M4D Business Journal 113 Should You Merge Your Practice? Part 2

MANAGEMENT FOR DESIGN BUSINESS JOURNAL 113 SHOULD YOU MERGE YOUR FIRM? PROBABLY! - PART 2 In our recent Business Journal we presented the business case for merging your business with likeminded businesses. Our advice is to start from the premise that you should merge your practice - not that you shouldn’t. By merging with like-minded businesses, you will accelerate your path to success and break the innate tendency to improve incrementally.

The advantages of merging in today’s increasingly competitive and oversupplied market place include: • • • • • • • • • • • • • • •

Increasing your client base Stronger and more talented leadership Increasing your skill base Increasing productivity Economies of scale Increasing the capacity to invest in technology, innovation and systems Building scale to engage experts in business Obtaining additional expertise Expansion into other geographic regions Adding new practice areas Capacity to devolve and spread client relationships Diversification of work to mitigate risk Sharing the workload and improved work/life balance Increasing your influence in the marketplace Succession and exit strategy

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Our advice is to start from the premise that you should merge your practice - not that you shouldn’t

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Considerations While mergers can be a valid option, making them work is often another matter all together. Problems are mainly due to cultural misalignment, personnel differences and improper due diligence. Successful mergers are based upon a sound integrated business strategy that creates synergy, and a combined firm that produces greater client and business value than either firm could produce alone.

Start by determining your merger objectives: • What size of firm are you considering?

• Do you want to practice in a large firm? If not, what is the largest firm that you would want to practice in?

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• Is having your name a part of the business name important to you?

• What are your expectations and objectives for a merger?

• What are you looking from a merger partner?

If you are weak in firm leadership, management and administration – look for a firm that is strong in these areas. Having said that, strong leadership, management, and administration may be hard to find in a firm fewer than 20 to 30 people. You also need to get your head around the fact that mergers typically occur without compensation or goodwill to either party.

No doubt you will find that outside resources can prove invaluable to bolster the internal team - an experienced consultant can find the right targets and facilitate and drive the entire process.

Additionally, experienced legal and tax counsel will also be vital, and an experienced partner will be able to manage these resources and bring them into the fold where and when needed.

A major consideration for an Australian practice, however, is who do you work with that has been through the process and can provide expert advice?

Preparation Typically, a merger occurs between companies of comparable size and finances, taking two likeminded businesses and making them stronger together. It should be a friendly transaction since both entities are agreeing to the deal, and both parties should benefit from the arrangement.

We’re not talking about the path to acquisition, which typically involves one business (the larger one) taking control over another.

Once you are sure that merger exploration makes sense – you should ensure that your business is in order. In other words – can anything be done to enhance the value and/or marketability of your firm? For example: • Do you have a business or strategic plan? If not – how will you convince a potential merger partner that you have a plan for the future and know where you are going?

• Work on and clean up your financials.

Improve the financial performance of your practice. Eliminate deadwood. Get your debtors under control • Fix up your business systems. Great systems seriously underpin the value of your business and the attractiveness of your offer to a potential partner

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• Avoid entering into long term commitments that might make your firm undesirable to another firm. (new long-term leases, risky client matters/cases, loans, admission of new partners, unfunded partner buyouts/ retirements, etc.)

• Your communications and branding collateral needs to up to date Next, develop a merger marketing plan and begin working the plan. Try to generate enough leads that you can explore a merger with several businesses rather than engaging in “random merger talks” which often result in isolated merger offers, leaving you with no framework for comparison.

Making it work The real question that businesses struggle with is not the what (merge) but the who (people).

The ‘who with’ should be a firm with a similar culture, excellent leaders (or potential leaders), great relationships and clients who understand the long-term benefits to all parties, resulting in what is often described as being 2+2=5: compatible culture, systems, technology, project, client and design aspiration.

Identifying acquisition targets, buyers or another firm to merge with is not an AEC firm’s core competence. There are though, many Australian businesses that have successfully achieved this in recent years including: • Rothe Lowman | White Architecture – establishing a Brisbane presence • SJB and FKA spinning off a separate business – PLUS Architecture • HDR and Rice Daubney • Prior Cheney to DWP | Suters to DWP • Cox Group and Coda Studio • Grieve Gillette | Anderson • Mark Williams Architects and AEV Architects In the CODA | Cox scenario - CODA directors Emma Williamson and Kieran Wong assumed

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By merging with Cox Architecture, we have a real opportunity to get stuck into larger and more complex work and to continue our interest in developing practice culture

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directorships with Cox, with all CODA people transferring from the practice’s former studio in Fremantle to the Cox office in the Perth CBD. Williamson said “By merging with Cox Architecture, we have a real opportunity to get stuck into larger and more complex work and to continue our interest in developing practice culture.”

Managing the risks “There aren’t a whole lot of catastrophic failures when it comes to mergers in the architecture and engineering space. Of course, these major failures can and do occur. But, they are very rare” – The Ultimate Mergers and Acquisition Manual, PSMJ Resources Inc. However, there are certain steps to take to minimise the risks of the merger not working out as intended: • Perform proper due diligence on the people and, in particular, the leaders and potential leaders. It’s critical that businesses ensure cultural due diligence is a key component of the merger assessment process. Philosophies, personalities, and lifestyles should be compatible. The partners should like each other!

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• Decide up-front who will be in charge, how you’ll deal with people changes (including redundancies), how you’ll integrate your financial and human resources systems, who will inform who about the changes, and what the plan is to action this.

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• Plan for client retention. Who will talk with clients about what’s going on? What will the message be? How will the new entity maintain its level of service during the change?

...don’t commence the planning process until you have thought through these issues and put in place the mechanisms to ensure you deliver on your aspirations

• Consider retention of key staff. How can you ensure that you don’t lose talented people because of this period of uncertainty and change? Who will go and who will stay after the agreement is formalised?

Merging versus acquisition

• Decide whose systems will be utilised in the new entity, or are you going to go down a path of renewal. Plan how you will announce the changes and how you will phase them in.

• Typically, the cost savings can be realised in general overhead/corporate services. In our experience you’ll achieve efficiencies in finance, IT, and HR. Bear in mind that with the AEC industry being a peoplebased business, you won’t be consolidating manufacturing facilities or finding large-scale redundancies.

• Assign a senior executive to “make it happen” – and find the right advisor to work with and guide this key person. Successful mergers require a critical degree of communication, alignment and consensus amongst your leadership team. Get on the same page and commit the resources you need to “make it happen.”

Finally, don’t commence the planning process until you have thought through these issues and put in place the mechanisms to ensure you deliver on your aspirations. Now is not the time to procrastinate. Make it happen!

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Most people misunderstand the meaning of these two words as they are often used together e.g.

M&A activity. But the meanings of them are totally different - an acquisition refers to one company taking over another whereby the larger business takes control over the other business they’ve acquired. Acquisitions as opposed to mergers don’t require mutual agreement, but they do require a huge amount of cash! But, to be clear, they both have their pro’s and cons.

In our future Business Journal, we will look at the path to acquisition and why it doesn’t happen often in our region.

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Management for Design has developed a unique approach to developing and executing a merger strategy that, if implemented effectively, ensures alignment of strategy, brand, aspiration and results. Our methodology and systems will ensure successful execution, which involves the key people in the business. For more information, contact Rob Peake on rpeake@m4d.com.au.

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