Fit to merge? Why the shape you are in matters

You find a merger partner that ticks all the boxes strategically. You do coffee and lunch (several times); shake hands on a broad outline of a deal; share the news with business partners on a need-to-know basis and you are ready to get stuck into the nitty gritty of deal-making.

But not everyone is happy. The news leaks out; staff and customers get disgruntled; trading goes off the boil; value declines and the transaction never happens.

What makes professional services different from most other sectors are their assets. While plant, machinery and tech are retained in a failed merger between, say, a sausage maker and a pastry manufacturer, in professional services, the assets have legs. They can walk away, often taking clients with them.

Reputational damage is more significant than the cost of professional fees and wasted time. It is often the hefty price that firms pay when a deal falls through once leaked or officially announced. It can destabilise the business and take years to recover.

Well-honed regime

Before you contemplate merger, verify the shape you are in. Make sure vision is matched by capability:

  • Check out your shareholder or partnership agreements; understand voting rights and disposal or acquisition mechanisms.
  • Know what you are selling and the ownership structure for that entity. 
  • Incentivise your support functions – HR, marketing, PR, finance, IT, compliance – the non-fee earners whose input is critical to making the transaction happen but whose roles might be vulnerable once the deal is done.
  • Check that accounting policies, particularly revenue recognition, adhere to industry norms. Ensure remuneration strategies are in line with market practice. If pay scales are out of kilter, expect conflict once the merger completes. (See our articles on ‘Are you using outdated information to predict your future?’)
  • Make sure management information is a good reflection of the business; is easy to understand and can withstand intrusive due diligence.
  • Identify your single point of weakness. If one client accounts for 70% of revenue or one fee-earner brings in 70% of  the total billings, you are not a promising merger proposition.

All in the preparation

Even a legal firm should not assign its high-end fee-earners to the transaction. While they transact, attention is diverted from clients and revenues may fall. External advisers provide objectivity, neutrality and can defuse heated situations that might compromise the union of two firms.

A secret shared by 12 people is not a secret. Leaks are inevitable and create distraction. But you can control the fall-out with pre-planned communication strategies that allow you to manage your story and how it is told.

Click here to download our 'Are you ready for the next step?' infographic.

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