Practice Management

By Cynthia Anderson, CPA, Entrepreneur & Founder, ThincStrategies

In today's changing business landscape, mergers and acquisitions (M&A) have emerged as a powerful strategy to accelerate expansion, innovation, and leapfrog the competition. However, executing a successful transaction is no easy feat. The following is a guideline to help you and your firm through each phase of the M&A process with best practices to find the right fit for your team, whether you are a buyer or a seller. 

Professional firms consider a merger or acquisition based on a few common motivations:

• Growth: Mergers and acquisitions can speed up firm growth. By combining resources, expertise, and market share, companies can expand their operations and reach new markets faster than through organic growth.
• Access to new markets: Acquiring or merging with a firm in a different geographic location or market segment can provide immediate access to a new customer base, distribution channels, or technologies. This is beneficial for companies looking to expand into new regions or diversify product/service offerings.
• Financial considerations: Mergers and acquisitions can be financially motivated. A Firm may acquire another company to gain access to its cash flow, to diversify investments, or to improve financial performance. By combining operations, firms often achieve revenue synergies and cost savings. Efficiencies are gained through economies of scale, shared resources, streamlining operations, technology sharing, innovation, and eliminating duplicate functions. This can lead to improved profitability.
• Competitive positioning: A merger or acquisition may be driven by a desire to strengthen market position or eliminate a key competitor. By combining forces, firms can increase market share or become more resilient.
• Succession planning can also drive M&A decisions. If a business lacks suitable successors with the skills to lead the firm, cultivate long-term relationships, and generate new business opportunities, owners may choose to sell instead. Selling to a third party can often result in a higher valuation and larger return compared to ownership transfer, which can aid in retirement planning. And a third-party buyer often injects new ideas, energy, and resources into the business.

Ultimately, the decision to pursue a merger or acquisition depends highly on the specific circumstances and strategic goals of the companies involved. 

The Process for developing a successful M&A strategy includes steps that can take months or years to prepare. Following these steps will improve chances for a successful transaction.

1. Strategy and Planning: Identify the strategic objectives of the merger or acquisition. Firms should assess potential target criteria, align key-stakeholder (leadership, owners, key team drivers) goals, and develop a clear plan for the M&A process. This critical first step helps develop and identify an ideal buyer or seller.

   1. What is an appropriate cultural fit for the company?

      1. Who will be part of the transaction’s Execution Phase? 

         1. Do you have an internal team, or will you need external support? 

         2. Can team members, such as accountants, human resources, and other leadership team members integral in assessing the transaction, understand and keep information confidential? 

      2. What are the non-negotiables when considering a transaction? Some examples of non-negotiables are the value and structure of the transaction, post-close employment goals, and non-competition considerations.

      3. How do you approach targets? 

      4. Do you have confidentiality agreements prepared for the entire transaction?

2. Target Identification: Firms research and identify potential target companies that align with their strategic objectives. Best practice is to identify several targets before deciding to move to the next phase, Due Diligence. This gives more intel on who may be the right fit for the team and goals. Be sure the proper non-disclosure/confidentiality agreements are in place and keep the conversation to a small group. Failing to keep an M&A process confidential can lead to several hazards and undesirable outcomes, like providing competitors with insights into a firm’s strategic plans or damage the reputation of companies involved. Stakeholders, including customers, consultants, and employees, may be uncertain about the future, leading to concerns about stability and potential negative effects on relationships.

3. Preliminary non-binding agreement: Typically, a buyer will present the seller with either a term sheet or letter of intent (LOI) outlining the preliminary understanding between the parties. The LOI expresses the intent to enter a future contract or negotiation, highlighting key terms and conditions that the parties have agreed upon. While not legally binding, an LOI serves as a roadmap for moving forward with the formal contract or agreement. The LOI is prepared based on preliminary information provided to the buyer from the seller, including, but is not limited to, financial statements for several years, employment agreements, salaries, and benefits information (usually by role), backlog, and pipeline information. Sufficient information must be collected to allow for a buyer to properly determine valuation terms.

