To merge or not to merge? Merging property partnerships

Posted on: September 14, 2016

Merging property partnerships – which are essentially people businesses – can be challenging. The topic of whether to merge or not to merge a small surveyors’ practice was discussed at a recent “Managing and marketing a profitable surveyors’ practice” (see https://www.mblseminars.com/Outline/Managing-_-Marketing-a-Profitable-Surveyors-Practice/5865/ for future dates and locations). 

Reasons to merge

Property partnerships cite lots of different reasons to merge. Some of the main ones are:

• Fast growth – Organic growth strategies can take time. It can be hard to recruit sufficient numbers of people of the right calibre to achieve ambitious growth objectives. Merging with a like-minded, similarly sized firm can help a firm to achieve the critical mass required quickly.
• Achieve scale economies – The cost of management, technology and compliance are hard to cover in a small practice. Merging means that these costs can be shared across a larger firm. Property costs can also be shared or rationalised. A merger can lead to greater efficiency and better margins.
• Increase resilience – Whilst being a specialist niche practice may generate higher than average profits, it might also mean that the firm is at increased risk from market changes. So merging with another firm that has service lines that are complimentary and counter-cyclical can increase resilience.
• No management expertise – Where partners prefer to spend their time doing the fee-earning work and/or do not have the inclination to invest time in developing management skills, then joining another practice that has a high performing management team can prove a useful solution. However, other solutions may be hiring or sharing in-house managers, using consultants or securing the services of an experienced Non-Executive Director (NED).
• Lots of management expertise – Some partners are really, really good at leadership and management. And rather than spending time growing a firm organically, they can pick up great people and clients by merging with a firm that needs strong management. An alternative to merger in this instance might be franchising.
• Plug skills and service gaps – Where clients are demanding additional skills and services, it may be easier to merge with a firm who has those skills and services rather than trying to recruit and develop them yourself.
• Increase geographical reach – Where the practice has successful operations but has clients requiring support in another area it can be difficult to provide the management and other resources to set up a new office from scratch. So merging with a successful and similar firm in another location can be a good solution. 
• Recruitment – Sometimes, a smaller firm does not appear sufficiently attractive to high quality candidates and this constrains growth ambitions. So merging with a larger firm can help with recruitment challenges. New recruits may be more attracted to a larger firm with established training and development programmes and a clear path for progression and perhaps a wider range of quality clients and work.
• Succession – If the owners of a property partnership are approaching retirement and there are no obvious successors then merger may be a way to obtain value from the business (an exit strategy) and provide ongoing career options for the professional and support staff who have served with the firm.

 Reasons not to merge

There are also lots of reasons not to merge. Some of the main ones are:

• Culture clash – Property partnerships are people businesses. People join and remain in a partnership where they feel that their values are shared by their partners. The culture of a firm is often the glue that holds it together and is the foundation of its success. The shared value and culture is even more important if there is no shared vision for the future. If two firms with different cultures merge, the result can be catastrophic with partners in constant conflict. There may be cultural differences in the way that different teams operate – the classic being professional verses agency staff.
• Loss of control – Inevitably, control and management will be diluted when two firms merger. There is generally a stronger partner who will take the lead. People who have founded and grown a partnership themselves may be reluctant to have to answer to others or have their decisions constrained.
• Acquisition rather than merger – If you merge with a much larger firm then the brand, culture and values of the smaller practice might be lost completely. Staff may feel that they have less prominence in a larger firm and lose position in the promotions race.
• Two small poorly managed firms make one big really badly managed firm – Where there is a lack of vision, leadership and management expertise in both firms the problems are simply compounded. There is an even bigger mess to deal with.
• Loss of key staff – Non-partners who have made a major contribution to the development and growth of the practice may be committed to remaining in a small firm and leave when you merge. They may also have expectations about the timing of their promotion and entry into equity which they may perceive as reduced or delayed on merger.
•  Client concerns – Clients may value the personal attention and service they receive with a smaller practice and be concerned about the impact of a merger. Clients may fear that a larger firm means higher fees without any additional benefits.
• Redundancies – To secure any perceived efficiencies, it may be that there must be some redundancies where there are multiple people with the same job functions. As well as the cost of the consultation and employment law expertise, good people may be lost and the morale of others reduced.
• Integration  issues – There will be a period of time where the merged firm is operating two sets of systems and time and cost will be required to find ways to integrate these systems. This can lead to disruption in day to day client and work management and further investment to buy new systems that are more scalable.
• Internal focus – While the leaders of the two merged firms turn their focus internally – to address the multitude of integration issues, their eye is off the external market. Clients may become disillusioned and depart. Competitors may steal a march.

