This handbook is intended to be a catalyst to stimulate the thinking of you and your partners and to be a reference source detailing what is involved in such a complex business strategy as a merger...

7. Commitment

You must constantly review everyone's commitment to the merger process since this can change as things develop. Someone who remains uncommitted can have a devastating effect on the other members of both firms by instilling doubt in other people's minds. There are some obvious stages where it is possible to analyze and re-affirm commitment levels. They are:

a) Long Term Goals. Is there a genuine belief that the long term goals agreed to by the firm are in both the firms' best interests and the various partners' best interests? It is one thing to go along with a set of firm goals and quite another to believe that they can really be helpful on an individual level. Each partner will have varying levels of commitment to these goals. Be on the look out for those who only give lip service to this procedure. Their hidden agendas can harm you if they emerge later.

b) Firm Policies. When you get into a discussion of firm policies, beware the partner who says they are fine for the firm, but who you know intends to go on doing things the way he/she always has, regardless of the policies. If they cannot buy in to the importance and purpose of these policies, they probably cannot buy in to the whole merger concept.

c) Merger Agreement. This is where you should be able to separate those who really think things will succeed from those who are having serious doubts.

d) Partnership Agreement. Again, a good place to see who is committed to the merger and who is more concerned with protecting themselves if the merger fails. Many firms require a lock in period to highlight the commitment that all partners must make to the merger.

e) Compensation. All mergers have a great deal of compromise built in. Since compensation is one of the most important factors to each individual partner, both in terms of money and status within the new firm, those who find it difficult to bend on their own compensation or on the compensation of other partners, are signaling a problem with the merger.

f) Pro Forma Budget. Since this will include projected hourly rates, time commitments and billing expectations, as well as expenses and profit, a lack of commitment may develop with some partners. If the firm's expectations differ from the individual's goals, you'd better sit down and come up with numbers that are agreeable to everyone. Over estimating projected profit can have a serious negative effective on whether the merger, once consummated, will succeed. Be very conservative in your financial planning and ensure that everyone can live with the resulting pro forma.

g) Firm Management. Do any of the partners have problems with either the style of management proposed or the individuals who will be responsible for the firm's management? The management, as important as it is to the success of the merger, cannot be effective if it doesn't have the support of all the partners. This must include their agreements to not second guess the management in spite of their own fears.

h) Staffing Arrangements. As mentioned earlier, a merger will not succeed if the styles of staffing are vastly different. For example, a firm that uses secretarial groupings will have problems with a firm that uses one-on-one secretarial alignments. If you are asking professionals to change the way they work with their secretary you have to be sure that they really are prepared to make the new system work or they will sabotage it. That can, in turn, sabotage the pro forma budget and eventually may sabotage the whole merger.

8. Communications

With the possible exception of culture, nothing is more important to a merger than communications. Everyone involved, from the file clerk to the senior partner, has fears about how they will be treated by the new firm. Efforts to communicate what is happening with the merger discussions become vital to allaying these fears. Some of the ways you may wish to do this are:

a) Social Gatherings. Separate and combined social gatherings for the partners, non-partners and staff are vital. Let them get to know each other on a personal level and they will feel a lot better about their future. It can also point out any problems you may have.

b) Policy Development. As the Merger Committee develops firm policies, meetings with all partners for ratification are advisable. This allows every partner to feel that they are part of the merger process. Obviously, when the Merger Agreement and the Partnership Agreement are developed, all partners should be involved by way of input and approval.

c) Departmental Meetings. Meetings of all partners, non-partners and support staff in a given department group will help them to get a sense of their role in the new firm, as well as helping to define the firm and its practice areas.

d) Staff Meetings. The people most concerned with the status quo are your staff. A merger is a very upsetting prospect for many of these people but, without their support, the entire merger can be in peril.

e) Clients. Every effort should be made to have your clients feel that the merger is being done in their best interests and that their support of it is important. Make them a part of the process. Introductions of professionals that they have not met, outlines of expanded services available and an emphasis on client service become vital. Special cocktail parties, luncheons, dinners and an open house are all ways to handle clients that will make them feel special. If a major client or clients are unhappy with the merger, the entire project should be re-evaluated to see if they can be brought onside or whether the new firm can function in a profitable manner without them. Also beware the partners who stand to lose one of their major clients - they can't be too happy about the merger at that point.

THE USE OF CONSULTANTS

Now that mergers are becoming much more numerous, consultants have become the experts. Very few professionals will go through more than one or two mergers while consultants may go through many of them on behalf of various clients. There is no point in re-inventing the wheel. It makes eminent sense to draw on the expertise that already exists.

