Mergers: Experienced Buyers Talk

Marc Rosenberg, CPA / Dec 17, 2018

Two Chicago area MPs recently talked to our roundtable about their experiences merging in smaller firms: Shelly Casella-Dercole, MP of 8-partner Eder Casella in McHenry, IL and Jon Segal, MP of 15-partner Kutchins, Robbins & Diamond in Schaumburg, IL (both Chicago suburbs). Each has completed several mergers and is very active in the merger market.

Why to merge in smaller firms
The MPs said the reasons vary for each merger: (a) acquiring great clients, (b) bringing talented staff on board, (c) obtaining a new service or industry focus, (c) developing exciting new opportunities for our staff, (d) expanding into a new geographic area and (e) building critical mass that provides better opportunities to recruit staff and attract larger clients.

Where to find merger candidates
The usual suspects: Consultants and networking. Segal added: “Sowing seeds is very important. You have to understand that it’s very difficult for sellers to pull the merger trigger. Often times, when they say ‘no,’ they really mean ‘not yet.” Buyers need to be patient.”

Profile of a desirable seller
Our MPs agreed on these traits: The practice should focus more on business clients than 1040s and write-up, though high-end 1040s are perfectly acceptable; firms with talented people will always be a big plus; it must be a win-win-“we don’t want a deal where the seller feels he/she gave up too much.” They also like it when sellers have a wealth management practice.

CPA Firm Mergers: Your Complete Guide, was written because relatively few buyers and sellers have much merger experience, be it up, down or sideways. The book 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 steal ►what larger firms should expect to see from smaller firms & vice versa ►how to negotiate a merger – from both buyer and seller view►14 things the letter of intent should address ►data that should be reviewed ►due diligence and other issues

Deal killers
Here are some big ones: (1) seller is only concerned about money and not so much with the clients and the intangibles; (2) seller has unrealistic expectations such as wanting to be over-compensated or asking for a huge downpayment, the common thread being that the seller fails to understand that the buyer will only do the deal if the cash flow works; (3) sloppy timekeeping by the seller, often indicative that the seller is doing more work for clients than is stated in their records.

State of the merger market
As more and more small firm owners approach retirement age, markets are now flooded with sellers. Adding to this, many markets – including Chicago – have seen a number of eligible buyers get acquired themselves, thereby reducing competition among the remaining buyers. Both of our MP’s said that today’s merger market is “way better than it has ever been.” Message to potential sellers: don’t think that selling your firm as an exit strategy is a slam-dunk.

Merger mistakes 
Our MPs offered two: In one instance, too many of the seller’s owners were brought in as partners by the buyer. At a second, the buyer overlooked some subtle signs during negotiations that the seller wasn’t the most ethical person and failed to act on these instincts.

Common sensitive issues
Sellers frequently want to keep working well after the merger. Both firms said they’re reasonably OK with this, but it must be beneficial for both the firm and the older person. Another common issue: the seller wants to keep doing what he/she has always done – after the merger; this won’t work.

Retaining the seller’s clients
Both MPs have experienced high rates of retention on their deals; losses experienced were on lower end work or with clients who were already unhappy with the seller. Clients are kind of lazy; if they trusted the seller, they will trust him/her to find a good buyer. It’s a headache for clients to change CPAs.

Said Casella-Dercole: “If the gap in billing rates is greater than 20-25%, we won’t do the deal. Both MPs said that if the seller’s rates need to be increased, they do it gradually over time.

Just when the euphoria of finishing the negotiations and doing the celebratory handshake is at hand, the reality of the major next step settles in – integration of the two firms. Many buyers say it can take 3-4 years to fully integrate people, policies, processes, documentation of workpapers and software. Cultural integration can be the most difficult. “Our firm is casual every day. But the people at a recent acquisition wore suits every day. The owner said “all I have is suits,” shared Casella-Dercole.

Advice to sellers:
• Do more than just tax.
• Have strong billing rates; don’t undercharge.
• Have good staff, even if they aren’t partner material.
• Keep track of your time, just like bigger firms do.
• Before negotiating, decide what your “must-haves” are.
• Understand that a successful merger is not just about the money; personality fit is also critical.

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  1. Hal Coons III on December 18, 2018 at 9:31 am

    What about older partners 65 plus 70 plus 75 plus wanting to work until they can’t ? Buzz

    • Marc Rosenberg on December 19, 2018 at 2:05 pm

      Buzz – mandatory retirement is one of the great areas of debate among local CPA firms. Pro is that it provides for succession planning by assuring that older partners step down to let in ambitious younger partners who will leave if the old partners say on forever. The con is that part-owners of their own firm should have the right to work as long as they want, especially if they are making important contributions to the firm’s profitability and success. Mandatory retirement has been hotly debated for 10-15 years and the debate will not end anytime soon. But one way to look at it is this: A partner group must decide what they want to do: have mandatory retirement or not. It’s their right to do whatever they want. And then put it in the partner agreement. This way, there is no debate. The partner agreement is in sync with what the partners want.

  2. Jim Bennett on December 18, 2018 at 5:11 pm

    Hi Marc, good content as always. Your advice to sellers looks like good advice even if you aren’t planning to sell your firm!

    • Marc Rosenberg on December 19, 2018 at 2:06 pm

      80% of all CPA firms eventually merge up. So even if your firm is not thinking of merging up today, they will in the future.

  3. Jim Metzler on January 3, 2019 at 8:48 am

    Like always, great info from Marc.

    • Marc Rosenberg on January 10, 2019 at 11:32 am

      Thanks Jim, especially when it comes from an even greater source – YOU!

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