There comes a point where purchasing a new client list or practice is the best way forward to ensure growth for your business. It is a tricky and challenging area with overlaps between legal issues and change management practices. Integrating a new business into your own should be considered its own project, but we know that many of our clients tackle this without existing project management skills or change management planning. Over the years we had many discussions with clients, often focusing on the legal issues that occur, assisting with the documentation, or attending to due diligence. In the last two years both Pamela and Leila have lead teams that had undergone their own M&A experience and this has lead us to prepare this series of blog posts and presentations. Leila has been lecturing on change management, best practice, and consulting law firms on issues of risk for over five years. Pamela mentors and assists others in growing their businesses and ensuring that their practice provides the best rate of return for their efforts.
Integration into Processes
Before you are able to do due diligence on potential businesses to purchase, you need to be aware what your own existing operational processes are and how you plan on integrating the new business into your practice. Sometimes the easiest way to proceed is to consider purchasing a portfolio or a list in a practice area you usually do very little work in. This would create a new client base and establish quickly presence in that portion of the market. If you are a dental practice that usually does limited cosmetic work, opening a second branch with an existing list of clients and new staff that are already fully trained and a surgery that is fully equipped has some significant appeal. The worry here is that the two businesses would be too disjointed to function as one and that you will split your attention and lose resources trying to put them together. Look for commonalities (same space, same client management software, staff or resources that could be shared) and then look at the differences to see the amount of effort integration would require.
- If you are not adding a new practice area, but instead are looking at purchasing a portfolio to expand your existing practice area, look at which of you is closer to what is considered “best practice”. What kind of workload are your existing staff experiencing and is there capacity for them to take on new files or will you be required to put on new staff / transfer staff from the existing business.
- Transferring staff assists with client retention but can make it difficult to bring in new processes or fully integrate the practice into your own.
- How would you integrate the current WIP? It may be as simple as manually entering the data in, or may require complicated negotiations with the Vendor and the client. Either approach is fine, but turning your mind to the issue of integration is essential.
- How do you think the best way forward is to obtain future work from the current book? The most important aspect of this project is to ensure a
Existing Team
Your existing team is hopefully working as a well-oiled machine, but adding new chickens to the coop (whether they are files or staff) can have an effect on productivity and morale.
Sometimes productivity will go up (Hawthorn’s effect) simply due to the change. In other situations, the anxiety and uncertainty caused by change will reduce productivity, which, in a situation where you have just made a significant financial risk, can also increase managerial burn out. It is best to have an existing plan on how to tackle this issue, and when required, obtain external intervention. Consultants who do best process integration (see above), client experience training, success coaches, or operational psychologists may be a worthy investment and ought to be considered a part of your toolbox.
Change management requires you do plan, implement, analyse, and react to your findings. The moment you start the integration process plan a series of team meetings and reviews to give you insight into each of those stages. Those meetings should be decreasing in frequency and should offer your team an opportunity to be heard. Both 1:1 check-ins and formal written surveys have a place in a well thought out change management loop. That feedback will be invaluable for existing implementation and future growth.
Legal Matters
- What are you buying and how is it going to be transferred?
- Despite this being the most obvious of the issues, it is the one where clients often come unstuck.
Technological Issues
- Where is the data stored? How? How will it be transferred?
- Even if you are buying the business name and the rights to the domain, who has access to it and how will that be transferred to you?
- What happens to the auxiliary registrations and licences?
- Due Diligence
- To assist with integration, make sure you understand their existing processes from client acquisition to payment recovery. This will allow you to understand the amount of effort and resources it is going to take to bring their practice fully within your way of doing business.
- Are there any risk issues that ought to be obvious and how do you plan on tackling these?
- What are the Vendor’s reasons for selling?
Financial Matters
- How are you going to pay for this new expansion?
- What are the ongoing costs of expansion?
- What is your rate of return?
- How do you plan on measuring that rate of return?
- What percentage of the book do you think will realistically be retained?
- Will this increase your insurance? By how much?
Financing the purchase
With so many opportunities to merge or to expand your business through acquisition it can quickly become frustrating when you go to your regular bank as a loyal customer to then be refused a loan. To finance expansion of your business you may have to think outside of the box, you may have to step away from the traditional lending methods and consider working with the vendor to achieve a suitable outcome for you both.
- Vendor Finance – if you have good communication with the Vendor this can be a mutually beneficial arrangement for both parties. Vendor finance is when the vendor agrees to finance the purchaser to buy their business from them. It should always have a legally binding contract and your terms and conditions should be clearly defined before this type of arrangement is entered into. Both parties are exposed to risk in that the purchaser could stop payments and take the business on the flip side the vendor can keep the business and the purchaser could end up working for free. Due to the nature of this arrangement it can become very litigious if it goes wrong. However when it goes right it can be the perfect way for the purchaser to build equity in the business. The purchaser can make payments, acquire the equity and then go to a bank to finance the rest of the purchase. This also allows the purchaser to get to know the business and the transition of owners can be very warm for the clients which can result in a higher rate of retention.
- Non bank lenders – Don’t overlook these non-bank lenders because they don’t have a big name or fancy building. Non-bank lenders are keen to expand their business and will often work with the business they are financing offering regular coaching and mentoring. The rates they offer can be better than the bank, they are also more flexible and willing to consider different business structures. If you have not considered these smaller lenders I suggest you do some research as you will be surprised as to how eager they are to work with you to grow your business.
- Second tier banks – this is basically not one of the big 4 banks, these banks seem to share the common feature of having minimum lending requirements of $1M which in its self can be a hurdle if you only want to finance a small purchase the first time. However they may allow you to bundle a few assets to reach the $1M which can result in a better interest rate and you will have more of your banking one place so it can also stream line your admin.
Final advice, use a broker. The work of lending can be overwhelming and confusing. A broker can assist you by researching the lenders and matching you to the correct lender, this can save you time and also reduce the amount of credit file checks you may have on your file which can cause more hurdles for successful lending. The broker will also be able to guide you with he reports and documents you need to provide to the lender, they will also be able to explain your business model and structure. A broker can be extremely helpful with securing lending for your business, make sure the broker has experience and understanding of business finance.
