No matter what the reasons for the merger, it is critical that there is all-partner consensus on the decision. This means that there will need to have been a clear strategy from the outset, for embarking on this action.
For Acquirers, the strategic reasons will, amongst others, include:
- Geography: growth through expansion of the firm’s reach into new locations
- Clients: acquisition of new clients which couldn’t be reached without merger
- Skills: expansion of existing, profitable niche services or acquisition of new, potentially complementary, practice areas i.e. extra growth through cross-selling opportunities
- Scale: improved profits from the economies of scale of a larger business
- Succession: enable the business to continue and grow, as existing owners approach retirement
For Sellers many of the above are still relevant, but other drivers often include:
- Lack of profitability
- Insufficient management skills
- Insufficient critical mass
- Partner disputes
Whatever the strategic reason, it is vital that business owners of each merger party recognise and accept whether they are, effectively, a buyer or a seller as there are very few “true” or alchemy mergers. This will have a significant effect on the negotiating stance taken by both sides.
Realised value is always a key factor in any deal and part of the consensus must be the owners agreeing at what level a deal will be acceptable. This of course means a practice valuation which will vary widely for many reasons. Generically, however, practices will be valued on the higher of net assets or an earnings basis. Our experience tells us that unless a practice is offering process-driven services such as personal injury or conveyancing, the valuation will often be based on net assets. With this approach, the biggest issue surrounds the valuation of WIP and accrued income.
Whilst price is important, there will be many other factors that will determine the best merger partner. The most important of these will be the “people fit” and it may be that a lower price is accepted in return for a more harmonious future working relationship.
The fundamental strategic question is “Does the deal enhance Profit per Equity Partner?”
Over any timescale, the exercise has to be worth the effort, stress and cost of going through the process.