This article was first written for and published in the Financial Times.
Question: Is a merger in our interests?
I run a business advisory service which offers management consultancy advice and which is structured as a limited company. We were recently approached by medium sized firm of accountants who wanted to merge the two businesses. I am keen in principle as I can see obvious benefits such as cross-selling and better business development opportunities. However, the firm of accountants wants the directors to become partners in their business but with restricted rights to involvement in the overall business. Is there any way I can protect against this or even merge the two businesses without becoming part of the partnership?
Your reluctance to become a partner is understandable, especially if the accountancy firm is a general partnership with unlimited liability rather than a limited liability partnership. More importantly, be wary of merging with anyone you do not know well.
A less permanent arrangement (such as a mutual referral agreement or a joint venture) may be preferable. None precludes merger in due course.
Alternatives to merger (each with its own commercial and tax consequences) include the accountants’ acquiring the shares in your company. Directors could continue as currently, without involvement in the partnership itself, although the extent of the partnership’s involvement in management decisions of the subsidiary would need to be addressed. The directors’ remuneration should reflect increased income generated from this group structure.
If you do decide to merge, check the terms of the partnership agreement carefully. Not understanding its implications (including the circumstances in which it can be changed after you have joined and the covenants that may restrict your business activities should you decide to leave) can have serious consequences. You should ask why your involvement in the wider business is to be restricted, especially if your profit share depends on the performance of the business overall.
One of the likely reasons the accountants have suggested your becoming partners is to convert you from employees to self employed, thereby securing 13.8% employers’ national insurance contributions savings on your profit shares. You should seek a share of this saving as well as increased remuneration to reflect the benefits of the merger.