five items for the second meeting.
by marc rosenberg and peter fontaine
cpa firm mergers: your complete guide
for now, let’s define the letter of intent as a written offer made by the buyer to merge in or acquire the seller. (a thorough definition is given later in this post.) it is a relatively short, simple, non-binding offer, subject to
- further negotiations,
- performance of due diligence and
- a formal vote by the buyer’s partners.
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before the loi is prepared
the first meeting was the “get-to-know-you” meeting. the purpose of this meeting was simply to introduce each firm to the other, give each a chance to “kick the tires,” get a feel for the personality and style of the other and to share some very basic information, all of which is designed to help each firm decide if they wish to go to the next stage.
the next stage is the exchange of financial and other basic information about the firms. after this stage, i’ve seen many firms go immediately to the letter of intent (loi) stage. i feel strongly that this is premature and leaves out an important step: convening a second meeting before the loi is issued.
the second and subsequent meetings
after the introductory meeting and a review of the financial and operating data that is exchanged, there still should be many questions that each side has for the other (if there aren’t, someone hasn’t done a careful enough review and analysis). that’s why a second meeting is a very useful session. armed with the information obtained from this second meeting, it’s more likely that the buyer will be in a position to make an offer they will stand behind throughout the negotiation process.
it’s also more likely that the seller will find the buyer’s offer close enough to what they were expecting so that serious negotiations can commence.
these are the items that are commonly accomplished at the second meeting:
- questions arising from each firm’s review and analysis of financial and operating information. if each firm conducts a thorough review and analysis of the financial and operating information, they should have many questions to ask of the other. doing this in person rather than via email is much more effective.
- deeper questions asked by the buyer. this gives the buyer a more thorough understanding of how the seller’s practice has been managed, how work gets done and how people work on client projects, all of which help the buyer gauge the likelihood of the merger’s success and the value of the seller.
- deeper questions asked by the seller. this gives the seller a more thorough understanding of how the buyer’s practice is managed, how they will fit in, what changes to expect in terms of systems, processes and technology and in general, what their roles will be at the larger firm. exploration of all of these issues helps the seller gauge the likelihood of the merger’s success.
- the parties exchange general ideas about desired terms. this makes it more likely that the buyer’s offer will be closer to what the seller is expecting.
- evaluation of culture and personality fit. these are the most important factors that determine the success of a merger – not financial or operational issues. so, it stands to reason that the more time each firm spends with the other, the better they will get to know the other and determine if the fit is there. this second meeting goes a long way toward furthering this objective.
definition of letter of intent (as used in a cpa firm merger)
at the onset of the merger process, most sellers contact at least two potential buyers and sometimes more. doing so positions the seller to achieve the most favorable merger terms possible while at the same time seeking the best fit.
relatively early in the cpa firm merger negotiation process, it is customary for the seller to request letters of intent (lois) from qualified buyers. this positions the seller to select one buyer to commence negotiations with in earnest.
the custom and process of issuing a letter of intent (loi) is a rather curious one because:
- the loi is contingent and, for the most part, non-binding.
- the offer is commonly made before the parties have begun serious, detailed negotiations and performed due diligence.
- lois are usually “short and sweet,” lacking the kind of detail that will later appear in the merger agreement.
when i represent sellers in a merger, i advise the seller to be proactive in the loi stage and give the buyer a list of issues they would like addressed in the loi before it is issued. this kind of proactivity makes it more likely that buyers will address all the areas considered key by the seller.
this was written in collaboration with attorney peter fontaine, the founder and managing partner of newgate law, a firm of lawyers that exclusively serve cpa firms. he has served as chief legal counsel for professional services firms for more than two decades. before establishing newgate law, fontaine held the general counsel post at mcgladrey, and was responsible for the company’s legal, compliance, risk management and government relations functions. he was also a partner at arthur andersen, where he managed the legal support for its global business consulting practice.