The Seven Steps to a Merger

or Acquisitionor AcquisitionSeptember 25, 2014

Terrence Putney, CPA

CEO-Transition Advisors

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Upcoming Webinars

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Upcoming Webinars:

October 23 – Admitting Partners and Valuing Equity When Selling to

Partners

November 13 – Roadblocks to Avoid in M&A of Accounting FirmsNovember 13 – Roadblocks to Avoid in M&A of Accounting Firms

December 11 – Mergers: How, Why, When and With Whom

Visit transitionadvisors.com/upcoming-courses.php for more information.

Transition Advisors, LLC

National consulting firm working exclusively with accounting firms on issues related to ownership transition

Reasons Why Firms Merge or Acquire

1. Firms seeking top line

growth thru acquiring more

clients

2. Firms seeking to achieve a 2. Firms seeking to achieve a

different strategic objective• Geographic expansion

• Acquire specialized talent

• Elevate brand

Reasons Why Firms Merge-up or Sell

1. Firms seeking to address

succession for partners

2. Firms seeking to achieve a

different strategic objectivedifferent strategic objective• Expand services to clients

• Hold onto high level clients

• Shed certain responsibilities

3. Solve a problem

Make sure you know why you want to do

this

Find out the reason the other side wants

to do this

Polling Question

How many partners are in your firm?

• 1-2

• 3-8

• 9-20• 9-20

• 21+

The Seven Basic Steps to Every Deal

• Upfront planning

• Identify and contact candidates

• Introductory meetings

• Non-binding memorandum of proposed terms• Non-binding memorandum of proposed terms

• Due diligence

• Contract

• Transition plan

Upfront Planning

Determine your goals

• Think about what kind of firm will help

you achieve those goals

• Think about the type of deal that will

make it happenmake it happen

• Make sure everyone in your firm knows

the goals

Upfront Planning

If you are selling or merging up, decide when to

start-

• Allow enough time for a proper transition of any

partners that will be leaving soonpartners that will be leaving soon

• Acquiring firms don’t like taking on too much

transition too fast

• Consider special circumstances that will take longer-

specialties, smaller markets

Upfront Planning

Be ready to talk about your firmIf selling or merging-up-practice summary

• Types of clients and services

• Rates and level of fees

• People• People

• Leases

• Profitability

• Partner issues-transition timeframe, ownership, compensation, productivity, role

Upfront Planning

Be ready to talk about your firm

If acquiring

• Vision for your firm

• Culture and values

• Partner compensation methods• Partner compensation methods

• Partner buyout methods

• What’s in it for the seller-why you are the best

option

• How you are dealing with your own succession issues

Polling Question

Our current level of interest in M & A is:

• Experienced at M&A and currently looking

• Never done a deal but actively looking for one

• Not sure if we should do a deal-intrigued• Not sure if we should do a deal-intrigued

• Not sure

Identify and Contact Candidates

Decide if you are:

• Going it alone or

• Working with an advisor• Working with an advisor

Identify and Contact Candidates

If going it alone

• Define criteria based on size, services, special

needs

• Develop a database of candidate firms• Develop a database of candidate firms

• Avoid relying on serendipity

• Lose your pre-conceived notions about firms

you know

Identify and Contact Candidates

Contact methods

• Your professional network

• Third party introductions

• Direct contact• Direct contact

• Mass mail seems to be less effective

Introductory Meetings

The issues are:

• How many intro meetings should you have?

• What information should be exchanged in

advance of the meeting?advance of the meeting?

• What should you be discussing?

• Where should the meeting be held?

Introductory Meetings

How many meetings?

Introductory Meetings

Exchanging information in

advance of the meeting

• Trade basic data on both

firms ASAP-no later than after firms ASAP-no later than after

first meeting

• Get an NDA if necessary

• Make sure you are talking to

the right firm

Introductory Meetings

What should be talking about?

• The four C’s

– Culture – Chemistry – Continuity – Capacity

• Goals-what are you and the other party looking for?

• What is in the data you have exchanged you need to know

more about

• What are the operational things you’d like to see

accomplished in a deal?

