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To merge or not to merge?

To merge or not to merge?

Joining forces

On the face of it, mergers can be an attractive way for some professional partnerships to grow, to save on overheads, reduce the competition and increase market share. And they can be very effective – 'Magic Circle' law firms such as Freshfields and Clifford Chance, and all of the 'Big Four' accounting firms (PwC, Deloitte, KPMG and Ernst and Young) have used mergers to build business.

Mergers can also, however, be fraught with difficulties and the roads of business are littered with the wreckage of badly thought out and poorly executed mergers. A few years down the line, you don't want to be telling anyone that 'it seemed a good idea at the time'.

 

Like anything else in business, a merger requires clear thinking in advance and detailed planning, to make sure you are doing it for the right reasons.

 

There are, of course, many good reasons to look at a merger as a possible course of action for your partnership:

 

  • Increase in market share. Merging with a rival to form 1 business with an increased share of market reduces the competition
  • Reduction in overheads. When a merger occurs, there is often a streamlining of support services where there is duplication across the 2 firms. There may also be savings over time in costs such as indemnity insurance, office space and more
  • As a defensive action. Some partnerships may consider a defensive merger in the face of new competition coming into their area
  • Broadening the professional skills base. In the same way that bringing in a new partner with specialist skills can help a business increase its offering, the same can be true, on a larger scale, with a merger. Bringing 2 boutique practices together with complementary skills could attract clients looking for a 1-stop shop
  • Expansion into new territories. Mergers can be an effective way to broaden the business geographically
  • Acquisition of expertise. One partnership may have much better and more modern admin systems in place, whereas the other may have better and more successful marketing. Mergers can allow the new entity to take advantage of both

 

Just as there are things that make mergers appear attractive, there are also good reasons for not leaping in:

 

  • Loss of independence. A merger essentially creates a new business entity and the 2 previous ones disappear. Partners who have been used to doing things 'their way' for a long time may struggle when it becomes apparent that change and compromise are part and parcel of any merger
  • What's their motivation? If firms are coming to you wanting to merge, make sure you ask yourself why they're doing it. Some want to merge because they have problems, either financial or with management, and think a merger will help them to go away. Remember, the partners in that practice will be yours soon. Do you really want to run a business with people who let those problems happen in the first place?
  • Bigger isn't always better. Mergers are not for everyone. As a partnership you all need to agree to the best course forward for your business
  • Rebranding. When 2 firms become 1, there is always the delicate matter of what the new entity is going to be called. This is a vital decision, since presumably the two mergees have built up client rosters and goodwill based on their names and reputations. Will that goodwill transfer to a new entity with a new name, in a new office and possibly with a new culture? Then there are the associated costs of marketing the new business, telling clients and prospects of the changes, which need to be factored in
  • Keeping staff on side. There will always be a desire to keep possible merger talks as confidential as possible but this also needs to be counterbalanced with a need to tell employees, at some point, what is going on. Talk of mergers has a tendency to cause staff to worry about their positions, and what you don't need at this stage are your star performers going to the competition

 

A merger is one way to ally with others but there are different options. A separate joint-venture partnership might allow you and another business to create a third business for a specific task, while each partner business retains its own identity. Or take on a new partner whose expertise is not yours – following the Legal Services Act, it is now possible, for example, for a solicitor to partner with an estate agent and for non-legally qualified people to be part of the ownership and management of a legal practice.

 

As always, keep a close eye on your goals for your business. Make a list of the reasons why you and your partners are considering a merger and ask yourself if you could attain any (or all) of those ambitions by changing the way you currently work. Skills shortage? Can you hire in those skills as employees? Market share? Perhaps you can identify new markets to create instead of trying to gain some more of the current ones you specialise in. Outdated systems? Maybe investing in new systems yourself will be better for you in the long run. Whatever the outcome of your deliberations, seek out the best independent advice available, take your time and always have a plan.

 

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