Merger? A Proper Courtship Can Avert a Nasty Divorce
Joanie E. Sompayrac and D. Michael Costello
- What were once the Big Eight accounting firms have merged into
what some call the “Final Four.” Small and mid-level
firms are following suit, and merging at an ever-increasing pace.
As accounting firms seek to increase their client bases, broaden
areas of expertise, and grow geographical presence, mergers afford
many firms the opportunity to make these dreams a reality.
preparation, however, the dreams promised by firm mergers can
quickly turn into nightmares. Being aware of the potential pitfalls
when two or more accounting firms join their operations can go
a long way toward enabling all parties to anticipate and address
problems before they arise.
is each firm seeking? Some of those experienced
in negotiating firm mergers believe that firms do not really “merge.”
They assert that most often, a dominant firm acquires a smaller
firm. In these cases, the acquired firm is looking to expand its
practice in terms of size, clients, or expertise. The dominant
firm may be seeking entry into a market that the acquired firm
could enhance. The acquired firm may be receptive to the advances
of the dominant firm if it is having a difficult time attracting
larger clients. In some cases, smaller firms are interested in
merging or being acquired because the small firm’s partners
seek to spend less time in administration and more time with clients
and client development.
appearances that each firm can benefit from the combination, it
is imperative that each firm find out what the other is seeking
from the union. They may discover that they each desire very different
things. The authors spoke to a partner in a large regional accounting
firm that has acquired and merged with firms in both the Midwest
and the Southeast. He noted that when discussing a potential merger
or acquisition, the answer to the question “What do you
want from this union?” frequently differs depending on the
ages of the other firm’s partners. For example, while virtually
all partners of acquired firms want monetary assurances, older
partners (over 60 years of age) tend to say they want respect,
while younger partners say they want opportunity. The aforementioned
partner asserts that combinations will often fail if the partners
from the acquired firm think they will not secure the respect
or opportunity they seek when joining the new firm.
the firm cultures compatible? When people work together
closely in any office setting, workplace efficiency often requires
that people get along with each other. This includes, in many
cases, sharing similar values and beliefs. Suppose a firm whose
members share conservative family values were to merge with a
firm whose members have hedonistic, materialistic values. Chances
are good that these very different individuals will not work well
together and workplace efficiency will decline.
partner of a large accounting firm that operates in Ohio described
to the authors a merger candidate in a large city in the Southeast
with which his firm had been having merger talks for four years.
He finally discontinued the talks when he spoke with each partner
from the candidate firm and discovered that they never really
functioned as a team. He reasoned that if these “partners”
had not yet found a way to operate as a team, how could they be
expected to adopt the team concept by which his firm operated?
This partner believes that a firm merger is much like a marriage,
so firms should strive to minimize any indicators of failure prior
partner of a midsized firm in the Midwest described to the authors
what happened when her firm merged with another local firm. During
the talks, she expressed concern that the firm with which they
were merging had no female partners. Partners from both sides
of the merger talks continued to assure her that the absence of
female partners in the other firm was not an indication of bias.
Despite her concerns, she went along with the merger. She told
the authors that, within months of the merger, the new firm environment
adopted what she described as a “locker-room mentality,”
and after two years with the new firm, she left. She claims many
of the other women with the firm left with her, taking their clients
with them. When firms ignore these indicators and unite anyway,
they may be setting themselves up for disaster.
the quality of each practice been assessed? As firms
explore the possibility of a merger or acquisition, they should
look at peer review reports, examine workpapers, evaluate employee
educational backgrounds, and assess the firms’ reputations.
Firms should ensure that they are bringing people together who
have similar educational backgrounds, experience, expertise, and
professionalism. Firms should also send questionnaires that ask
basic questions (no confidential information) about software systems,
types of clients, financial measures, firm mission and philosophy,
billing rates, and fee collection policies. The questionnaires
should help each firm identify potential problem areas during
merger negotiations. If, during this assessment period, one firm
finds the other lacking in a key area, then that firm should give
serious thought as to whether the merger should proceed.
covers subsequent malpractice liability claims?
With new people entering the firm, the “acquiring”
firm will need to increase its malpractice liability insurance
coverage. As the managing partner of one Louisiana firm notes,
however, “The firm that no longer exists may later have
malpractice claims against it, and we all have to worry about
who is responsible for those.” The Louisiana partner recommends
that these acquired firms make sure they have some type of reserve
or other coverage in case any subsequent claims arise.
In most states,
successor liability tends to be the exception rather than the
rule. In other words, when one company sells or otherwise transfers
all of its assets to another company, the successor company is
generally not liable for the debts and liabilities of the transferor
company except when—
- the successor
company expressly or implicitly agrees to assume such debts
- the transaction
amounts to a consolidation or merger of the company;
- the purchasing
company is merely a continuation of the selling company; or
- the transaction
is entered into fraudulently in order to escape liability for
help establish who would be liable in situations where the firms
have not contractually defined the parameters of responsibility
prior to the combination.
will all of the employees be incorporated into the new firm?
