Mergers among professional services firms have long been seen as an opportunity to access new markets, acquire new service lines and build critical mass. Not all have been successful but they have, for the most part, been driven by a common desire to build for the future. However some recent examples have led to the question:
A recent ABA Journal article cited lenders refusal to renew Patton Boggs revolving line of credit as a driver for its merger with Squire Sanders.
Prior to the merger, an impasse with the banks led to senior Patten Boggs partners suspending their draws and contributing additional cash to keep the business afloat during a forbearance agreement with the banks.
In 2012, a similar story led to the exclusion the former BDO Victoria and New South Wales partnership from the BDO network and its subsequent acquisition by Grant Thornton.
According to a report in the Australian Financial Review, the troubles at BDO were a result of a 2007 move to amalgamate BDO’s Sydney, Canberra and Melbourne offices, with the firm taking on tens of millions of dollars in unsecured loans to allow partners to cash out the value of their goodwill.
Grant Thornton partners reportedly agreed to pay $50 million in order to bail out the BDO partnership, which was still struggling to deal with $100 million in debt.
Proceed with caution
Both cases shine a light on the need for firms to adopt a prudent financial structure with an appropriate balance of debt and equity, understand the importance of cash and working capital management and to maintain a healthy relationship with their lenders.
In his post The Ides of Maturity for professional services firms marks a modern-day turning point, my colleague, George Beaton posits we are approaching the point of life cycle maturity for professional services firms. A point where price falls and volume growth slows while costs continue to rise. All of which leads to increased pressure on cash flow.
To manage their businesses effectively, firms must maintain open dialogue with their banks to ensure there are no surprises, debt facilities are structured or in some cases re-structured effectively and a workable level of cash remains available.
Not doing so may result in the need to find a suitable merger partner, one that can afford to cash the cheques you have written.