Introductory Meetings

Make sure at least one meeting is held in each

party’s location

Introductory Meetings

Your introductory meetings should prepare you

for the next step which is to discuss deal terms

in a clear and complete manner

Polling Question

The most important thing in my mind in a M&A

is

• The financial terms

• The cultural fit of the parties• The cultural fit of the parties

• Retention of the acquired clients

Deal Terms

• Should this precede due diligence?

• What should be included in the offer

document?document?

• Should you use a signed LOI?

Deal Terms

Relationship to Due Diligence

• What due diligence should precede the offer?

• What should be performed after?

• What can go wrong doing field due diligence • What can go wrong doing field due diligence

before an offer?

Deal Terms

What to include in the offer document• Describe the general nature of the deal

• Key dates for milestones

• Operational changes-location, staff, leases, etc.

• Compensation of selling owners• Compensation of selling owners

• Treatment of working capital and other assets

• Buyout terms if buying

– Pricing formula, payment terms, tax treatment, client retention

adjustments

• Key components of partner agreement if merging

• Reiterate why this is good for both parties and what objectives will be

accomplished

Deal Terms

Form of offer document

• Formal Letter of Intent

• Informal memorandum or letter

• Pros and cons of both• Pros and cons of both

Due Diligence

What to review in field due diligence

• Operational and Deal Issues

• Professional and Quality issues

• Financial and Legal • Financial and Legal

Due Diligence

Operational and Deal Issues

• How will the terms of the deal protect you or

expose you to risks that will affect the

outcome?outcome?

• What assumptions have you made that need

to be verified?

Due Diligence

Operational and Deal Issues

• Service methodology

• Specific client issues

• Staff-census, benefit programs, employment • Staff-census, benefit programs, employment

agreements

• Equipment, technology

• Other key operational assumptions

Due Diligence

Professional and Quality issues

• Licensing and registration status

• Workpaper review

• Coordination w your QCD• Coordination w your QCD

• Professional liability policies and

claims

Due Diligence

Financial and legal

• Detailed financial information

• Contracts and leases

• Lawsuits• Lawsuits

• Obligations and commitments

Polling Question

In the next five years my firm is likely to:

• Acquire a smaller firm

• Merge with a similar size firm

• Merge into a larger firm• Merge into a larger firm

• Sell

• Not sure

Contracts

• Consulting v asset or a combo

• Assumption of clients-can’t really sell people

• Payments

• Restrictive covenants• Restrictive covenants

• Reps and warranties

• Commitments

• Miscellaneous legal provisions

Contracts

• Keep it as simple as possible

• Agreements can be as short as 10 pages long

• Contracts should not be used to negotiate

business and financial terms business and financial terms

• Watch out for legal advisors that want to re-

negotiate deal terms that have been agreed to

Transition

• Communicate what’s in it for clients and staff

• Emphasize what is to be gained, not lost

• Minimize change

• The five questions every client asksThe five questions every client asks

• Use a script

• Don’t assume anything is a given in the communication

• Create a successor for every client in an acquisition

• Give the transition time to work

Other Thoughts

• General “chemistry” between the parties

• Continuity/Culture of relationships will help retain clients

• Capacity to take over the roles being diminished

• A good deal is a fair deal

• Remember, it’s the package, not the individual variables

•

Suggested Additional Info

The following webinars are available on our website:

www.transitionadvisors.com/archives.php

• How to Value Your Accounting Practice 6/24/14

• Innovative Approaches to M &A Deal Structure

For Firms Seeking to Acquire for Growth 5/15/14For Firms Seeking to Acquire for Growth 5/15/14

• Innovative Approaches to M &A Deal Structure

For Firms Seeking to Merge Up or Sell 5/13/14

• 2014 Accounting Update: What’s In, What’s Out?

A Marketplace Update 7/31/14

For More Information

Please visit our website for resources including

FREE reports, whitepapers and case studies.

Terry PutneyTerry Putney

tputney@transitionadvisors.com

1-866-279-8550

www.TransitionAdvisors.com