M&A assessment process

Management gurus propose the following seven tasks in the M&A assessment process:

1. Confirm the strategic rationale
2. Select the right target
3. Assess the risks
4. Value the stand-alone entity
5. Identify the potential synergies
6. Value the net synergies
7. Ensure added value

Perhaps the first area – the strategic rationale – is the most critical. There needs to be a clear vision of what the merger will achieve – both in the short and long term. The partners need to be clear about what they do and don’t want from a merger partner and develop a “shopping list” of criteria to help identify potential merger partners. There must also be an acceptance that some compromise is likely to be required and an understanding of what the deal breakers might be.

In larger firms, they may create a merger team – to concentrate management resources on finding suitable targets and undertaking preliminary discussions. The terms of reference for the team need to be clear so the partnership knows what can be disclosed during these discussions. There’s some merit too in having a separate team available to undertake the negotiations once things get serious.

Due diligence, risk and project planning and communication

Once the assessment process is complete there is a significant investment in time during the due diligence process. While most firms are usually good at inspecting the financial information and property leases, there is often insufficient attention on the client base, the work pipeline, the management and work processes, the human resources policies and the quality of the professional and support staff. There may be concerns about some of the staff and ensuring salaries, benefits and roles can be aligned without creating problems.

Many partnership merger negotiations hit problems when they get around to looking at pension provisions and capital accounts of the equity partners and aligning points systems. I’ve seen more than one fruitful merger hit a wall when partner pensions and annuities are examined. One suggestion is that retiring partners only withdraw their capital over two years to ease cash flow issues.

Negotiating the finer points of the merger agreement can be very time consuming. Keeping negotiations confidential can be tricky – and staff may become suspicious and nervous if they are not fully aware of what is happening. Some firms will consult early in the process with critical clients and referrers and this can de-stabilise those relationships. And there will need to be a damage limitation exercise if the negotiations break down and reputations need to be protected.

There also needs to be significant project planning to tackle the various internal and external communications programmes and all manner of integration projects if the merger proceeds. Post-merger activity can take up to two years. This is often under-estimated by both management teams.

A project plan covering the key tasks are needed for:

• Legal and insurance work
• Internal communications
• External communications (including the media and client “launch”)
• Rebranding
• Office relocation (property acquisition/divestment)
• Training and staff integration
• Systems integration
• Ongoing integration and change management programmes

Stories of successful and unsuccessful mergers – the culture gap

I recently talked to a medium-sized law firm about its merger with a larger firm. It had a long list of nearly 30 firms who could be potential merger partners based on size, location, client type and range of services (both complimentary teams to bolster their existing teams and other services to fill in gaps). The firm’s leaders met with six of the firms – and their decision was almost instant when they met the partners from the firm they eventually merged with. They realised that there was a good personality and cultural fit. They were people that they felt comfortable being in business with. Any issues in the negotiations were quickly resolved as both firms really wanted the merger to happen. Often, “deal-breaker” issues occur in negotiations when one or other party isn’t entirely sure about the merger.

Another less successful scenario was where two property firms merged. On paper, it looked like a good match – similar clients, services, locations etc. However, there were major differences in the attitudes of the partners and little consideration of how the merged firm would grow and change in the future. This unhappy marriage pushed some of the best people to leave. Eventually, the hard decision was taken to de-merge the firms. It took four years to repair the damage and make up the lost ground for both firms.

Other points

During the workshop, I promised to get back to the delegates on a few other points:

• Business and financial support for growing firms https://www.gov.uk/business-finance-support-finder/search There is a wide range of schemes listed here. For firms developing new services some of the research and development and innovation schemes might be relevant. There are also various training grants – but these are often area specific. For consultancy funding support there is the matched funding Growth Vouchers Scheme https://www.gov.uk/government/collections/growth-vouchers-programme Increasingly, property partnerships are exploring apprenticeships to “grow their own” people.
• The growth stages – and how to resolve the various challenges – are summarised in this post http://kimtasso.com/leadership-in-property-eight-insights/
• Client profitability management – reducing time spent on smaller and less profitable clients is covered in this blog post http://kimtasso.com/be-more-t-rex-client-management-with-dinosaurs/
• We discussed various property management apps – particularly those that make it easy to manage a small portfolio. iPropertyMgr was one suggestion. Property Management Pro, Landlord Property Buddy, DIY Landlord appear on the app search. However, none appear to have rave reviews so maybe there is an opportunity here.
• I will get round to writing a blog summarising all the time management tips in due course