such a notion previously.  Avoid costly mistakes and mismatches by consulting our step by step manual, CPA Firm Mergers: Your Complete Guide.