Merging Up: The 3 Mental Stages

Merging up or selling your firm is one of the key career milestones a CPA will experience.  You’ve toiled long and hard to build up your firm.  It’s your life’s work. Adding to the anxiety is the element of facing your own mortality.

When people contemplate significant personal or business decisions, it’s common to move through stages mentally.  Merging your firm is no exception.

1^st stab – not sure.  The potential sellers reach a turning point in their late 50s or early 60s such as the expiration of an office lease. That’s when the thought of merging first comes to mind. At this point, it’s common for the seller to seek advice, perhaps from a consultant or a fellow CPA that the seller knows well.  The vast majority of sellers at this stage either consciously or unknowingly put off a merger decision.  It’s too scary.  Mentally, the seller simply is not ready.

The irony is that there is no better time to merge than at this first stage because (1) the firm will command a higher selling price from buyers (younger clients and longer transition period),  (2) the buyer’s management expertise will increase the seller’s income during the 5 years or so he works as an active partner at the buyer before the buyout kicks in and (3) the seller has an enviable negotiating advantage because he can approach the deal with the mindset of “I don’t have to do this deal.”

Danced before-still not ready.  At this stage, the sellers have aged 3-5 years and are in the 63-65 age range.  They decide it’s time to revisit the merger option and meet with one or more firms on an informal basis, maybe even getting a few offers. Nothing comes of it because the sellers still aren’t ready, but at least the seller has now confirmed that buyers are interested, has learned what deal terms might be and has an idea of what life might look like as a member of a larger firm.

When I meet with firms at this stage, a common refrain is “I wish I had met you five years ago.”  I have just shown them (1) how low their billing rates and fees are compared to similar firms and thus, how much money they left on the table and (2) I have shared with them the lucrative deal terms that buyers are willing to offer.  But if they still are not ready to pull the merger trigger, I persuade them to make their firm more attractive for a future sale by raising rates, tightening up their time records, collecting old receivables, upgrading personnel and firing clients that should have been dismissed years ago.

Let’s get this done.  The sellers have gone through the first two stages and are now mentally ready to do a deal.  They are 65 or older and it’s likely that there’s less than a year left on their office lease. While it’s still possible to get good deal terms, at this stage the seller is most vulnerable because (1) the firm needs to do the deal and can’t afford to walk away, (2) the attractiveness of the seller’s firm has diminished from its peak value of 5 years ago and (3) the seller will not participate in any of the improved profits made possible by the buyer’s superior management knowhow.

Learn more about merging your firm up, down or sideways by reading our newest monograph, CPA Firm Mergers: Your Complete Guide.