Howard’s Inner Circle, No. 25: 1+ 1 = …

I noticed a significant, surprising, and welcome change at the recent New York State Society of CPAs’ 2010 Practice Managing Conference. All four accounting firm managing partners freely shared on a panel and in roundtables at lunch their views on firm mergers and acquisitions. It wasn’t a discussion in the clouds as they didn’t play it close to the vest as many managing partners normally do. They openly shared providing extensive details on all aspects of the merger process including their individual firm’s merger philosophy, retirement funding, capital requirements, payouts, and method of integration.

Here is my take on their cumulative M&A wisdom:
1. A Real Due Diligence--Determining compatibility of cultures requires “dating.” It goes beyond financials, getting firm information, and meetings with the managing and other partners. It can involve walking around a firm unaccompanied and going with a prospecting partner to present a proposal to a possible client.
2. Use of Guarantees--To get needed buy-in and alleviate anxiety, incoming partners can be guaranteed in the first two years that they will earn at least what they previously earned. Some firms have a no-harm, no-foul one-year period that allows for a quiet unraveling of the merger or the departing of an unhappy incoming partner. This option is rarely exercised and included to provide comfort that the merger isn’t cast in stone.
3. Maintain a “No-Jerk” Zone--Closely evaluate incoming partners so a problem partner isn’t brought aboard. Interestingly, the other incoming partners are usually happy that individual is gone.
4. Pay Attention to Integration--Transition should begin quickly and be comprehensive. Benefits, culture, career development, and opportunities should be detailed. Training is instituted right away as well as meetings are conducted to provide quick and effective integration of practice areas and niches.
5. Belief in Increased Value--There is a significant distinction between an actual merger and an acquisition. Just calling something a merger doesn’t make it so. A real merger is based upon a substantial potential for increased value. 1 plus 1 equals at least 3. For example, it might be that growth is identified by the offering of more services to key clients of the firms. This is in contrast to an acquisition which is simply a retirement payout to retiring partners. The ultimate actual payouts with regard to mergers and acquisitions significantly reflect the differences.
6. Individualized Guidance--Professional coaching should be given to each partner so they fully understand and acclimate to the new firm.
7. Understanding Why--The reason for a firm merging in often involves succession issues such as retirement funding or an inability to grow. In contrast, the more dominant firm might need a niche, more staff, or expansion into a new geographic market. Both should understand why the merger is being sought by the other. A merger should always be part of a comprehensive strategic plan.
8. Better Usage of Staff--A merger allows a firm to reassign staff and place them in more suitable positions. Larger firms permit greater specialization whether it is a particular practice area like taxes or a niche like litigation support.
9. Greatest Difficulty--There are always problems incurred with a merger or acquisition. Even if everything is done right expect some. The most common one involves software, such as when the two firms were using different tax software. It can take a full one-year cycle to rectify.
10. Be Realistic--In a merger there is usually one dominant firm and that firm’s culture and processes and procedure will, with minor exceptions, normally control. It is rare to see a real merger of equals. The reason is for that to be successful there needs to be the creation of an entirely new culture with attendant new processes and procedures.

I walked away from the conference with the distinct impression that each of these managing partners represents a new type of firm leader. One who really understands that win-win is an integral part of their successful firm business model.
© 2010
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The above may be reproduced in full if that fact is stated and Howard Wolosky at http://howardwolosky.blogspot.com is credited as the author.

Howard’s Inner Circle, No. 24: Outsourcing as a Revenue Center

For many years, the local branch of a nationwide bookstore, upon request, gift wrapped the book that you purchased. There was a choice of at least five wrappings and a cute little bow was attached. This week when I purchased a book, rather than the cashier wrapping, it I was directed to two individuals in pink at the end of the counter. They were obviously affiliated with a foreign dance company. I knew this because there was a video playing by them. As one took the book to wrap the other began to talk to me and gave me a brochure with performance information for the dance company. Neither understood when I asked if they had wrapping paper other than holiday wrap. When I picked up the wrapped book I noticed much cheaper paper was now being used, the wrapping looked amateurish, and there was no cute little bow. As I left I wondered if outsourcing of the wrapping is a revenue generator for the store.

