Getting into bed with a different partner

When all around seem to be merging their practices or at least seriously thinking about such a move, only brave practitioners set their faces against it and ignore the trend. This does not mean that one should rush into a merger out of a sense of fear or desperation. The merger option should be considered in order to appraise the very significant benefits that can derive from a successful combination of practices.

There have, over recent years, been some spectacular merger failures, and indeed other rapid turnabouts which have attracted much less press attention but have been disastrous for the professional and private lives of some of those concerned. This can be avoided. The merger can be successful if the partners determine the strategic objectives they want to achieve, and do not lose sight of this ultimate goal.

Economies of scale

If a strategy is not defined and strategic objectives are not established at the outset, it is not possible to measure developments at every

stage in the negotiations against these pre-determined criteria.

There are several good reasons to merge two or more practices. Combining different skills, sharing practice management responsibilities, or simply just having someone to talk to can almost be reason enough. In today’s highly regulated environment, where accounting and auditing standards change frequently, not to mention the ever changing taxation environment, it is not surprising that small partnerships or sole practitioners feel it is almost impossible to keep their skills up-to-date.

The combination of two or more firms will produce a larger, stronger entity with greater resources which can employ experts in one or more of these fields, thereby relieving the partners of the need to keep up-to-date in every discipline.

There will inevitably be economies of scale deriving from a merger: only in some rare circumstances will it not be possible to rationalise office premises, furniture, computer hardware and software, and secretarial support. But these overhead savings can hardly be regarded as a major strategic development of the business.

In a truly successful merger, the interests of two constituent parties must be catered for. The interests to consider are those of the practitioners (including their senior staff) and those of the clients. The interests of these two, perhaps surprisingly, are not in conflict. A merger which enhances the range of services offered, the level of expertise available and which projects an image of greater competence is going to be of benefit to the practitioners and their clients. A merger should always bring about an enhanced service to existing clients and a stronger base from which to develop new clients.

It is important that the merger is communicated to the clients in a professional and respectful way. A client’s immediate perception of a merger is likely to be enhanced bureaucracy, higher fees and less approachable partners.

Very careful handling is required to prevent this perception taking hold.

Stress factors

Getting married and moving house are acknowledged as major stress factors in life. A merger can have elements of both these experiences, plus a financial risk element.

There is probably no such thing as an ideal partner in a merger situation, but this should be no bar to searching for the ideal. Suitable partners are found where one practice complements another, where the combination will produce a large degree of synergy and where the practice management principles are common to both.

This latter point is extremely important. There is no point rushing into a merger which achieves a reduction in overheads and where one partner’s skills perfectly complement those of the other only to find that the partnership management principles are not shared. For example, if one practice has been funded by the practitioner’s capital account but the other has been funded by a bank overdraft this potential conflict has to be identified and resolved early in the discussions.

Even though there may be compelling strategic reasons for two practices to merge it will not be a success unless all of the often minor details can be agreed beforehand. One partner’s desire to have an expensive car paid for out of the partnership can take on inordinate significance if it is directly opposed to the style of the other partner.

It is essential that throughout the merger discussions both parties are prepared to be frank in their disclosure of information. This is clearly a situation in which confidentiality is critical and no details should be disclosed by any intermediary to the other side without the express consent of the party involved. Setbacks and failures must be disclosed as well as the successes and strengths. Practitioners contemplating a merger may feel that in order to facilitate full disclosure and for difficult questions to be asked on their behalf they may wish to retain the services of an experienced intermediary.

Outside help

There is usually a choice of two types of intermediary – the broker and the consultant. Brokers take a shorter term view – bringing the two parties together, closing the deal as quickly as possible and getting paid. They accept little responsibility for the merger not being successful. Commission, based on the gross recurring fees of the combining practices, can be very high for the input contribution the broker has made.

Experienced consultants, bring the two parties together and will lead the merger discussions, prepare the merger document and ensure that all relevant issues are brought up and discussed.

Consultants will appraise the merits of the merger at each critical stage.

Good consultants will have little incentive to force the merger through, irrespective of its merits. They will not be afraid to advise that there is no synergy in the proposed merger and recommend that the parties do not commence detailed negotiations.

Sometimes situations will arise where consultants’ fees are incurred and, through unforeseen circumstances, merger talks are broken off. This would be a fairly rare situation but the fees written off would be insignificant by comparison with the expenses of a failed merger.

Also, if consultants are used wisely, they can save a great deal of partners’ time allowing them to continue to service clients and earn fees while the merger is in progress.

Philip Pawson is a partner with the Practice Development Consultancy.

MAKE SURE YOU … determine and stick to strategic objectives put plenty of work into the planning stage communicate merger to clients in a professional way look for complementary areas of knowledge in partners examine partnership management principles be frank in disclosure of information be aware you can use a broker or a consultant to mediate.