Pros and cons of Mergers and Acquisitions in middle market Professional Practices

To make sure owners of middle market professional practice are financially secure, then they must know what options are available in these difficult times.  The possibilities include selling, merging, growing by acquisition or just continue on and see how things pan out.  This last option is probably the least advisable especially if you need stability in your finances. So what about Mergers and Acquisitions in middle market Professional Practices?

Ideally merging or growth through acquisition is the best way to move forward and increase financial security. However, if you do not have the time, energy or skills to make that a success, selling may be the best option for you.

Introduction

In this article we will be look into mergers, which include growth by acquisition and also reorganization of the practice.  Merging practices creates a bigger practice, which can have a number of benefits:

  • Combined resources.

Merging practices will mean that there are combined resources such as equipment, administration, professional knowledge and training.  All these can be shared and enable a higher standard of practice with greater efficiency.

  • Cost efficiency.

With the right structure in place costs are cut across the board with the joint use of administration, staff, space equipment and systems. These all make the business more efficient and more profitable.

  • Better coverage.

With more professionals available, there is the opportunity for greater flexibility for coverage of one another. This enables service to the customer to continue whilst allowing for time off.

  • Attracting customers.

    A wider range of services can be offered with a bigger practice, which in turn will pull in more customers. Advertising can also be more effective as resources are pooled together.

  • Greater market share.

With the combined customers from the separate practices, the percentage of the market share is increased.  This can in itself lift the practice into a higher sphere and bring in more custom.

  • Better deals with suppliers.
Suppliers will be willing to make better offers where there is greater demand. A larger practice may even be able to find new and better channels for their supplies as their revenue stands at a higher level.
  • Greater worth to each practitioner.

If the terms are well written then a practitioners financial status will be better than if they had continued in a small practice. This requires a well thought through strategy for when a  practitioner comes to the end of his career or wants to pull out

  • Higher value.

When a larger practice has a good management structure it invariably commands a higher valuation than the combined smaller practices.

With all these advantages in Mergers and Acquisitions in middle market Professional Practices, it is also necessary to point out that it is not all a bed of roses and you need to be aware of some of the disadvantages that are involved.  Use strategies to help avoid or cope with these.  Here are some of the disadvantages and ways to help with them:

  • Lack of control:

All parties may feel to some extend that they no longer hold the reins and are in control of the direction of the practice in the way they were in their smaller practice. When this loss is greater than the benefits of the merger, this becomes a problem.  Careful planning beforehand is necessary with a detailed agreement made about the roles and responsibilities of each party in order to reduce this risk.  It is also crucial that a comprehensive buy-sell agreement is made should problems arise and if in the end the problem remains unsolvable.

  • Dissatisfied parties.

It is easy for mergers to not work out as expected for those involved and this is often because the goals of the merger have not been clearly defined. Clearly define and work through the purpose and strategy of the merger before a merger takes place.  For instance whether the aim is to provide more comprehensive service to the customers or to broaden the customer base etc.  Clearly define the aims to have a much better chance of a successful merger.

  • Disagreement on financial structure.

There can be a lack of agreement on both the financial structure and the control.  A retiring practitioner may well be more concerned about the finance whilst another up and coming practitioner with his career ahead of him, will be looking to Grow the Business

and will be concerned about the control.  It is important, therefore, to make sure that the financial structure is not linked to voting rights.  Make a clear set of rules that clarifies what is passed by the board or shareholders or management.

  • Disagreement on income.

The division of income between the owners and personnel can be a cause of friction. Think through this carefully. Take into consideration tax impact and avoid any abuse of the system.

  • Discrepancy in benefits.

Different practices will have different benefits and ill feeling can be caused if these are changed without prior knowledge. It is necessary to synchronize these across the board. Also, agree upon this before the merger in order to avoid disharmony.

  • Incongruent specialities.

There can be instances where the specialists that are making up the merger, are not compatible with the needed areas. Consideration must be given ahead of time to work out if the combining of these specialist areas is compatible and beneficial.

  • Friction over offices and personnel.

Merging of different offices and personnel is open to friction, so combining these resources needs to be planned carefully. If it will finalize after the occurrence of merger then draw up comprehensive rules to make sure it makes an agreeable outcome for all parties.

  • Unaddressed liability issues.

To address these issues liabilities predating the merger should be indemnified.  This should address both the organization and individual needs.

  • Discrepant supplier or customer contracts.

Check over contracts with customers and suppliers and where there are different contracts with the same customer or supplier. Reconcile these to avoid confusion.

In summary

There are many benefits from merging professional practices. Not least the better financial stability that comes with a bigger more diverse practice.  However, a lot of planning needs to go into preparing the merger. Covering many aspects of the business, in order to create a harmonious outcome that leads to a successful practice for all involved.

This all takes a considerable amount of time and negotiation, often needing anything from six to eighteen months to complete. Mergers and Acquisitions in middle market Professional Practices come with both pros and cons.

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