Merger Guidance for CPA Firms: Start Early, Plan Strategically for Long-Term Success

Somewhere between 70%-90% of mergers fail during post-merger integration, according to a report from the Harvard Business Review. Why? Momentum falls, due diligence was poor, synergies didn’t happen, inadequate communication, or maybe an unexpected amount of talent leaves. “It could be some or all those things,” says Allan Koltin, CPA, CGMA, CEO of Koltin Consulting Group.

During and prior to closing a merger, leaders tend to focus on the “event” of the closing itself, neglecting the “what comes next” phase, and that’s a big misstep, according to Dan McMahon, CPA, CMAA, founder and managing partner of Integrated Growth Advisors LLC. “Post-merger integration success is actually rooted in how you begin the merger itself,” he says. McMahon coaches clients to consider the merger as a process covering months, if not years, of time rather than a standalone event. “Treating it as a ‘perpetual process,’ starting before and extending beyond closing, exponentially enhances a successful merger and acquisition (M&A) outcome,” he adds.

Trent Holmes, business broker at Accounting Practice Sales, says post-merger struggles often have their genesis in a mismatch of expectations. “Acquiring companies, especially larger practices with private equity (PE) involvement, are looking for firm partners who are going to stick around. But in the merger, there’s usually at least one firm partner who’s looking to scale back hours or exit,” he says. “These buyers may work with CPAs and have them on staff, but they don’t always understand what CPAs do, nor do they always have the talent and capacity lined up to compensate the owner who’s stepping back. It’s a post-merger challenge that needs to be addressed.”

Post-Merger Planning Strategies

To get ahead of these challenges, there are five key planning strategies CPA firm leaders can leverage to create a smoother post-merger transition from day one.

Start Early

Don’t wait until the deal is closed to start integration planning because it’s only half of the process; the other half is integrating systems, technology, and people. “Let’s not have a shock to the system after the deal closes,” Koltin advises. “Build a foundation early so nobody is caught off guard the first day.”

Ideally, post-merger planning begins simultaneously with merger talks, but McMahon suggests a smooth integration can still occur if planning starts just 90 days prior to closing—a timeline that can often be met with resistance in the accounting and finance space. “Accountants tend to live in the now. They ask why they should plan when they’re not even sure the deal will close,” he says. “There’s not always an understanding of the risks that can take place after closing, so evaluating the risks in advance, and getting a plan in place as early as is practical, can help ensure a smooth integration post-closing. Firms serious about making a successful investment will approach it in a way that’s forward thinking regarding the needs of the surviving entity.”

Develop an Integration Team

Without a team, there may be a mad scramble once the deal closes. “It’s difficult to settle into a rhythm that’ll carry you through the transaction if this effort isn’t approached as a process,” McMahon warns.

To start, form a group of high-level, in-the-know people from each firm to create a game plan and steer the transaction and transition. “This committee can’t be just for show,” McMahon cautions. “It should include people who have impact.”

McMahon recommends that the team determine timelines and continue to add key members as their “need to know” status about privileged information arises.

Communicate Clearly and Often

Change makes people nervous, and with employee and client retention critical to most deals’ success, how and when you communicate will set the tone.

“There’s an old saying: Tell them once, tell them again, and then remind them you told them,” Holmes says. “This applies not only to your employees but also to your clients. All stakeholders like to know what’s going on and to feel respected throughout the process. You don’t want to reveal too much too early, but that doesn’t mean you can’t have a plan in place to roll out as the timing dictates.”

Experts say leadership teams should carefully consider critical messaging and communication to employees, not just to shareholders and customers. Additionally, firm leaders should be consistent when communicating their goals, objectives, changes, and risks associated with the transaction.

Cultures and roles should also be redefined at all levels, and the expectations of both firms’ employees should be clearly communicated—everyone will be wondering what the deal means for them and how, or if, they’ll fit into the new company.

As for clients, don’t kid yourself that they’ll automatically stay. “Your clients are going to be pursued by competitors because everyone assumes there’ll be turmoil after a merger,” McMahon says. “Your revenue needs to be secured through your relationships and post-closing messaging to the marketplace.”

