Art of Accounting: Merging with Withum

When assessing a practice merger candidate, sometimes the "little" things are the "big" things.

Further, everything counts and needs to be considered. It is much easier to combine than to separate, so tread carefully. Last week I wrote about an unpleasant encounter. Today I want to talk about our merger with Withum. 

I previously wrote about our merger. Now I want to provide some of the details of the transaction. After our lunch, Withum partner Bill Hagaman said that if we wanted to proceed, we should have a meeting where we brought details of our practice. We figured out everything we would want to know about them, and then assembled all of that information about our practice. Here is a list of what we provided:

• P&L and balance sheets for the last five years and the current year to date. These were on the cash basis, which is how we maintained our records. We did not convert our numbers to the accrual basis. 
• Year-end accounts receivable schedules for each of the previous five years. We deleted all names of clients.
• Year-end W-2 forms for each of the previous five years. Names were removed.
• We provided descriptions of each person's level and number of years in accounting and number of years with us. When we merged with Withum, all of the accountants who came with us started their careers with us. We also provided the total chargeable hours for each person for the last year. As an FYI, the largest number of hours was one staff person at 1,800, with the rest split at 1,700 hours and 1,600 hours. The three partners combined had 3,700 chargeable hours. We also listed the date of the next raise for each person.
• We prepared a schedule for the prior year of our largest client groups identified by their industry with fees over a designated amount. This came out to 13 clients that totaled about 32% of our aggregate collections. We listed the total fees for each client along with their realization. Some 72% of those revenues were from fixed monthly retainers and 28% were based on time or extra billings. This schedule showed three individual clients, two in each of two industries and the remaining six in different industries. This was an eye-opener for us, and this process provided us with some data we felt we could use in marketing going forward. One of these clients was publicly traded and another was a highly regulated financial services company.
• Schedule of billing rates for each person.
• Schedule of total firm time charges and collections (and realization percent).
• Aggregate partners' compensation for last year.
• We highlighted our marketing expenditures for the last two years, which were quite high as we had a full-time marketing person and did a considerable amount of advertising.
• Our last peer review report.
• Malpractice insurance details.
• Additionally, we provided details about special features and "assets" of our practice.

We organized all the information and had it bound into a hardcover book, which was our practice when presenting advisory services reports. I know clearly what we provided to Withum as I have just read the above from an extra copy I retained. This book is about 75 pages. 
Needless to say, we had a great, productive meeting. When it ended, I asked Bill to make available to us the same information about their firm as we provided to them. At the next meeting everything was laid out for us on their conference table. They did not hold back anything! Talk about sizing up merger candidates. Everything was straight and direct. No hidden agendas. Every meeting went as well as it could. We met each other in June, had lunch in July, and the meeting I described occurred on Aug. 5, 2004. The merger was effective on Jan. 1, 2005, with all documents signed, sealed and delivered. There was no messing around. After the merger, there was not a single bad day. Pretty cool. 

Do not hesitate to contact me at emendlowitz@withum.com with your practice management questions or about engagements you might not be able to perform.