Our recent M&A Pulse Report focusing on accounting and financial advisory firms identified some major challenges with integration following acquisition of firms. Around 60% of firm leaders said that their post M&A integration process was loosely planned or completed in an ad hoc manner. Around 29% of firms felt that financial outcomes (revenue, profit, value) were consistent with or exceeded expectations at the time of the transaction.
Despite these challenges, 100% of firms said that they would consider another acquisition in the future! Clearly, consolidation of firms will continue for some time. However, there’s no doubt that significant opportunity is being lost through poor integration of clients, people and systems following acquisition.
Often, the real issue comes back to established positions and unwillingness to really integrate. Push back makes the acquiring business unduly sensitive to changes in the way that clients and people are managed. What often results is the misalignment of the consolidated business as the 2 groups move in different directions. The results can be catastrophic.
The scenario below is played out on a consistent basis within the industry.
A relatively large metropolitan firm had successfully integrated 2 firms in the past. In all cases, the offices were centralised within 12 months and the principals of these firms continued to work in the consolidated business. The firm took on a 3rd acquisition, located around 30km from the head office. Whilst there was no formal agreement in place concerning post-merger integration, it was agreed informally that the acquired firm would continue to operate largely independently for a year or so, after which time the 2 offices would be merged. It became clear early on that there was resistance to changes in systems and processes. It was difficult for senior managers to meet with the clients of the acquired firm, due to the distance between the 2 offices. When a consolidation of offices was suggested, there was immediate pushback. Whilst on the surface it was ‘business as usual,’ there was a subtle increase in antipathy and resistance to change. After 3 years, the owner of the acquired business elected to leave and set up another office within 10 km of the original office. All original staff and a substantial proportion of the clients went with him.
In reviewing this scenario, it becomes clear (in hindsight) that the acquiring firm was largely responsible for the situation they ended up in, despite their claims that the seller had acted unethically by taking their money and retaining most of the clients.
- There was no real effort made to transition client relationships to the consolidated business. Clients did not see any change in ownership, therefore they were content with the status quo. Whilst this made some sense in relation to client retention, in the long run it was a poor strategy.
- The firm did not act on clear resistance to ‘this is the way we do things here,’ leading to the perpetuation of an ‘us vs them’ mentality which only hardened as time went on. Whilst the seller was in a position to keep servicing clients, they had no motivation to change.
- At a time when the acquiring firm had strength (when contract payments were still outstanding), they failed to act decisively on clear signs that consolidation was being resisted. By the time this came to a head, it was too late to take any proper action.
It’s generally the lack of early action concerning integration of clients, staff and systems that results in significant issues down the track. We see this especially in smaller acquisitions where there is more of a tendency for buyers to have a hands-off approach in the first 1-3 years following acquisition.
The only way to overcome these issues is to have a clear integration strategy in place as the M&A deal is concluded. Each party should be aware how the integration will play out. Ideally, there should be an external, independent project manager holding both parties to account.
What’s the real risk that clients and staff will leave? Minimal, if the integration process is handled strongly as well as sensitively. If you feel that there’s a strong risk of clients and staff leaving, then perhaps this is a deal you should never have entered into in the first place.
For more information on how to prevent ‘US VS THEM’ thinking in your acquisitions, contact Dale Crosby or Magnus Yoshikawa on Ph 1300 621 883.