Small and midsized CPA continue to experience difficulty in growing organically at an acceptable rate. Because of the ever-increasing number of baby boomer retirements and because of the added COVID-19 impacts, we are betting that mergers will continue to happen at a very healthy pace. To illustrate, in just the past few weeks, we learned about Baker Tilly US (#11) and Squar Milner (#46) created a new $1 billion firm. A number of smaller transactions have occurred over the last few months.
Having said that, mergers and acquisitions are a tricky business and are not silver bullets to solving a CPA firm’s problem in achieving sustainable growth in this less than optimum economy. To say the least, these transactions are extremely time-consuming, riddled with “sand traps” and full of opportunity costs but more than that they have considerable risk.
When we speak to CEOs and other senior management at the Top 100 and other fast-growing firms, it’s apparent that many, if not most, of these mergers/acquisitions fall significantly short of growth and profit expectations. Some even wind up in divorce with costly break-up costs as morale drops, go-to-market opportunities fail to materialize, and key partners and potential partners leave for other opportunities. And for every transaction that actually does happen, it is also apparent that handfuls of potential deals die at the altar.
So, we thought it would be helpful if we took a deep dive into merger and acquisition difficulties and offered some advice. The following summarizes our observations as to why many mergers/acquisitions fall short of expectations and why so many more die at the altar:
You notice that we identify irreconcilable culture clashes or differences as the #1 reason why transactions run into difficulties and that valuation and other deal considerations are identified as reason #11. An assessment of cultures is particularly challenging during these COVID-19 times and Zoom calls.
While many people believe deals fall apart because of economics, we have found that while economics are clearly important, this conclusion is a myth. Here’s why. Financial considerations in a transaction are usually flushed out quickly. If there isn’t a meeting of the minds, deal discussions shut down. Little ventured; little gained. Further, we have found that valuation and other deal considerations most times can be successfully negotiated if the two firms believe that 1+1=3 and that they can have greater success in the marketplace if they are together rather than apart.
On the other hand, culture clashes or differences usually take considerable time before they bubble up to the top of the “we have an issue” heap. This is why culture compatibility is so important and without it deals fall short of expectations or never see the light of day.
Before we take a deep dive into culture compatibilities and what can be done to deal with potential clashes, culture needs to be defined. To sum it up, a firm’s culture is the accumulation of shared values, beliefs and behaviors that determine how partners and staff carry out day-to-day tasks such as managing and governing the practice, serving clients, and attracting and retaining talent. Culture has three key prongs:
We have found that when it comes to determining culture compatibilities, many firms talk a lot about a few cultural similarities as proof of compatibility but cheap culture talk fails to help firms navigate through the difficult task of dealing with potential culture clashes that will help improve outcomes and the probability that a combination will be a win-win.
In Our Opinion, an assessment of culture compatibilities between the larger firm and a merged-in firm should not be a gloss over or an afterthought when considering a possible transaction. We believe culture deserves a lot more weight in the due diligence process as a potential transaction is evaluated. This becomes a particular challenge if the culture assessment can’t be done face-to-face and firms need to fall back upon Zoom calls during these COVID-19 times. Our advice is:
Here are four questions that might help you assess your due diligence efforts regarding culture:
If you answered yes to any one of these questions, you need to pay more attention to the #1 reason why so many deals fall short of expectations and why so many die at the altar.
Cultural integration isn’t something that can wait until after a merger or acquisition is consummated. The Top 100 and other fast-growing firms usually flag possible cultural clashes or differences as an integral part of due diligence.
Buyers and sellers beware! Why did Dillinger rob banks? Because that is where the money is. Why should the larger firm and the merged-in firm make culture due diligence a priority when evaluating a potential transaction? Because that’s where most deals fall apart.
ESPOSITO CEO2CEO, LLC — a boutique advisory firm consulting to leading CPA and other professional services firms on strategy, succession planning and mergers, acquisitions and integration is actively led by Dom Esposito, CPA. Dom, voted as one of the most influential people in the profession for two consecutive years by Accounting Today, authored a book, published by www.CPATrendlines.com., entitled “8 Steps to Great” which is a primer for CEOs, managing partners and other senior partners. In Our Opinion, is a continuing series of perspectives for leading CPA firms where Dom and his colleagues share insights, experiences and wisdom with firm leaders who want to “run with the big dogs” and develop their firms into sustainable brands. Dom welcomes questions and can be contacted at either firstname.lastname@example.org or 203.292.3277.
This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and ESPOSITO CEO2CEO, LLC, its employees and its independent contractors accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.