When any two or more businesses (whether these are limited companies, partnerships, sole traders or limited liability partnerships) come together to share the risks and rewards of a combined enterprise, it can be the start of a mutually beneficial relationship. The reasons behind the merger must be considered in advance to ensure a smooth transition for all concerned. Some key factors of a merger are that there is no transfer of control, resources will combine as a result of the process and one of the biggest considerations is the fair treatment of employees and ensuring that the equilibrium is maintained as much as possible.
The top end of the accountancy sector is seen to be dominated by large practices. However, there are a number of strong regional practices, including sole practitioners to firms with over a dozen partners that will look to the benefits of a merger to increase their offering. A merger of two practices may be a considered and sensible approach for both parties involved in an effort to consolidate resources and make use of a larger client base and perhaps a new geographical range or sector focus. This combined approach together with a diverse client base and potentially reduced administrative costs should hopefully push the newly merged firm forward and increase profit margins.
The legal considerations behind a merger form an important part of the process. As with all corporate transactions, the advising lawyers will recommended that the parties undertake detailed due diligence. This process will help each party understand the other’s business. Careful thought should be given to matters that this can expose, including the client database, employees, ownership of key assets, debtors and creditors, complaints and associated procedures involved, and insurance.
The due diligence should reveal that each practice has in place professional indemnity insurance. This will be a particularly important consideration of the due diligence in accountancy practices with partners at or reaching retirement age, especially in smaller firms or sole traders. One particular type of insurance likely to have been purchased is run-off cover, especially where the partners have focused on an exit strategy. It will act as security to cover the cost of defending claims made against those insured (typically partners and key employees) and potentially reimburse losses should a claim be upheld. It will come into effect when the practice stops trading and will continue until the clients have ‘run off’.
This type of insurance can be expensive if the practice stops trading and it will need to be funded for a number of years post retirement. However, if the merger incorporates the maintenance of professional indemnity cover and the run-off under that policy then the exit costs for the retiring partner could be dramatically reduced as he will not have to pay off the run-off cover.
This in itself could be one reason for the increase in mergers. Partners reaching retirement age may be looking for ways to reduce their outgoing liabilities whilst still covering claims that may arise in the future.
Once due diligence has been completed the legal teams will prepare the necessary agreements that contain the detail of the transaction. Each party will require adequate protections, such as wording to deal with partner retention periods and appropriate limitations regarding the accounting treatment of the firm allowing the newly merged practice a fresh start and to look to the future post completion.
Mergers may seem a popular choice but they must be carefully thought out between suitable parties to ensure the stability of the venture not just in the short term, but also into the future for the benefit of everyone involved in the business.
Vanessa Crawley, solicitor in the corporate team at SA Law