Merger Best Practices: My Short List

My merger “best practices” list consists of over 100 items.  From that list, here are my favorites.

FOR BOTH BUYERS AND SELLERS

By far the biggest factor in determining the success of a merger is culture and personality fit. Both sides should spend plenty of time getting to know each other and clarifying expectations.

Negotiate with the mindset that you don’t have to do the deal.

Don’t rush through the merger process. Allow enough time for due diligence, and ask all the right questions.

Don’t automatically choose January 1 as the merger effective date. If you do, seller has to deal with the merger, relocation, software conversion/training and…the tax season, all at once. Merge before January 1 or wait until after the tax season.

Avoid de-merger clauses. It could cause one of the firms to pursue merger implementation with less than 100% commitment because they know they can always pull out if they don’t like something.

FOR BUYERS DOING DOWNWARD MERGERS

Be crystal clear regarding how much and how long the seller will be permitted to work. Sellers don’t want to face the reality of retiring and will linger indefinitely if their termination date is not in writing.

When vetting the purchase of a small practice, review their time records carefully. Clarify how much time the seller is really taking to get the work out. Sellers don’t put much effort into timekeeping and often don’t record time they think won’t be billed.

Use the same high standards for bringing in sellers as partners you would use to make someone a partner in your own firm,

If there is a large gap in billing rates between buyer and seller, don’t automatically assume the merger won’t work. Owners of small firms have lower rates because they do a lot of staff level work that they won’t do after the merger. Also, most small firms under-bill their clients, who will pay higher fees as long as they continue to receive great service.

Get non-solicitation agreements from seller’s staff. Their willingness to sign is a good test of whether they will stay or leave and take clients with.

Don’t think you will profit from a merger by lowering overhead expenses. Start-up costs like software conversion and down-time due to merger implementation will offset lower overhead initially.

FOR SELLERS DOING UPWARD MERGERS

It’s understandable that a seller will focus on the financial terms. But intangible factors can be just as important to the success of the merger. Don’t ignore them.

Minimize the number of “must-have” terms. A long list of “must-haves could cause buyers to walk away. These days, buyers have many merger opportunities and they won’t waste time with an unrealistic seller.

Go out on top. The best time to merge up is 5 years or so before you retire. This way, your firm is more attractive to a buyer, clients are 5 years younger, you provide plenty of time for assimilation and client transition, you are freed up from the hassles of administration and…your compensation and buyout will most likely go up.

Don’t hide your “dirty laundry.” These things are much more difficult to deal after the merger than before.

Don’t automatically assume your firm is worth a premium multiple. Most buyers have multiple merger opportunities and will only pay a premium if they think your firm deserves it.