Most firms are pursuing mergers either upstream, (i.e., looking for a firm to merge into) or looking for mergers as a means to expand their firms. The difference between a merger and an acquisition or sale is generally determined on whether some or all the owners of both firms acquire or retain equity in the combined firm. Normally in an acquisition, the owners of one firm do not acquire equity in the combined successor firm. Many mergers are a combination of a merger and an acquisition providing an exit strategy for the senior partners and a long-term growth strategy for the younger ones. The two most common mergers are upstream mergers and mergers for growth.
The common reasons smaller practices look for a larger firm as a merger partner are:
- Succession. Most often the No. 1 reason firms pursue upstream mergers is that they have partners who are nearing retirement and the firm is not comfortable they have a viable internal succession solution. Many of these smaller firms also have younger partners who intend to remain on for longer periods of time. These partners want to grow with the firm but lack the capacity to take over for the partners seeking role reductions. Therefore they often find it easier to grow and sustain continuity via the support of a larger firm.
- Quality of life. Partners in the firm, especially the managing partners, may think that their daily responsibilities are too burdensome. An upstream merger often allows them to focus on the things in their jobs they enjoy doing and less of what they do not. A classic example is a firm wherein the managing or senior partners are tired of overseeing the administration duties and through an upstream merger can relinquish those responsibilities to the successor firm in order to concentrate more on client relations and growth.
- Professional and financial growth. Merging into a larger firm often affords the partners an opportunity to improve their long-term prospects by having deeper bench strength, a larger platform of services to offer and a stronger brand.
- Risk Management. Larger firms are not as vulnerable to the loss of specific staff or clients and can compete better in the increasingly dynamic marketplace for CPA firms.
Mergers for Growth
The reasons practitioners pursue mergers as a means of growing their firms include:
- Create or strengthen niche areas. The quickest way to open new practice areas is to acquire a firm that already offers those services. A merger can result in acquiring the talent that is necessary to pursue special service offerings or industry segments. An example is a firm that has a substantial amount of high-net worth individuals that merges with one that provides financial services. Another is a practice that has many law firm clients that merges with one that does a lot of litigation support work, valuations, and estate and trust work.
- Enter or strengthen new geographic markets. Access to new clients may require proximity to them. Firms that are growing are increasingly doing so through creating multiple office networks.
- Strengthen internal succession teams. The talent a practice needs to successfully transition its senior partners may be found in a merged-in firm.
- Bigger is often better. Larger operations often have higher income per partner, better brand recognition in the market which leads to more organic growth. They can also take advantage of cost synergies resulting from a merger. Larger firms can frequently attract qualified staff, a critical objective of many mergers.
- Absorb excess capacity. If you have excess office capacity, a merger is probably not an optimal strategy to fill the space. Firms will likely spend more waking hours with their new partners than their families. In many cases it’s better to sublease the space
More information on mergers:
- Mergers & Acquisitions of CPA Firms: Understanding the Roadblocks to Successful Deals by Joel Sinkin and Terrence Putney, Journal of Accountancy, c2009
- Mergers Emerge as Dominant Trend by Joel Sinkin and Terrence Putney, Journal of Accountancy, c2013
- Alternative Deal Structures for Succession by Joel Sinkin and Terrence Putney, Journal of Accountancy, c2014