Not Letting Go

The other day I received a call from a client of ours who inquired about de-mergers. Apparently he brought in a sole practitioner about 18 months or so and during that time, the mergee has not lifted a proverbial finger to begin transitioning his clients.

Needless to say it’s been a frustrating year and a half for our client. He found the seller firm through another advisor – obviously one who simply matched two firms together and disappeared during the drafting of the contract.

I told him yes, we occasionally do help clients with a de-merger but we’re not particularly fans of it.

Here’s why.

Firms that request a de-merger clause in the original contract aren’t usually “all-in” during the length of the agreed upon period. We liken that to having one foot in the front door and one out the back just in case.

In a merger for succession, a demerger can provide the successor firm a free “look” so to speak and invoke the clause if they aren’t happy right out of the gate. Imagine giving up your location, hard assets, starting the transition and then have the buyer decide to back away.

Also merging two larger firms together can be, unless it was two separate offices, a difficult process to unwind. Lastly, having a demerger clause can actually make it more likely to de-merge. That sounds somewhat counter-intuitive but sometimes parties that have a de-merger clause focus on protecting their relationships with the clients in the event of a de-merger – much like the above mentioned scenario. So instead of integrating the firms, they hold back making it more unlikely that the merger will be successful.

But back to our client.

I didn’t want to wag my “I told you so” finger and inform him that had he used us instead of someone else, we would have had language in the contract that outlined just how the client transition would occur.

Now he has engaged us to draft a de-merger agreement that will ultimately usher in what promises to be an ugly divorce.

This little provincial episode lends itself to a far larger trend throughout the profession. More firms are gravitating toward the “One Client One Firm” strategy and weaning themselves away from the traditional – and some say antiquated – individual book of business mentality. Obviously post-merger integration is far easier under a system whereupon the client is shared amongst the firm.

I think our client has learned that lesson as well – unfortunately it was the hard way.