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Mergers and inquisitions

technical & practice - Architects looking for a quick way to grow into bigger practices should not be afraid to ask awkward questions

An increasing number of architecture firms are assessing merger possibilities. Indeed, boosting the size of your practice and diversifying or building on your range of offerings could be a sound strategic move. However, while a merger is driven by a desire to encourage growth and maintain profits, if you do not exercise adequate care during negotiations with the firm with which you intend to merge it can all too easily bring the opposite results. A botched merger could end up as a financially unstable venture - a firm with a confused identity, watching as its client base abandons it at speed. Due diligence is the key to success.

Due diligence has often been perceived to be a dirty phrase, or at least one to be viewed with suspicion. Having approached a firm with a merger proposition, announcing that you would then like to run a variety of checks to ensure they are up to scratch can cause offence. The approach must be handled with some delicacy, but in a corporate environment of heightened risk awareness, the process is generally accepted.

Money matters In-depth financial checks on the 'other side' are key. While a firm may boast a sterling reputation and sound historical performance, it could be harbouring any number of hidden extras, such as onerous leases, VAT problems or annuity payments to former partners.

A thorough assessment of the firm's financial health will soon sniff out those firms looking to merge for the wrong reasons. A practice attempting to mask poor profit performance or steal your clients will soon be exposed when its finances are analysed.

Depending on the scale of the exercise, it may be possible to perform the assessment in-house. However, the levels of expertise (and time) required to comb through a firm's finances should not be underestimated. It is all too easy for professionals to overestimate their own competence and there is the danger that unless the team knows exactly what it is looking for, potentially hazardous aspects will remain unidentified. An internal team may also lack the necessary objectivity. If the team members are eager to push ahead with the venture, while hoping to convince the sceptics, they are likely to be less open to any bad news brought to the surface.

While the firm's finances may get the all clear, it is also vital to establish that the firms are culturally and strategically compatible. The creative fit must be correct. For example, for an architecture practice specialising in the residential sector but looking to diversify, merging with a practice with a healthcare focus may be ideal. However, the opposite would be true for a firm looking to add weight to existing business.

Clash of the titans Assessing the personalities of key players is also crucial. Bringing together creative minds within two ambitious firms increases the likelihood of egos clashing. Before firms fuse, it is vital to identify the leadership team members and ensure that they are able not only to gel but also to share the limelight.

As the merging firms may previously have been competitors, having their feet under the same table can involve a seismic cultural shift.

Strong communication is vital - from the early merger discussions throughout the entire process from which a unified firm emerges.

Poor communication is notoriously prevalent in many partnerships but a merger must be backed up with continuing dialogue between partners and directors, as well as ensuring other stakeholders receive continual updates.

Consideration must also be given to whether, and how, staff should be told about negotiations. Unchecked rumours, particularly among support staff who may perceive their jobs to be under threat, can be damaging.

Although it can be exhausting, you must hold regular meetings to keep all parties informed so they are able to contribute, where necessary, to the development and implementation of the merger.

Firms should embark on the process with their eyes wide open. It will call for the close involvement of auditors, bankers and lawyers. Don't underestimate the mammoth amount of paperwork and the length of time spent in legal meetings. And at all times be aware that there is still your own firm to run - which means that, whatever the negotiations, you must always keep your eye firmly on the ball.

Sarah Mason and George Bull are partners in the Professional Practices Group of accounting firm Baker Tilly.

Telephone 020 7413 5430

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