Merging or acquiring another company (M&A’s) can be a long and complicated procedure which is fraught with hidden pitfalls. M&A’s can fall apart at the seams, or you can get your fingers burnt, if care is not taken. In order to help guide readers through the process, this article will address the first phase of the M&A process, dealing with the initial meeting through to the formation of an M&A Committee before the commencement of detailed due diligence and final implementation. This article will help you avoid the common mistakes made in the first phase of an M&A project.
M&A’s of professional practices are generally taken to involve the acquisition or sale by agreement of the whole or part of a practice or the merger of two or more practices to become one new merged practice. The M&A may involve several wholly owned or affiliated federation types of interstate practices or studios using a common name. In uncertain economic times, mergers occur more and more often, for a variety of reasons. With skilled labour shortages in various professional industries and / or pressure because of growing overheads, including accommodation costs, merging two existing practices or acquiring a separate practice, can be a cost effective solution to excessive overheads and technology costs (which can often cripple a business), and securing a better depth of skill via a combined workforce. By using the existing or combined infrastructure within the two or more practices, you can reduce costs while increasing productivity and planning for the future. You can achieve strategic practice growth objectives more quickly than organically growing from within.
You can also use an M&A strategy to assist with implementing succession within an aging practice.
The Structure of the M&A
There is no common way for M&A’s to be structured, and each M&A will have its own idiosyncratic configuration. Architects and engineers generally tend to adopt a corporate structure, which shields the individuals who run the corporation from liability. By contrast, in an unincorporated practice, liability will fall to the individual partners. M&A’s may involve winding down one practice until it is dormant and redirecting new work to the continuing dominant practice or to a new entity established for the M&A. The M&A may simply involve purchasing all or part of the shares in one of the practices.
First Phase of any M&A
Step 1: Making contact
After your initial investigation, it is as simple as picking up the phone to discuss a potential merger between two practices. Otherwise, you could go through a mutual friend or use an intermediary to handle the introductions. It is important at this stage to agree in principle that there is sufficient strategic rationale and compliment of cultures between the practices to warrant preliminary “no obligation” discussions taking place.
Step 2: Deed of Confidentiality
A deed of confidentiality is a standard, uncontroversial document which legally binds each party to secrecy regarding the discussions that will arise from your meetings in relation to your possible merger. It is important to have both parties to the meeting sign the document before any real discussions take place, as the deed will protect the interests of each participant, if the merger falls apart. Considering that initial conversations may deal with such diverse and confidential information as your revenue (going back up to five years), future maintainable earnings, client lists, tenders in progress, professional negligence claims and leases on premises, it is vital to your success going forward that you disclose such matters without fear of consequence.
Signing your deed of confidentiality will help your comply with your privacy obligations regarding clients personal information, and indeed, compel the return of all hard copy information handed over if the M&A does not proceed. The deed will set out enforceable rules of engagement.
Step 3: Form an M&A Committee
Your M&A committee should have equal representation from both sides and the smaller the better. These committee members should be sufficiently high up in your company so as to be able to negotiate in good faith, and be representative of internal stakeholders. If they do not have that authority, they do not belong on the committee.
This committee will consider the initial due diligence information obtained (clients, conflict checks, fee revenue, future maintainable earnings, calculation of price (if any) and M&A structure options, including the trading name) and then meet to discuss any issues and ask questions.
Thereafter, the committee representatives report back to their respective practice stakeholders to confirm discussions should continue.
1. How will the company continue to trade?
Too many potentially successful mergers have fallen apart at the eleventh hour because this issue was not raised first. It is impossible to underestimate the emotional connection that people have with the name of their company. Their reputation and personal and professional branding are usually tied up in the name of the company in its present form. Who will lead the new group? Will you be changing the name, and are you happy with that change? If you’re not, it will affect the progress of your merger, and may even derail it entirely.
2. Why do it?
What is the strategy behind your merge? Is there a good cultural fit? Is there a true and logical business reason for the M&A? It is important to have answers to these questions before you start the process. If you don’t have a real reason for combining or acquiring, don’t do it for the sake of it.
3. Are you satisfied with the financial health of the practices?
You should be assured of the financial well being of each practice group. What do their recent internal management accounts show as well as historical accounts? Up to date information is critical to verifying trends.
4. Are you paying goodwill?
When paying for goodwill, you are essentially paying for the reputation and skill set of the individuals in the firm you are merging with or acquiring. Without their continued presence, the company’s value will certainly decrease, especially when acquiring a smaller practice where the profitability is usually directly tied up in one or two individuals. Are they close to retirement? Make sure they are happy with any changes you intend on making and ensure there are good employment contracts in place which will stop any stars from waltzing out the door with the clients. If they go, the value of the company will too. Are you paying too much?
The second article in this series will address what happens after the first successful M&A committee meeting, including the things to look out for in your detailed due diligence and your heads of agreement.
The final article in the series will examine how to successfully transition your businesses to achieve an effective implementation of your M&A.
This information is intended to provide a general summary only and should not be relied on as a substitute for legal advice.