There are seven main areas where consultants can be used to the maximum advantage. They are:

1. Interviews

By having a third party interview each and every partner you will probably get a better feeling for who has problems with the merger and what their fears are. This is especially true if the results of the interviews are given to the Merger Committee without reference to the individuals who expressed the concerns. The purpose is to resolve potential problems, not assign blame for them.

2. Pro Forma Budget

Again, a third party may be desirable for the task of reviewing past firm financial information and generating a pro forma budget for the new firm. If the numbers do not work, then members of the firms have not had access to the financial information of the other firm. By generating the pro forma the consultant can also review all other aspects of how the old firms, and consequently the new firm, will operate. This will give them a greater insight into potential problems and should allow them to make recommendations regarding how to solve them.

3. Organization and Direction

A consultant should be able to keep the Merger Committee on track by organizing the matters that need to be resolved and setting their priority in the discussions. Developing a time line is a must in any merger and something that most consultants deal with on a daily basis. Also, their experience will often allow them to offer several options on most issues put before the Merger Committee.

4. Agreements

It is important to develop a Merger Agreement as quickly as possible, before the news leaks out that talks are under way. This will also provide the base for the Partners' Agreement. A consultant can be very important in defining what should be and what should not be in these agreements. While the drafting of the agreements should be left to the professionals, the consultant can provide the framework.

5. Technology

There will be a myriad of technological concerns in a merger that a consultant should be well versed in. With the size of the firm changing so dramatically, it will be necessary to review data processing hardware, accounting software, word processing equipment, telephone systems, copiers, facsimile devices, optical character readers, telecommunications networks, copier monitors, secretarial computers and the compatibility of all these things. In conjunction with your administrative staff, they should be able to help design the day to day systems to back up this equipment with the least amount of upheaval in the way the professionals function.

6. Marketing

A merger provides one of the greatest opportunities to market a professional firm. In fact, it is imperative that the new firm be marketed strongly at the beginning if it is to have the credibility from clients and the profession. Getting the new firm's name and its greater diversification and specialization known can be a key to whether the merger succeeds at the level desired. A marketing consultant or public relations firm may end up being your greatest asset in the merger process.

7. Partner Compensation

Often, when partner compensation systems differ, a consultant can help to facilitate a new, custom made compensation systems that combine the best of both worlds and develops partner buy in.

The use of consultants is optional but their value will probably far exceed their cost. It may be in the firm's best interest to use different consultants for different aspects of the merger (for example an accounting firm might do the pro forma while a public relations firm might do the marketing) and it may be possible for the administrative staff to do much of the work otherwise done by the consultants.

THE MERGER CHECKLIST

The following is a checklist of the various things firms will have to consider when trying to put together the actual merger:

The Merger Committee

If this group has the respect and confidence of all of the partners, prospects will be good. If not, look out. The smaller the committee, the more decisive they will be and less billable time will be consumed. They must have the ability to make decisions that bind their partners without further consultation but they must also be aware that they will have to bend over backwards to communicate with everyone and get them involved in the process.

Long Term Goals

As soon as possible, the Merger Committee should enunciate a set of new firm goals and measure all their actions back to that set of goals. Of course, partnership concurrence on these goals is absolutely necessary.

Organizational Style

How will the firm be governed? Who will do that governing? A suggestion is that the Merger Committee become the Management or Executive Committee for at least one year after the merger, since it is an ongoing process that lasts longer than the day the firms join forces.

Firm Policies

As these are developed by the Merger Committee, they should be discussed and ratified by all partners. Among the policies you may wish to consider are:

• Lines of authority for the Executive Committee, the partnership as a whole and the Executive Director
• Who the firm auditors should be
• The policy regarding adding or dismissing professionals
• Which bank(s) the firm will use
• Allowable business development expenses
• Memberships
• The use of clients as suppliers
• Guidelines for the acceptance of contingency files
• Guidelines for the acceptance of pro bono work
• Hours, billings, hourly rates, and accounts receivable expectations
• Insuring partnership interests
• Format and frequency of partnership meetings
• Sabbatical leaves
• Vacation entitlements for partners, non-partners and staff
• Practice group makeup and leadership

Pro Forma Budget

A necessity if you are to know where you are going and how you intend to get there. (See previous comments.)

Merger Agreement

This should be kept simple but address matters such as the effective date of the merger, the firm name, the form of the merger, who will be the partners, what their percentage ownership will be, how the capital accounts will be structured, who the Merger Committee shall be, the form of firm management, who will be the non-partners with the new firm, how conflicts will be dealt with, the use of committees, liabilities from before and after the merger, a lock-in provision and a statement of the principals affecting a partner's percentage share in the firm.

