Accounting firms have been major players in the M&A market since 2008 and are at the midpoint in a wave of accounting-firm mergers predicted to last 10 years. Accounting M&A activity rose to $6.38 billion in 2010, based on calculations by Accounting News Report. Retirements, gaps in succession planning by smaller firms, competition in regional markets, greater regulatory oversight requiring specialized knowledge, and the need for high-level operational expertise all account for the trend.
The most active players in accounting M&A have also become experts in the merger and acquisition process in general. M&A practice is based on a thorough, systematic fact-finding process and an understanding of business relationships that extends beyond the trust and competencies expected in every business transaction. If anything, an M&A deal is the perfect blend of hard data and soft skills.
The first steps
A concrete internal business plan generally precedes initial conversations about a merger or acquisition with a potential partner. Corporate executives looking to expand their businesses often have possible mergers or acquisitions as key pieces of their strategic plans and timelines. They have identified specific areas of expertise, products, services and geographical locations in their financial goals. They have already determined whether they will finance a deal with cash, bank financing or private equity. Now they need to find the right dance partner and execute the steps in the dance.
The best M&A partner isn’t easy to identify from across the room. The match is for the long term, and the goal is to ensure the continuity of the business and establish a smooth transition for customers, management and employees. And although the financial implications are critical, the merger or acquisition will falter if the cultures of the two businesses are not compatible.
Culture is not always readily apparent, despite the image a company projects. After extensive research, the only way to solidify cultural compatibility is through initial meetings with the potential partner. During these meetings – which include confidentiality agreements at the outset – executives from the two companies should discuss philosophical and practical approaches to their business operations, customer relationships and HR.
When considering whether to join forces with another company, it’s important to exchange tangible information about the following cultural attributes:
- Ethics, honesty and integrity.
- Leadership and management styles.
- Hiring practices.
- Workloads and expectations.
- Advancement policies and procedures.
Most potential M&A partners also exchange financial information early in the process. If the culture and financial picture match, the next step is due diligence. The acquiring partner will most likely conduct a risk analysis that includes a full review of customers, staff expertise, compensation and benefits, hardware and software, background and credit checks, and even psychological profiling of key leaders.
When the deal appears to be imminent, the acquiring partner provides a letter of intent to the other company’s board. This document states all of the key aspects of the deal, including the purchase of the stock or ownership units of the target company and/or the purchase of the target company’s assets. Generally, a stock purchase brings all of the assets and liabilities of the target company with it. An asset purchase allows the acquirer to pick and choose the assets and liabilities.
Key elements of an M&A deal typically include:
- Partner designations.
- Compensation guarantees.
- Assets purchased/liabilities assumed.
- Capital requirements.
- Retirement and death benefits.
- Employment agreements.
- Mutual hold harmless agreements.
- Extended liability or “tail” coverage.
Communication is key
Beyond the formal structure of the deal, it is vital to develop and execute a communications plan involving staff and key customers first, followed immediately by the media and public. Companies that set the stage with a communications strategy are prepared for the response when the curtain goes up on the new partnership.
Once the match is made, let the waltz begin.