12 questions to ask in firm M&A post-coronavirus

May 4, 2020 9:00 AM

As a consequence of the COVID-19 pandemic, accounting firm M&A activity will likely grind to a halt during the second and third quarters of 2020. However, once that activity resumes, the lingering effects of the pandemic will require greater scrutiny of some issues.

The pandemic will bring about a few major changes in how accounting firms operate, meaning that firms looking to merge must evaluate transactions with an entirely new lens.

Mergers by accounting firms are not immune to this scrutiny and due diligence teams for both the acquirer and the merged-in firm will need to consider certain aspects of acquisitions from a fresh perspective. Accounting firm leaders will need to evaluate transactions through an entirely new lens, but those that can adapt for the issues listed below will be able to explore M&A activity with greater confidence.

1. Finding a merger partner

In many cases, negotiations begin in earnest only after a firm has had a chance to meet and consider several possible merger partners. For those firms that have not already completed this step, how will this process need to change so that the right merger partner can be identified and serious discussions can commence?

2. Assessing the client base

What percentage of the firm’s clients are in vulnerable industries, particular those that have been hardest hit? For example, industries such as restaurants and bars, travel and hospitality, and retail. What percentage of clients remain at risk to close their businesses or to seek bankruptcy protection?

3. Evaluating financial condition

How has the disruption in business impacted collection of accounts receivable? Have the days to collect lengthened and by how much? Have adequate reserves been established for an increase in uncollectible accounts receivable and WIP?

4. Stating the deal terms

How is merged-in partner compensation tied to future revenue generated from clients? How have ancillary services, such as financial planning or litigation consulting, been impacted?

5. Assessing the workforce

Has the firm experienced material layoffs and furloughs? How have those changes impacted continuity of client service and responsiveness?

6. Analyzing remote access and availability

How adept was the firm at transitioning to working remotely while remaining accessible to clients? Does the firm’s infrastructure raise any concerns about security issues?

7. Measuring risk management and business continuity protocols

Are the firm’s emergency and risk management protocols sufficient? What plans are in place for business continuity and succession planning?

8. Evaluating material contracts

Does the firm have any long-term or material contracts that are not readily terminable? Is the firm at risk of default under any of its contracts, particularly with a lender or its landlord?

9. Analyzing leases

Does the firm have more space than it needs, and who will be responsible for the cost of that excess space? What percentage of the firm’s workforce is likely to continue to work remotely?

10. Determining cultural fit and reviewing due diligence

Decisions about whether potential new partners are a cultural fit have traditionally been based upon face-to-face meetings. Will remote communication and online access to documents be sufficient for purposes of due diligence without the benefit of site visits?

11. Addressing collaboration and integration

How will partner and staff collaboration succeed if people continue to be reluctant to travel and meet in large groups until a vaccine is available? What challenges will need to be overcome in order to integrate computer systems and migrate client data?

12. Defining material adverse changes

Once discussions about a combination commence, what material adverse changes or events should terminate the deal, such as a reduction in revenue by a set percentage or the loss of material clients? Would the occurrence of another shut-down trigger the right to terminate?