Partnership Agreement

This should be a continuation of and expansion of the matters dealt with in the Merger Agreement. This would address other matters such as withdrawal, retirement, expulsion, resolutions, an amending formula, fiscal year end, duty to practice, admission to the partnership, partner's disability, death of a partner, disclosure, benefits payable to partners, voting rights, arbitration, and its relationship to the Merger Agreement.

Timetables

A timetable listing all matters to be dealt with before, during and after the merger should be generated, constantly revised and followed as closely as possible. Be sure to allow enough time for all the things that will come up that you haven't thought about or allowed sufficient time to handle properly. Once the merger gets rolling there will be a temptation to get it done quickly. While you should take advantage of this momentum, it should not force you into making the final moves until you are ready.

Outside Advice

You will have to decide how much outside advice you wish to seek. Some areas you might consider seeking help for are strategic planning; tax considerations; the valuation of assets; marketing and public relations.

Valuations

You will need valuations for assets, accounts receivable (including bad debts and the possible future recovery of them) and work in progress. Consultation with your accountants is recommended so that your decision includes all the tax considerations applicable.

Technology

A review of the compatibility and expandability of the various pieces of equipment currently on hand are required. This would include word processing, data processing, other computer hardware and software, telephone equipment and photocopy equipment.

Staff

It is unlikely that you will be able to reduce the compliment of staff very much in the beginning. It is better to have too much staff service at the start, until the professionals are comfortable with how the new firm works. Nevertheless, there may be some duplication of personnel. It is suggested that as many of the duplicates be found other jobs or take up the attrition slack rather than be let go immediately. Mass dismissals will only leave the staff looking over their shoulders and wondering who will be next. This cannot help the transition.

Systems

The day-to-day systems of the firm will have to be examined, adjusted to fit the new firm and conveyed to all professionals and staff. This includes: billing procedures; the various forms to use; the type of filing system (centralized or decentralized); disbursement recovery procedures and payroll.

Manuals

The creation of a policy and procedures manual so that everyone will know what is expected of them and how to go about doing almost anything from how to operate the phones to how to draw a cheque.

Committees

As a means of getting other professionals (not just partners) involved in the merger process, you may wish to create committees to study the various aspects of the merger and have them report their recommendations to the Merger Committee. Some committees that you might consider would be the library committee; the future space or space design committee; the social committee; the Partnership Agreement Committee; the marketing committee; the precedent and style manual committee; the technology committee; the finance committee (this is usually a function of the Merger Committee) and a human resources committee.

INTERNALLY REINFORCING THE MERGER

Communicate, Communicate and Communicate some more. Celebrate your new firm every chance you get. A new firm champagne party after the first day together is a good start. Some firms create a memento of this glorious occasion. An example would be T-shirts or sweat shirts announcing the merger on the front and the first day letterhead listing of professionals on the back.

Firm luncheons should continue after the merger takes effect and regular staff meetings should be scheduled. These can be used to get feedback and gripes so that they can be dealt with quickly before they start to permeate the firm. Some firms also use a good news memo or e-mail to trumpet accomplishments and cement the concept of a new, vital firm.

MARKETING THE MERGER

Of paramount importance to the success or failure of the merger will be how it is perceived by clients, prospective clients and the profession. The best way to be sure the right message is getting out is the development of a song sheet where all professionals and staff are committed to saying the same positive things about how the merger is progressing and how they see nothing but great things in store for the new entity.

A public relations consultant can be most helpful in developing the "song sheet" as well as preparing press releases concerning the merger - before, during and after. If handled properly, positive word of the merger can have great and long lasting effect. On the other hand, poor P.R. could have the competition saying that it was just a merger of two bad firms into one that is even worse.

Announcements should be prepared and mailed to all clients, prospective clients and firms outside of your general geographic area. Your competitors will already know and they won't be sending you any business regardless. Wherever possible, highlight the new strengths acquired by the merger - specialization and diversification might be examples to promote.

In advance of the merger arrange as many small client receptions with your major clients as possible. This lets them get to know the new faces and can impress them with your concern for their blessing. Once the merger has taken effect, you should organize a firm open house reception for all of the new firm's clients, so that they can all feel as good about the merger as the major clients who have already been consulted and entertained.

Immediately create a firm web site telling the story of your merger, your new depth, specializations and commitment to client service. A printed version can then be used by every professional in the firm as an introduction to potential new clients and as a cross selling device to current clients.

©1990, 2002

Michael J. Anderson

EDGE INTERNATIONAL

Download Mergers: A Practical Handbook: Part II in [pdf].