Could an M&A be right for your firm?

By Jenny Chua Yu Chin

Mergers and acquisitions (M&As) have emerged as a popular business tactic for growing the bottom line, for enlarging markets, and for branding purposes.

Within the profession, it’s a popular growth strategy for accounting firms looking to build their practice and clientele. In addition, M&As among small and medium-sized accounting practices (SMPs) have become a viable succession planning strategy for practitioners looking towards retirement.

Six ingredients for success

Six ingredients have been identified as essential in formulating an M&A proposal in the business world: the timing for a compelling business case, the strategic fit, the financial fit, the leadership fit, the cultural fit and the people fit. These six ingredients are useful as well for accounting firms in considering a potential M&A.

The Timing Fit

For M&As among accounting firms, the right timing will depend on the drivers for M&A.  There are many drivers for M&A among accounting firms, such as geographical expansion, talent acquisition, succession planning, achieving a niche specialty, etc. If the market is rewarding growth through M&As and owners of accounting firms see opportunities in the market to gain this reward, this will drive them to pursue M&As. A firm that is doing well in terms of growth, profitability, talent management, technology adoption, etc. is going to catch the eye of a potential acquirer when the time is right.

The Strategic Fit

According to an article published in the McKinsey website by Goedhart et al. in March 2017,  every deal has its own strategic logic. Based on their experience, most successful deals have specific, well-articulated value creation ideas compared to less successful deals where the strategic rationales — such as pursuing international scale, filling portfolio gaps, or building a third leg of the portfolio — tend to be vague.

Diversification also seems to be a key driver for accountancy M&As. A recent February 2018 interview by Accounting Today entitled “The Shape of M&A in 2018” with M&A advisors who work with accounting firms to find appropriate merger partners, revealed that the biggest landscape change to M&A this year versus last year is the continual movement of larger CPA firms acquiring non-CPA firms. Larger firms seem to be trending away from general compliance practices, to acquiring consulting, advisory and outsourced-type practices, whether it be wealth management, cybersecurity, outsourced accounting, or a niche practice.

Other drivers include the ability to recruit talent, to service growing clients, and to invest in technology as emerging technologies such as blockchain, artificial intelligence and robotics are expected to dramatically change the profession in the coming years.

The Financial Fit

The purchase price package is a critical ingredient when formulating an M&A proposal.  Every party in negotiation wants to walk away with the best bargain given their financial objectives and relative strength of negotiation. The seller wants the highest price and as much cash as possible, with the least tax obligation.  The buyer wants the best price with maximum discount, favourable purchase terms and for the seller to have a vested interest in the future, normally in the form of deferred or contingent considerations.

The purchase price package is important and it does contribute to the systematic pursuit of successful deals. However, the right price may be arbitrary, depending on strategic intent and other external market factors.

The Leadership Fit

Strong leadership and management buy-ins are perhaps the most important success factors driving M&As.

According to J. Keith Dunbar writing in the September 2014 Harvard Business Review article “The Leaders Who Make M&A Work”, senior leadership capabilities in acquiring companies and middle management leadership in targeted companies are equally important in predicting the success of an M&A. Senior leadership capabilities in acquiring companies include thought leadership, results leadership and people leadership, he added.

The right leadership is important in an M&A as it can influence the strategic intent of M&A, purchase price of the target, corporate culture and will eventually affect the effectiveness of HR strategies and integration plan post-M&A.

The Culture Fit

Every business has a culture. Bain & Co cites culture clash as the single biggest reason for failed mergers when two autonomous corporate cultures meet in an M&A. Cultural clash is inevitable when integrating two different entities into a new and reconstituted entity. As the owner, it is important that you clearly articulate your vision, niche and focus for your clients, employees, teammates, referral sources, and partners.

Cultural incompatibility will ultimately affect the M&A performance. Hence, ignoring a potential clash of cultures can lead to M&A failure. Cultural due diligence is as important as financial and legal due diligence in the M&A process.

The People Fit

The role of HR is critical in engaging people during M&A, in aligning the structure of the merging firms, in addressing HR issues arising out of M&A, and in handling the merger syndrome, such as incompatible cultures, loss of key talent and clash of management styles.

In all organisations, one of the most valuable resources would be human talent. Developing good talent is hard and it takes years; harder still is to substitute such talents as the replacement may have the technical expertise sought but not organisational or cultural fit. Losing good talent is akin to a lost opportunity.

Many research studies have shown that a good HR strategy to tackle these human capital challenges that arise from M&As, using the right change management tools, and effective communications to support employees in the entire integration process are key when formulating an M&A proposal.

Ensuring good fit for your firm

By finding a firm that’s a good fit, you’ll guarantee continuity for your clients, a good working place for your staff, and the peace of mind for your retirement.

Nevertheless, there is no standard formula for a successful M&A. The unpredictable behaviour of M&A remains a mystery due to the interconnectedness and complex relationships among ingredients, and the difficulties in determining the right mixture of ingredients needed in each deal. There is no one size fits all formula and the absence of one ingredient might lead to the failure of an M&A deal.

Now, it’s your turn

Has your firm grown via M&A or did you use M&A as an exit strategy? If so, let us know your story by contacting MIA at [email protected].

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