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To Merge or Not to Merge? Good Question!
Mergers can be difficult, risky and expensive. So why do so many engineering & architectural firms contemplate them?
Most would say they are hoping to achieve a competitive advantage or find a quick fix to a perceived need. Mergers often help firms realize their strategic objectives. However, if not done for the right reasons, they can be a source of frustration and lead to a firm’s demise.
A good place to look for the right reasons is your firm’s strategic plan. It should contain an analysis of your firm’s strengths and weaknesses and the opportunities and threats it faces (also known as SWOT analysis). Armed with this information, construct an action plan to deal with any issues. A merger just may be the best option. For instance, a merger may make sense if your firm wishes to:
The Right Reasons
Add experience, expertise and depth to an established practice area. Marketing to existing clients is always easier and more cost effective than searching for new business. Therefore, offering clients expanded capabilities is a great way to keep their business and increase your billings.
Increase specialization. With engineering & architectural firms becoming more industry focused, a merger could allow your employees to expand beyond their traditional roles and become true business advisors. Energy firms, for instance, would rather deal with a trusted advisor who has broad experience in industry-specific areas that matter to them, such as dealing with environmental permitting issues and going green.
Enter a new geographic area. Expanding geographically may allow you to take advantage of opportunities in underserved markets or to become a regional or national player. Or you may wish to follow an important client into a new locale. In these cases, merging with an existing firm in the desired market may be preferable to starting from scratch.
Correct an internal weakness. Mergers are viable strategies to fix certain internal issues, such as principal groups that have become unbalanced in terms of age or ability. If too many principals are, for example, over age 50, your firm may find itself without a viable succession plan.
Or if your firm was founded by entrepreneurial rainmakers who hired more technically oriented employees to service its clients, you may no longer have enough business developers. Merging with the right firm can be a much better answer than trying to quickly develop rainmakers internally.
Other good reasons for merging might be the availability of new cross-selling opportunities or the ability to tap into more profitable lines of business. As many “right” reasons as there are for merging, however, there are wrong reasons as well.
Typically, mergers are not the answer to the following issues:
The Wrong Reasons
The desire to be bigger. Getting larger isn’t a good enough reason to merge. Focus on whether the merger will make your firm better. Also, it’s possible that a merger can reduce profitability. (See “Solve profitability problems” below.)
Dealing with problem principles. Firm management that won’t deal with problem partners may want to merge to avoid an uncomfortable situation. Such issues won’t go away during the course of a merger. In fact, the problems will probably resurface and cause the newly merged firm to blow apart.
Solve profitability problems. Most profitability issues in engineering and architectural firms are related to the top line (billable hours and realization), not to overhead expenses. There are usually few, if any, economies of scale to be gained in a law firm merger. Combining two underperforming firms will only result in a larger problem.
Minimizing the Pitfalls
When contemplating a merger, keep the following in mind:
- Communicate regularly with principal and staff as the merger progresses. Make sure all parties are aware of expected changes as a result of the merger as well as the benefits.
- Have a good grasp of your firm identity and culture. Mergers succeed when both firms have the same work ethic and common visions of management, strategic goals, principal compensation and professional standards.
- Gauge the public and industry perception of your firm. If perception is poor, your firm’s attractiveness as a merger candidate will suffer.
- Solve principal problems first. Going into merger discussions with excess baggage is not a good idea. You will be at a disadvantage at the negotiating table, and the deal may fall apart once the problems become apparent.
- Make sure all of your principals support the merger, especially if the majority of client relationships belong to a few key principals.
In most cases, tackling these issues upfront will remove many obstacles once the merger process begins.
Think it Through
Proper planning and an honest evaluation of your firm’s current strengths and weaknesses can help ensure a successful merger that solves more issues than it creates.
Sidebar: 7 Would-be Deal Breakers
Want to make sure your merger doesn’t fall apart? Then address these seven issues early and thoroughly:
- Capital value differences. Reconcile the excess of one firm’s capital over the other’s. If it’s paid out, make appropriate financial plans.
- Principal compensation. If compensation methods differ, work out a single approach for the new firm.
- Management team. Discuss early on who will be on the new management team. Try to base decisions on specific merits of various partners, recognizing that you may need to deal with areas of overlap. Expect some fallout from principle who do not make the cut.
- Outstanding receivables. Firms must choose between contributing outstanding receivables to the new firm or liquidating them under the former individual companies.
- Valuing goodwill. If goodwill is part of the deal, retain a qualified valuation expert to perform a valuation.
- Principal retirement plans. If plans are funded at different levels, create a new single plan for the merged entity.
- Office space. Evaluate locations, office features, and lease terms of both firms. Then decide whether to keep both offices or move into new quarters.
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