4. Valuation: During the pre-LOI stage, both parties negotiate and determine the value of the selling company. Various valuation methods, such as discounted cash flow, market multiples, and asset-based valuation, are used to assess the firm’s worth. Some key factors influencing company valuation fluctuations include:

1. 1. Market Conditions: Changes in overall market sentiment can impact company valuations. A booming market and high investor confidence tend to raise valuations. Conversely, during times of economic uncertainty or market downturns, valuations may decrease.

   2. Financial Performance: Financial performance is a significant determinant of a firm’s value. Factors such as revenue growth, profit margins, and overall profitability influence investor perception of a company's value.

   3. Industry Trends: A firm’s value is affected by industry-specific factors. If a particular sector is experiencing rapid growth, companies in that sector may see higher valuations. Conversely, industries facing challenges or disruption may experience lower valuations.

   4. Competitive Landscape: The competitive landscape affects company valuations. Market share, competitive advantages, and the presence of strong competitors all influence how investors value a firm.

Note, firm valuations can be subjective and influenced by various factors. Investors and analysts assess different aspects of a company to arrive at a valuation, which can cause fluctuations over time.

5. Negotiation and Structure: Once a valuation is determined, companies negotiate the terms and conditions of the deal, including purchase price, payment structure, and any contingencies or conditions precedent to closing the transaction.

6. Due Diligence: Once the broad terms are agreed upon, the acquiring company conducts due diligence, which involves a comprehensive analysis of the target firm's financial, legal, operational, and commercial aspects. This step validates the transaction’s potential value and risks. 

1. 1. Regulatory and Legal Approval: Mergers and acquisitions often require regulatory approvals from relevant authorities. Many states have rules governing who can own a professional service firm, so understanding your state’s rules is vital. Confirming that all approvals can be obtained should occur early in Due Diligence.

   2. Integration Planning: Both parties should collaborate during Due Diligence to outline a plan for how the firms will come together, including merging operations, aligning systems and processes, integrating teams, and managing cultural differences. This might include which of the firms’ operational, HR or financial systems are the most competitive or effective. 

7. Execution and Closing: Legal documentation is finalized, and the deal is officially closed. The acquisition is completed, and ownership and control of the target firm transfer to the acquirer.

8. Post-Merger Integration: After the closing, focus shifts to integrating operations, systems, and teams to achieve the transaction’s original synergies and strategic goals. This stage includes aligning management structures, streamlining processes, and integrating IT systems. These steps are typically done in phases based on priority—what is integrated at closing, within the first 90 days, 6 months, 1 year, etc.

It's important to note that the M&A process can vary, and the specific steps involved may differ depending on the complexity and nature of the transaction. Companies often engage professional advisors, such as M&A advisors, CPAs, and legal experts, to guide them through the process and ensure a successful outcome. 

In conclusion, navigating the M&A process can be a complex journey, but with the right guidelines and best practices, you can successfully find the right fit for your team, whether you are positioning yourself as a buyer or a seller. By diligently following each phase of the process, you increase your chances of achieving your goals and ensuring a smooth transition. 

Remember, thorough due diligence, effective communication, and a focus on the long-term vision are key components. So, whether you're seeking growth opportunities or strategic realignment, embrace these guidelines and set yourself up for a successful M&A experience.

All images copyright ©2024 Thinc Strategy. All Rights Reserved

_____________________________________

An established certified public accountant, serial entrepreneur, and former C-suite executive, Cindy Anderson is known across the architecture and engineering sector for her strategic vision, rigorous financial expertise, and a talent for transforming and growing businesses to increase value and ROI for owners and shareholders. She has aided more the 150 professional service firms, from promising startups to established global enterprises, to improve ROI, increase shareholder value, and accelerate growth. Her leadership and guidance have built world-class leadership teams, shaped partnerships with organizational leaders and executive boards to solve complex business challenges, and advanced the mission of more than a dozen private sector and nonprofit boards with subject matter expertise in professional/managed services.

(Return to the cover of the February 2024 PM Digest)