When multiple firms unite, the uncertainty that it can create
for the employees of each firm involved can create unrest and,
in some cases, substantial turnover. If management anticipates
this issue and addresses employees’ concerns up front, then
much of this unrest can be avoided. The
managing partner of an Ohio firm meets with each new employee
who enters his firm as a result of a merger or acquisition. He
says: “Generally, in a CPA firm merger, all employees will
keep their jobs after the merger. They might have legitimate concerns
about their long-term status with the firm, but they will have
ample opportunities to prove themselves worthy of promotion with
our firm.” He goes on to say that most firms are “as
concerned about keeping people as people are about keeping their
the firm use a noncompete agreement or other provision to prevent
partners from leaving and taking clients? Once a
merger occurs and all parties have made a good-faith effort to
work within the framework of the new firm, some partners may find
they are not happy with the new arrangement. They may perceive
that they are not getting the respect or opportunity they expected
from the merger. In some cases, partners who were less involved
in the merger negotiations may find their share of the pie in
the new firm amounts to less than what they expected. Whatever
the reason, partners will sometimes choose to leave the newly
combined firm after a short period of time and, in many cases,
take clients with them. Because the point of most mergers is to
grow the client base, the departure of a partner who takes clients
raises questions, including: Can the new firm prevent the client
exodus, and if so, how?
In the past,
merged firms have required partners of the new firm to sign noncompete
agreements or agree to pay certain fees to the merged firm if
they take clients away. This practice has been challenged in many
legal cases, such as Peat Marwick Main & Company v. Lawrence
Haass (818 S.W.2d 381 Tx. Sup. Ct. 1991), in which a partner
named Lawrence Haass left Main Hurdman (MH; a predecessor to Peat
Marwick Main & Company) after his firm merged with MH. Haass
had been a partner in a San Antonio, Texas, accounting firm that
merged with MH. Haass’ partners negotiated the merger and,
for the most part, pressured him into going along with the deal.
Haass signed the merger agreement, which included a provision
that “if Haass withdrew from MH and took MH clients with
him that he would compensate MH as provided for in the partnership
agreement.” When the merger became unpleasant for Haass,
he and some other members of the new firm left and started Haass
and Company. It was undisputed that Haass and his fellow employees
planned the new company while they were on MH’s payroll.
Furthermore: “Many MH clients who had been served by Haass
or one of the other departing accountants then became clients
of Haass and Company, some of them almost immediately.”
When MH sued
for damages, arguing that Haass was prohibited from taking clients
without paying compensation for servicing these clients, the Texas
Supreme Court ruled in favor of Haass. The court noted that many
jurisdictions have examined similar issues, and they ruled that
such agreements must be reasonable in their scope or they are
considered to be unlawful restraints of trade. The court held
To be reasonable
an agreement not to compete must satisfy each of three conditions.
First, it must [be] ancillary to an otherwise valid contract,
transaction, or relationship. Second, the restraint created
must not be greater than necessary to protect the promisee’s
legitimate interests such as business goodwill, trade secrets,
or other confidential or proprietary information. Third, the
promisee’s need for the protection given by the agreement
must not be outweighed by either the hardship to the promisor
or any injury likely to the public.
Supreme Court examined the damage clause applied to Haass’
situation and determined that it functioned as a restraint of
trade. The court opined that even if Haass were not restrained
from competing with the merged firm for any reasonable period
of time, the effect of the damage clause would prevent him from
competing with the merged firm. The decision stated: “The
practical and economic reality of such a provision is that it
inhibits competition virtually the same as a covenant not to compete.”
With respect to the enforceability of the damage clause, the court
said it was unreasonable, and thereby unenforceable against Haass,
because its terms were overbroad. The court further noted the
clause was oppressive to Haass and injurious to the public by
limiting its choice of accountants.
types of clients does each firm have? Can they benefit
from the merger? Are there independence issues? Over time, different
firms begin to develop areas of expertise with certain types of
client bases. When firms consider merging, it is very important
that they consider the types of clients each firm has. For example,
will a firm whose client base is largely composed of individual
doctors and medical practices be compatible with a firm whose
clients include the large hospitals in the area? Will all of the
clients believe they are benefiting from the merger? Will there
be independence issues? Most of the time, capabilities will likely
be enhanced, but these issues cannot be ignored during the merger
negotiation process. The impact of the merger on each firm’s
client base must be evaluated and addressed.
other issues might arise? When two or more firms
consider merging, countless issues can arise. Smart negotiators
can attempt to anticipate and address as many as possible. Additional
issues to consider are as follows:
- Are the
firms’ billing rates compatible?
- Can skills
or services that are in demand be added to the new firm?
- Is the
combined firm enhanced?
are the risks of the merger to each firm?
- Can the
risks be mitigated? How?
for a Successful ‘Marriage’
complexities and the risks associated with mergers and acquisitions,
accounting firms are finding that combinations with complementary
firms offer opportunities that are beyond compare. Just as many
fearless couples enter the bonds of marriage every year, many
accounting firms boldly enter the merger arena hoping for a successful
marriage. With proper planning and a firm commitment from everyone
involved, benefits can be maximized while risks are minimized.
here to see Sidebar.
E. Sompayrac, MAcc, CPA, JD, is a UC Foundation Associate
Professor of Accounting of accounting at the University of Tennessee
D. Michael Costello, CPA, ABV, provides consulting
services for Decosimo Corporate Finance and Joseph Decosimo &
Company, LLP, and has testified as an expert witness in U.S. District
Courts and Chancery Courts throughout Tennessee and Georgia.