Phone calls, letters, and personal visits all have their place in the communication plan. Holmes recommends organizing client lists by size, and then after the deal is done, meet personally with the largest ones to ensure you’re on the same page.

Carefully Consider Changes

Holmes says it’s natural for there to be changes after a deal is made but suggests too many changes too quickly may cause problems: “We tell buyers to target firms with a similar operational dynamic to their own. A lot of rapid-fire change doesn’t guarantee failure, but it can be a recipe for disaster.”

Debrief

Post-merger learning comes from debriefing. “Ask yourself, ‘Where did we screw up? Where did we cause heartburn?’” Koltin recommends. “We learn from what made the deal more complicated than anticipated or almost not go through. Some people think it’s beneath them to ask these questions, but this is how we continuously improve and transform in integration.”

With Opportunity Comes Profitability and Accountability

A new firm structure brings news ways of making decisions, especially in PE deals.

“PE deals provide the capital for accounting firms to go out and buy the best in class,” Koltin says. “They’re making better and deeper investments, and because of that, firms are reaping the rewards of greater profitability.”

Koltin says changes after a PE deal will be felt most keenly at the partner level, and PE culture means more accountability for partners who might have had more autonomy in the past: “Goals are set, and partners are expected to meet those goals.”

PE also brings a change in expectations and culture with more accountability for actions and a lot of new opportunities for personal growth. “If you want to make a lot of money, go out and perform,” Koltin says. “If you want to try something new, be prepared to explain the return on the investment. You’re setting goals, getting coached, being held accountable, and getting paid for how well you perform. That’s going to be a little bit of a shock to some, but not all, firms. There will be greater scrutiny on every dollar.”

Overall, Koltin says PE firms bring a greater focus on profitability and growth to the accounting firms they’re investing in. “At the end of the day, the firms that perform at a high level are the ones where the culture is focused on profitable growth of revenue and talent. You need one to feed the other. They go hand in hand.”

Koltin sees chief financial officers (CFOs) having a big post-merger wake-up call, especially after a PE deal. “Leadership is looking for a much more proactive CFO. The CFO is expected and challenged to talk at a much deeper level about performance and trends and then provide recommendations for improvement.”

Staff Are Key to Post-Merger Success

McMahon says staff also have an important role in the merger process. In accounting firm mergers specifically, the people factor is crucial. “People drive the revenues and client relationships,” McMahon says. “Firm leaders should pay critical attention to the retention of their people and clients. The selling firm especially needs to ensure their people are going to stay—if the people stay, the revenue stays.”

Making the Deal Work

McMahon recommends that sellers explore engaging an M&A firm that can help ensure a proven process is followed.

Holmes says it takes both parties in a merger to play fair and set guidelines on what the roles of each will be going forward: “It’s about both working together if they really want this deal to run smoothly. It takes active communication to get everyone on the same page when you transition.”

Koltin emphasizes that every deal is unique: “We can’t try to fit a round peg into a square hole, so it’s important to ask what’s the best integration plan for each specific firm. What matters to them? What matters to us? Let’s pretend to be married before this deal is even done.”

Additionally, Koltin says there’s a stereotype that PE firms care only about making money. “Just like there are great, good, and not so good accounting firms, it’s the same in the PE world,” he points out. “If you’re going to partner with someone, focus less on the economics and a lot more on the culture and strategic fit.”

In the end, Koltin says that on the day you close and the wire clears, what’s most important is having long-term alignment on what you’re looking to build together as one new, promising entity.

Related Content:

• Eyes on the Prize: M&As, Leadership Changes Present Growth Opportunities: Merger and acquisition (M&A) activity among CPA firms has been on a wild run over the past few years. While these deals are often great for leaders at the top, what about the rest? Experienced M&A leaders offer suggestions on how staff can use these transitional changes to their advantage.
• The Hand of Private Equity in Accounting Firms: Private equity is reaching into the accounting world, but why—and what’s the trade-off for CPA firms?