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Mergers and Acquisitions – due diligence and the risk management process

Accountants Professional Liability Insurance

Mergers and Acquisitions – due diligence and the risk management process

There has been a spate of firm consolidations in the past few years and the pace is unlikely to slow down. Retirements, business expansion, consolidation of practice areas or acquisition of a new specialty drive the reasons to merge firms together.

Due diligence is essential in the evaluation of the firm.  Identifying issues before a combinations can avoid an errors and omissions claim and especially during the critical firm integration period in the first year or two after a merger or acquisition.

In previous blogs we have written extensively about mergers and acquisitions:

Professional liability coverage options for effective mergers – here

Mergers & Acquisitions malpractice risk management – here

Risk & insurance implications of mergers and acquisitions – here

When undertaking a due diligence examination, consider these key points from a risk management perspective:

  • Cultural compatibility and practice management philosophy

Understand what make the firm a good merger target for you and how it fits with your firm’s style.

  • Service compatibility

Will the merger target benefit your practice and add to your service capabilities?

  • Professional liability insurance and claims history

What is the loss experience and quality of the coverage for the target firm?

  • Increased risk of claim arising from prior acts

How was risk managed in the past and how successful was this?  How are future claims to be resolved and non-insured costs apportioned?

We have designed an aide memoire to assist a CPA in the due diligence process.  Follow this link for a copy of the document in MS Word.

The foregoing considerations are part of a much more comprehensive due diligence process.  There are various consultants and industry practice guides available to assist you.

Competent legal advice is also prudent in the drafting of the merger agreement which should contain provisions for sharing of deductible, indemnification provisions and clauses relating to a potential de-merger.

The risk of a malpractice claim is a very real problem associated with mergers and acquisitions. Firms that use the aide memoire will be better prepared to manage the liability risks associated with a merger or acquisition, and to concentrate on the expansion of their practice.

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