Pros and cons of merging your practice

Historically, business mergers were intended to enhance market position and restore monopoly. However, the concept of merging has widened into other possibilities, resulting in overall growth. Businesses mainly choose to merge to either improve their financial performance or reduce their risk.

“Alone we can do so little; together we can do so much.” – Helen Keller

Over the years, several businesses and practices have closed merger deals. However, merger and acquisition deals haven’t been spared from the impact of COVID-19. The global volume of deals experienced about a 50% decline in mid-February 2020. However, soon after, a merger became an option to survive for business. Experts predict to see a record number of M&A deals in the next few years.

Benefits of firm mergers

Increased market share. When two practices merge, it immediately reduces the competition. The size of the firm increases and results in an increase in market power. We all are aware of the history of tax and accounting firm mergers from “Big Eight” to “Big Four,” and how they dominate the market today. Merging firms can not only expand your presence geographically, but may also help you to dominate a certain industry niche.

Diversification. Mergers allow immediate access to new markets. Expanding service offerings or adding new products may take years. However, the merger may not just strengthen one niche, but also expand your market to several niches. An accounting firm merging with a tax practice or a financial institution now has an opportunity to stay engaged with their client throughout their financial process. Accounting practices merging or acquiring product companies can become one stop shop for their clients. My firm is a good example of this synergy.

Additional talent. The key to a successful business is to find and maintain a skilled workforce. Merging firms immediately have access to each other’s talented employees, who can be subject matter experts to support now diversified business. Bigger businesses also attract the best talent. Future recruiting becomes easier. 

Additional resources. With mergers, you not only have access to additional human resources, but also additional materials, assets, and other tangible resources. Merging firms can have better investing, as well as financing options and additional capital.

Reduction of cost. With business expansion, you’ll need to buy additional equipment, infrastructure, training, and other items that are reduced when you merge with a business that is already equipped with required resources. With a larger market share, production increases, giving the option of bulk buying. This will also result in a cost reduction. Overall, a merger provides cost-effective solutions.

Accelerated growth. Businesses must pass through different phases of growth to move from a startup phase to becoming profitable. Each phase requires time and money, which may be reduced, or in some cases eliminated, if the business had the potential to merge. Ambitious entrepreneurs choose mergers as an option for accelerated growth, rather than organic slow growth. The merger provides scalability, resulting in accelerated growth.

Business continuity. Some small practices may be single-owner or small family businesses. In these cases, there is always a risk of losing the principal to either retirement or lost interest. The merger provides additional decision makers and top management to secure and strategize succession plans.

Tax benefits. Business expansion through mergers may end up beneficial to merging firms from a tax perspective, if they expand into favorable geographic locations. Recent net operating loss (NOL) provisions in The Coronavirus Aid, Relief, and Economic Security (CARES) Act allow companies to claim NOLs for past tax years, providing several tax-saving opportunities to merging firms.

Challenges firms face when they merge

Just like any other business restructure, mergers may fail if these benefits aren’t implemented properly. The Harvard Business Review suggests that the failure rate for mergers and acquisitions is between 70% and 90%.  

Cultural differences. The merger is not just about merging two names or brands; it’s about merging two different cultures and bringing together people with different values. It is often very difficult to adjust and adopt different cultures, values, and principles. Differences in cultural values must be carefully considered when deciding on a merging strategy.

Power struggle. Mergers can easily result in a power struggle if both the owners are not willing to respect each other’s authority and decisions. Difference of opinion within top management often puts the successful integration of two firms in jeopardy.  

Different goals. Businesses sometimes miss identifying dissimilarities in business goals between two firms. Choosing the wrong firm often results in a failed merger. 

Turnover. Sometimes, top management forgets to pay enough attention to key stakeholders of the company. Key personnel buy-in is very important for a successful merger. Lack of input can result in high turnover, and sometimes even unemployment based on a niche skillset.

Steep learning curve. The entire process of a merger can be time-consuming, resulting in lost opportunities during the transition phase. The learning curve may also be very high, resulting in a stressful working environment.

Increased debt. A merger requires a huge financial investment, and both firms may have a high level of debt, resulting in a higher level of debt in the integrated firm. Eventually, this leads to huge losses in the following years.

Compliance and internal control adoption. Both businesses may have different statutory requirements based on product, services, and geography. They might also have different tax requirements, and even different accounting methods. Conversion or adoption of each other’s policies, procedures, and workflow could be challenging. 

Technology adaptation. Similarly, both companies could be using different technology stacks. Unfamiliarity with new technology, or an unwillingness to learn, may result in stressful work culture, lost interest, and ultimately high turnover. 

Large legal and other costs. Mergers involve hours of accounting and legal assistance that can be very costly. Regardless of successful or failed mergers, huge sunk costs may result in significant losses.

Strategy is key

Successful mergers require a strong strategy. Both firms should carefully consider their financial position. They should take professional help to decide whether merging is the right option for them, as well as when the time is right to merge. Firms and practices should also carefully pick the right firms to merge with by considering their growth and business strategy. It is also essential to work out details to draft and execute the transition plan. To obtain the required positive benefits of a merger, both businesses must implement the right strategies that align with their goals and growth plan. 

Like they say, “Mergers are like marriages.”