This presentation by Russell Shapiro addresses the legal aspects involved in combining two accounting firms, including the process, confidentiality agreement, letter of intent, partner on-boarding, structure of transaction, agreement terms, due diligence, tail insurance, and internal target issues.

1. Accounting Firm Mergers – The Legal
Aspects
Levenfeld Pearlstein, LLC
2 North LaSalle Street, Suite 1300
Chicago, Illinois 60602
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2. Reasons Behind Merger Trend:
• Strategic Planning
- National presence
- Ability to provide additional services
• Succession Planning
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3. Some Terminology:
- Partner = Owner. Same as Shareholder
- Partnership Agreement = governing agreement among
owners
- Selling firm – the firm being absorbed
- Acquiring firm – the surviving firm
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4. How Does It Start?
• Introductions are made
• Executive Committee Discussions
• Meetings with Key Partners
Same as any deal that your client would have
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5. Confidentiality Agreement:
• Sign early on
• No poaching for two years
No sharing of client list until much later
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6. Letter of Intent:
• Generally non-binding
• Addresses basic economics
- Compensation
- Capital requirements (generally funded with A/R & WIP)
- Governance
- Name (there can be a transition period)
• Binding Terms
- No shop (60-90 days)
- Potential acquirer restrictions
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7. On-Boarding of Partners:
• Time consuming and challenging
• Uncertainty causes anxiety
• Plan on a number of meetings
- Some with Acquirer lead partner
Each Selling Firm partner will ultimately have to sign on to
Acquirer partnership agreement.
Acquirers have to recognize sensitivities and the process
the selling firm is going through
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8. Structure of Transaction:
• Selling Partners join Acquiring Firm
• Selling Firm is eventually dissolved
• Physical asset transfer to Acquiring Firm
• A/R & WIP can remain with seller or go to
acquirer – economics are the same either way
• Other structures:
- Merger
- Purchase of Stock
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9. Agreement Terms:
Partner Admission and Asset Transfer Agreement
•Transfer of Assets
- Physical (may not be paid for)
- A/R & WIP
- Goodwill
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10. Agreement Terms (continued):
• Obligations to Retired Partners (generally
assumed)
- Watch for an acceleration provision
- Sometimes retired partners have approval rights
• Assumption of Other Liabilities
- Leases
- Payables
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11. Agreement Terms (continued):
• Seller Partner retirement benefits from Acquirer
- Vesting credit
- Separate time period
- Other exceptions that make sense
+ Partners near retirement are protected
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12. Agreement Terms (continued):
• Governance
- Executive Committee Representation
- Compensation Committee Representation
- Local Office Head
- Lead Office in Metropolitan Area
- All of the above are time bound
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13. Agreement Terms (continued):
• Compensation
- One year guaranty of no less than prior year
- Measure apples to apples
+ Insurance
+ Benefits
- There may be performance thresholds
+ At least 95 percent of prior year
+ Revenue generated from same office
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14. Agreement Terms (continued):
• Employment of Target employees:
- Commit to hire all professionals?
- Same compensation
- Compare benefits
- Will be required to sign Acquirer employment (restrictive
covenant) agreement
- Who pays severance to terminated employees?
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15. Agreement Terms (continued):
• Representation and warranties from Selling Firm
and its partners
- Financial statement accuracy
- Litigation and disputes
- Insurance
- Employment matters
- Material contracts
- Employment practices
- Intellectual property
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16. Agreement Terms (continued):
• Representation from the Acquirer
- May depend on size differential
- Do what makes sense
+ Financial Statements
+ Litigation and insurance
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17. Agreement Terms (continued):
• Indemnification (can be a heavily negotiated item)
- Joint and several liability?
- Basket and cap
- Seller Partner representation
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18. Due Diligence:
• Both parties will want to conduct a level of due
diligence
• The Acquirer will do more
- Financial
- Liabilities (potential for successor liability)
- Litigation
- Insurance coverage
- Peer review reports
- Potential conflicts and independence issues
- Contract/lease review
• Minimum of Target: Financials, Litigation and
Insurance. I like to also inquire about
“special” deals with partners
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19. Due Diligence (continued):
• Responsibility of Target firm to its partners (MP
and EC)
- Enough information to make an informed decision
- Financial
- Litigation review and insurance
- Understanding of Acquirer partnership agreements, e.g ., the
restrictive covenants and retirement payments
• Sometimes hard to assess litigation exposure
and insurance coverage issues
• Client List
- Wait until the end, if at all
- May not be a big concern, depending on the parties
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20. Tail Insurance:
• Both sides want (successor liability)
• Policies have a tail endorsement
• Not cheap
• Statute of limitation period for malpractice
claims
• In-place insurance to subsist if report will be
issued by Target post-closing
• Prior acts coverage (under Acquirer’s policy)
• Allocations of expense (check agreements)
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21. Internal Target Issues:
• May be many clean-up issues
• Will generally require an agreement among the
Target firm partners – Contribution and Cross-
Indemnity Agreement
• Issues may include:
- How units in new firm will be divided
- How other consideration will be divided
- True-up of capital accounts
- Release among the partners (including a release of the
managing partner)
- Disposition of any life insurance
- Selling Partner representative and authority
- Contribution obligation (except for personal
misrepresentations or bad acts)
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22. Questions/Comments:
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