Outsourcing is increasing, often hidden, whether it is a mattress delivery by a leading mattress seller or service provided by the support staff of a technology company. At first cost cutting was the primary motivator for outsourcing, now that is coupled with a motivation for revenue generation. I am still getting calls from the technology company’s so-called support staff trying to sell me a product for my computer.

Increased efficiency and continued effective delivery of a quality product or service should be the primary objective when outsourcing is utilized. If the focus is too much on cost cutting and revenue generation quality may suffer. Is this bookstore ensuring a deterioration of a number of long-term customer relationships each time a book is wrapped?
© 2010
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The above may be reproduced in full if that fact is stated and Howard Wolosky at http://howardwolosky.blogspot.com is credited as the author.

Howard’s Inner Circle, No. 23: “Customer Crazy Glue”

I first saw it when I was with Practical Accountant. Tax research companies began purchasing tax prep software companies followed by the acquisition of those companies specializing in payroll software and CRM systems. The acquisitions allowed for suite offerings. The suite business model is based on the idea that it is more difficult for a somewhat unhappy customer to leave if they are getting more than one service or product from the company. The problems for suite customers are that quite often the new product isn’t best-of breed, the acquiring company has little prior in-depth understanding of the new product, and integration with existing products is slow and often poorly done.

This isn’t the only form of “customer crazy glue” that I detest. There are the customer loyalty programs in which you are urged to join, some of which have an annual fee. An example is those offered by airlines which rate passengers on miles flown to determine the different baseline of service they will give to a flyer. It reminds me a bit of the different passenger classes as portrayed on the Titanic in movies.

My least favorite “customer crazy glue” is the customer support offered by technology companies which are marketed so beautifully when you purchase the product. You soon find out this support is outsourced, that a charge is often incurred, and a good portion of the call, which takes numerous prompts and a long wait, is consumed with a pushy sales pitch for an additional product that you supposedly really need.

Perhaps I hate this “customer crazy glue” retention because I grew up working in my father’s store where a customer didn’t have any special ties encouraging them to come back. It was a time of “The customer is always right.” So when someone complained that a mop they purchased disintegrated on its first use we would replace it at no cost with a cotton mop and explain that disintegration probably occurred because they use used bleach and that wouldn’t happen with this, a cotton mop.

Customers aren’t always right but they also aren’t fools and they will become more aware of customer glue traps and how to avoid them. It will be interesting to watch the marketplace reaction to this.

© 2010
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The above may be reproduced in full if that fact is stated and Howard Wolosky is credited as the author.

Howard’s Inner Circle, No. 22: I Could Be …

On the whole according to Karen Schulz, “our indiscriminate enjoyment of being right is matched by an almost equally indiscriminate feeling that we are right.” She adds “If being right is succulent, being wrong runs a, narrow, unhappy gamut from nauseating to worse than death.”

This aversion for being wrong is perhaps why I found “Being Wrong—Adventures in the Margin of Error” by Kathryn Schulz so fascinating. First of all it is a subject that few fully understand, explore, or write about. Second, and most important, it is a professional journalist’s treatment of the subject. Ms. Schulz provides many well-documented examples that illustrate how being right and being wrong are interrelated in so many surprising ways and how significantly they impact our emotional and societal frameworks.

As to the individual, Schulz points out that “…[O}ur beliefs are in extricable from our identities. That’s one reason why being wrong can so easily wound our sense of self.” Regarding to the communities we live in, she points to a so-called disagreement deficit which supports what we think as being right. “First our communities expose us to disproportionate support for our own ideas. Second, they shield us from the disagreement of outsiders. Third they cause us to disregard whatever outside disagreement we do encounter. Finally, they quash the development of disagreement from within.” Schulz observes.

One of the questions that Schulz asks is: “Do we have an obligation to others to contemplate the possibility that we are wrong?”

Is she right?

