Over the years I have assisted a variety of professional service firms demerge - A nice way of saying divorce. It is painful. It is expensive. It is disruptive to the business. Business relationships are often irreparably damaged. The personal toll on the participants is significant. Everyone else in the organisation is impacted from the lack of energy and distracted leadership team. It is certainly something to be avoided.
Some of the key factors in failed combinations include:
- The leaders are not on the same page.
While the numbers might look good on paper indicating that the merger or acquisition will be a great financial outcome for all participants, people have to work well together. Different attitudes to spending money on practice development, to training & attending conferences, to salaries and employment to name just a few issues all create a difficult environment with distrust and angst. Working relationships can quickly disintegrate with one party feeling that the other is holding them back while the other feeling that their partner is being profligate. This is especially the case if the promised financial returns from the combination have not been realised. Care should be taken to ensure that financial outcomes are conservatively estimated.
- Differing professional standards
While we like to think that the profession as a whole has high professional standards, the reality can sometime be quite different. Some practitioners may have struggled to keep up with their professional education. Other practitioners are more willing to test the boundaries. Unfortunately, some are just plain incompetent. This is a different type of hell. All of a sudden costs are being incurred as shoddy work is rectified. Difficult conversations are needed with clients. Trust goes out the window with work having to be reviewed incurring extra cost. It’s not all one way. Some practitioners may think that their new partner is too much of a stickler for accuracy and compliance leading to work being unprofitable. It is very hard to resolve such differences. If the transaction is an acquisition often the principal of the acquired practice will depart earlier as a way to resolving the differences. In a merger it’s a much more difficult matter to resolve. It is often an area which is overlooked in due diligence but it is a very important consideration.
- Stress for junior partner in transaction
Not everyone can run the ship. For a sole practitioner who is used to doing their own thing merging into a larger firm can be a traumatic experience. It is easy to quickly feel disempowered and downcast as others start to tell you what to do, especially when you may not agree with the instructions. It can be quite a stressful environment. Clients must feel confident that they will not be adversely affected by the change, new processes and technologies have to be learnt while coping with new relationships and a foreign culture. Performance can suffer that add further to the stress and create a spiral of despair.
There are just a few of the factors leading to failure. To mitigate the risk effective due diligence is required exploring factors like professional standards, billing practices, processes in addition to finances, clients and employees (the name just a few).
Lots of discussions are needed to determine roles and accountability, agree standards and get to understand attitudes to expenditure, employee management and client engagement. Shareholder agreements need to be negotiated and agreed.
A well thought though combination can be that marriage made in heaven. Spending the time to ensure you don’t end up in the marriage from hell is time and money well spent. Cutting corners is not an option.
David Smith, the founder of Smithink, is external chairman, mentor and adviser to professional service firms. He will be presenting “How do buy a practice and not screw it up?” at Accounting Business Expo in Sydney on March 21, 22