There are many circumstances that can kill a merger or acquisition. This article will profile basic and advanced mistakes applicable to the CPA profession; however, these deal killing concepts can be applicable to any industry.
One major mistake can be the decision to consider an unsolicited M&A offer. Unexpectedly, a call or letter arrives with details about a firm for sale. It looks good on paper, as they all will, because no one sends a marketing piece that lays out the firm’s problems. Why would you look at this deal? If growth through M&A is part of your strategy, then control the process and don’t depend on brokers to send you firms they randomly find.
Controlling the process is vital. Nothing kills deals more quickly than a flawed start. We see this when firms want to conduct business development. They want to add clients, but fail to identify the type and size they want and then create a non-defined prospect plan. Do not make this mistake when seeking an M&A partner. You need to manage the direction, and if nothing is readily available in your market, be patient. Keep calling. Never do a deal that is not a good fit, even if the price is right.
Determine what you want. Then, construct a plan to go after that type of firm. Now, you can evaluate an unsolicited deal that a broker brings you to see if it fits into your strategy. Be wary though: broker deals typically come with terms you may not be willing to pay. Most want all cash up front, and that is a major deal killer. Never pay all cash up front for a firm – maybe a little cash down-payment to show good faith, but never 100% or a large percentage because you have zero protection or alignment against client runoff.
Other common basic deal killers.
- High numbers of and/or low fee 1040s
- Major rate differences
- Wanting to work beyond firm retirement limits
- Industry or service niches new to the firm
- Real estate
- Cultural differences
Some advanced deal killers. The more unusual a request is, the more potential there is that the request becomes a deal killer for one of the parties.
- “My daughter needs to be guaranteed her job.” You cannot do that. Being asked is a sign of an issue.
- Not Having a Draft LOI. You need lawyers to write the contract, but not until you have a signed draft LOI where both sides agree to core terms, compensation, and a plan. Why hire a lawyer without this done?
- Lawyers: Part 1. Each lawyer will try to protect his/her client by establishing the best position and start changing terms. Once that starts the mistrust comes to the surface.
- Lawyers: Part 2. Using counsel who has not done M&A deals, preferably for at least professional service firms, is a huge mistake. They do not understand the process, terms, etc. and will try to begin to negotiate a deal that has already been agreed upon in the draft LOI to protect their client.
Deal killers go both ways. The buyer or seller/upward merger firm can say things to kill a deal. We have seen both parties propose some irrational things or poorly word a request, which leads to improper interpretation.
To avoid deal killers:
- Use an intermediary. A person who is given changes to review from both the buyer and seller before those changes go to the other party is optimal. We do this often and see interesting requests.
- Ask hard questions early. Do not wait until you invest 20 hours into a deal with a candidate before finding out they want to work until they are 90 or want $6 million dollars in cash up front. Yes, we have heard both of those and many more requests. You never want to kill a deal, but you need to flush out deal killers quickly.
- Identify what a deal killer is for you. One firm may be fine with an 80-year-old partner. Another may be hard lined at 65. Also consider real estate, type of clients, etc. It is okay to be one-sided in your deal killers. Just be clear about them, so you can identify them quickly in the process.
- Reassess your deal killers. Are they ‘preferences’ or hard stops? You might prefer someone to stop working at 65, but if you will accept someone who wants to work to 75, that is not a deal killer.
We welcome the opportunity to talk with you about your ideas. To talk further, please contact Bob Lewis. Bob is the President of The Visionary Group & CPA Growth and can be reached at 800.995.9186 or blewis@ThinkVisionary.com. Visionary provides growth services and customized merger and acquisition searches for the CPA profession.