Mergers FAQ

Many firms across the country that previously declared no interest in merging are now actively engaged in merger discussions with other firms. According to the AICPA 2016 succession survey:

  • 35 percent of the CPA firm owners surveyed by the AICPA will retire by 2020
  • In the next five years, data show that 57.5% of the firms said they would have one-quarter or more of their ownership in transition and 27.8% will have half or more of their ownership in transition

A merger, if planned and executed well, will provide substantial advantage for the merged firms and their respective staff and clients. A merger of any kind – upstream merge, merger of equals, merger for succession, merger for practice development or niche acquisition – requires a significantly different form of investigation and analysis than an acquisition or sale.



  • What is driving the merger mania?
    Merger mania is alive and well in our profession. There are many reasons for the dramatic increase in merger activity in recent years and for the foreseeable future including:
    • Aging of the Baby Boomers
    • Increase in regulations and/or requirements
    • Competition
    • Niche service development or expansion
    • Talent shortages
    • Risk management
    • Succession solutions
    • Quality of life enhancement
    • Practice growth
    • Realization of synergies
    • Strengthen or expand service offerings
    • Geographic expansion
    • Aging of the client base
    • Cross-selling opportunities
    • New client acquisition
    Many firms are using mergers to assist firms who have partners that will seek succession but currently lack the bench strength to fill the void, also to build bench strength, increase their platform of service offerings or to strategically expand their geographic reach. If your firm has just one of the needs or goals mentioned above, a merger should be high on the list of potential solutions. More information on mergers:
  • Why consider a merger?
    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. Upstream Mergers 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:
  • Finding that perfect match
    Regardless of the goal of a merger, first and foremost there must be the right chemistry between the firms. Culture and firm personality must be almost parallel with one another for a merger to work. They must also be able to offer clients and staff reasonable continuity to ensure retention. CULTURE. Culture can include employee benefits, vacation policies, dress codes, IT, recordkeeping, organization and communication. Critical steps include reviewing a firm's employee handbook, work charts or guidelines and also to ask probing questions. EGOS. Egos will play a significant part in the merger process. Egos will have an impact on the name of the new firm, the titles, the order of the names on the letterhead, compensation, office accommodations and, most importantly, control. This is a natural occurrence but the question that must be asked constantly is, "What is the business case for any decision?" If ego can increase billing rates, bring in new business or enhance profitability, great. If it cannot, make a business decision. SYNERGY. Synergy and opportunity must be identified and analyzed. A merger of clones produces mass. Mass does not necessarily translate into growth or higher profit. This is exactly why it is important to understand different is not a bad thing, it is just different! BILLING. Billing rates must be analyzed. Very few firms charge the same hourly or project rate because many firms make internal decisions regarding what services are included in a particular fee rate. Billing rates are important but realization rates even more so. If in fact, two firms do have significantly different billing rates it's important to evaluate what level of staff can perform the work being billed. Often a manager or other level can perform the work previously done by a partner of the merged firm. GOALS. Goals of each firm must be analyzed to ascertain if each will be met. If your firm is merging for purposes of succession and the partners of the other firm are similar in age or just a few years younger, this is a merger that probably will not work well. If a firm is looking to merge for purposes of cross-selling their audit services and the firm being considered does not have clients needing audits, the benefits of the merger may not be fully realized. POLICIES. Policies and procedures must be compared as they contribute to a firm's culture. Firms with vastly different procedures or processes may not match well for purposes of a merger. No firm is a perfect clone of another, so often there will be differences and the need to make changes. The deciding question must be: Will making that change alter the firm's personality or culture? If the answer is yes, then do not go into a merger unless you and your staff are ready to accept this cultural change wholeheartedly! More information on finding a merger partner:
  • Merger agreements and structures
    Structuring the merger starts with knowing your goals. What does success look like? What are we trying to accomplish? Once you establish this foundation, the types of successor firms, and targets for smaller firms and deal structures all seem to fall in line with the right thought processes and guidance from professionals who have been down this road. If your merger means adding partners, then having a strong partnership agreement is key. Working out compensation is rarely the top issue. It is highly unlikely the successor firm does a deal to lose money indefinitely, while the mergee rarely will devote the same time and effort to bring in the same revenues and make less money. Therefore, compensation is only a partial answer. Whereas understanding the roles for both the seller and the successor firms, having clear goals and a strategy to achieve them, and achieving consensus amongst the owners to implement them, are critical keys to merger success. Here are more articles to help point you in the right direction:
  • Potential Pitfalls
    Many mergers are pursued for reasons that are not adequately justified including:
    • Overhead Reduction. Some firms consider merging for the single purpose of reducing overhead. There may be better ways to use up excess overhead, including getting rid of it. The benefits of overhead reductions are short lived and will probably not sustain a merger if the combination of the firm cultures is not going as smoothly as hoped.
    • Bigger is Not Always Better. There are many advantages to being part of a larger operation. But bigger is not always better. Some clients choose a firm because they like the size. Some partners of smaller firms may find it difficult to accept the accountability often required by a larger firm. If "bigger is better" is the primary objective for a merger, make sure "bigger" helps the partners attain personal, financial, professional, and lifestyle goals without sacrificing clients and staff. Otherwise, some key people will not be retained. A proper transition plan can also alleviate much of the attrition risk.
    • Post-Merger Activities Not Matched to Pre-Merger Goals. A firm pursuing a merger to acquire talent should be certain the target has the capability and willingness to execute the intended strategy. An example of this would be the case of a $2 million firm that was targeted for a merger in part because it had two excellent managers with a lot of upside potential. To take advantage of that potential, some of the managers' existing duties would need to be passed down to senior and junior level CPAs. However, after the merger, management of the combined operation failed to create the necessary lower level staffing capacity. Furthermore, the managers were not coached on how to make the necessary changes in their duties. The managers soon became frustrated and both left within one year of the merger.
    • Speed and communication. Two of the major reasons why some mergers are not successful are 1) the speed with which the changes are made and 2) the lack of communication. Change is a scary thing for clients, staff and partners. Change is often necessary but wholesale changes enacted immediately post-merger are usually not conducive to client comfort and continuity. Slow and methodical change is more palatable for both clients and staff. Communicating the advantages of changes and instituting them in a time frame that makes sense (although some do need to be accomplished day one) can be critical to the success of your merger.
    More information on pitfalls of merging:
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