The application of due diligence is most commonly associated with mergers and acquisitions, although there are a number of aspects of practice development and management where it is equally applicable, broadly identified as human resources and financial. And yet the number of mergers that fail to meet the expectations of both parties are testament to the fact that the due diligence process has not been properly carried out.

An accountancy firm’s assets are its client base, the quality of its staff and partner team, and the quality of the work done. In a nutshell, there are only two facts to be established: the bona fides of the business and the bona fides of the people.

All too often, firms adopt a ‘what-you-see-is-what-you-get’ attitude and if everything looks fine they don’t bother to dig too far below the surface. In an M&A situation, this is simply not good enough.

A very common example of what can go wrong is the unexpected departure of one or more partners soon after the completion of the merger; made possible because their exit arrangements had not been fully researched, discussed and agreed. This can prove expensive in terms of equity repayments or other financial arrangements and can destabilise the client base as well as affect the prosperity of the new business.

Then there are the unexpected discrepancies between the perceived financial performance of the firm being purchased and the reality. Sometimes it is simply that the figures have not been examined closely enough, or it could be that a reasonably healthy overall figure is masking the fact that one or more departments is underperforming. Should this department have been expected to prop up a similarly weak operation in the other practice, the result is hardly likely to enhance the business.

By measuring the profitability and financial performance of each partner and department within a firm it is possible to arrive at a clear conclusion as to whether the required norms of partner behaviour are being complied with and performed to the highest standards required.

Another area often overlooked is the firm’s client base. In-depth research is vital and should cover the size and type of clients, the nature of their business, the age and stage of their owners and the range of needs versus the range of services offered.
Due diligence should apply to every aspect of practice management. When you appoint a new partner, you should not only check that they have the right experience or qualifications, but that there is a real cultural fit and that their aspirations are in tune with the firm’s growth and development strategy. Indeed, due diligence should be front of mind at all times, rather than being considered as something that is only relevant to a small part of the firm’s activities. It is, after all, simply good business practice.

Phil Shohet is a director of Kato Consultancy