© 2010
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The above may be reproduced in full if that fact is stated and Howard Wolosky is credited as the author.

Howard’s Inner Circle, No. 21: Being Proactive When There is Uncertainty

A number of speakers at the UJA Federation of New York 41st Annual Sidney Kess New York Tax & Financial Planning Conference urged attorneys, CPAs, and financial planners attending to encourage their clients to review their wills. There was concern that the federal estate tax repeal for 2010 could have a devastating impact on the distribution of property if they died in 2010.

A particularly expressed concern were those wills with formula clauses that assumed the existence of an estate tax. Martin Shenkman with Martin M. Shenkman, P.C. in Teaneck, NJ indicated that relying upon a state-enacted stop-gap law that assumes an estate tax of a certain date for purposes of a formula clause might not work as it could result in the disposition not intended by the actual formula clause in the will.

I believe it was Daniel Daniels of Wiggin and Dana LLP in Stanford, Conn. who opined if a change in a will is needed, a deficient formula clause might be replaced with a bequest to a giant QTIP trust providing flexibility to deal postmortem with the estate tax uncertainty. This is especially true if the estate tax is imposed retroactively to individuals dying towards the end of 2010.

Shenkman also pointed out how the estate tax repeal discourages charitable bequests in a will since there is no estate tax charitable deduction to utilize. He offered a number of alternatives which would result in a deduction for income tax purposes. He also added that similar logic would apply upon reinstatement of an estate tax if the estate is under the estate tax exclusion amount.

Also in dealing with uncertainty, Steven Siegel of the Siegel Group in Morristown, NJ recommends including alternative dispositions when drafting, as this allows for the greater effective utilization of disclaimers to accomplish a desired result despite the uncertainty.

It is extremely unfortunate that the Congress that enacted the “Economic Growth and Tax Relief Reconciliation Act” and subsequent Congresses, especially and including this one, created and continue to perpetuate this uncertainty. In 2001, while I was editor-in- chief of Practical Accountant, I mentioned in a cover story on this subject that a practitioner observed tongue-in-cheek, “Some advisors are having clients sign a living will where the plug will get pulled five minutes before the end of 2010.” My fear is this Congress will take no action in 2010 and a plug might be pulled or someone might commit suicide just before 2010 ends so the death occurs before the estate tax is reinstated.
© 2010
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The above may be reproduced in full if that fact is stated and Howard Wolosky is credited as the author.

Howard’s Inner Circle, No. 20: Seeking Clarity

Not having a job doesn’t mean you’re not working. Much of my efforts are focused on “staying in the present.” I’m finding that it is particularly difficult. So, as I often do, I turned to a self-help book. The right one is easy to find at a library, bookstore, or online by simply looking at some titles. Publishers of self-help books are adept at reeling you in that way.

Arriving in Your Own Door--108 Lessons in Mindfulness by Jon Kabat-Zinn is the one I picked to read and the following is helping me to stay in the present:

“When you are taking a shower, check and see if you are in the shower. You may already be at a meeting at work. Maybe the whole meeting is in the shower with you.”

“Our thoughts may have a degree of relevance and accuracy at times, but often they are at least somewhat distorted by our self-centered and self-serving inclinations, our ambitions, our aversions, and our overriding tendency to ignore or be deluded by both.”

““The intention would be to see things as they actually are, not as we would like them to be or fear them to be, or only what we are socially conditioned to see or feel.”

© 2010
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The above may be reproduced in full if that fact is stated and Howard Wolosky at http://howardwolosky.blogspot.com is credited as the author.

Howard’s Inner Circle, No. 19: Did You Ever Notice?

The older you get the more you understand that what is right is subjective.

If you tell someone to do many things at least one won’t be done, but if you ask only for only one thing, it will be done.

Lately popularity governs what is “news.”

Control shouldn’t always be gained, but is often better given up.

A blind spot is hard to see even when someone points it out to you.

Today we have almost unlimited tools to create and inhabit a manufactured reality.

How hard it is not to leave footprints?