Do names matter? Risk and the use of ‘merger’ or ‘acquisition’

By Nicole Lazarz Graham, Esq., and Stanley D. Sterna, Esq.

“What’s in a name? That which we call a rose By any other name would smell as sweet.” 
William Shakespeare, Romeo and Juliet
When Shakespeare posed the question, “What’s in a name?,” he meant that names are only words used to distinguish people, places, or things; the name itself does not have any worth or meaning. Was Shakespeare right? Is a name an irrelevant convention with no deeper meaning? In the case of firm mergers and acquisitions (M&A), the answer is no.
M&A transactions among accounting firms have increased in recent years. The desire to expand service offerings, the profession’s ongoing pipeline issues, and the increasing costs of technology and other tools have fueled firms’ interest in M&A activity. Every week you can read news of CPA firms “merging” or “joining” or “combining.” Does what you call it really make a difference? It does, especially in determining successor liability.

What is successor liability?

Generally, in a merger, the merged entity is a continuation of the merging firms. The newly merged entity will take on all assets and liabilities of both firms, including any errors and omissions generated by the firms’ services prior to the merger. In other words, the merged entity, or survivor firm, can be held liable as a successor-in-interest for the prior acts of each of the merging firms even though the survivor firm did not perform any services prior to the transaction date.
By contrast, in an asset purchase, the acquiring firm will assume certain assets of the acquired firm. Unlike a merger, the acquiring firm generally does not assume the acquired firm’s liabilities — only its assets. Because the acquired firm still technically exists, it remains liable for its prior acts. The acquiring firm is liable for acts that occur after the transaction date. An asset purchase is often favored by acquiring firms because they can choose what to purchase and help avoid the prospect of unknown liabilities from the acquired firm.

Avoiding the risk of successor liability

Even if a transaction is structured as an asset purchase, the acquiring firm may still be at risk. How? Although the words “acquisition” and “merger” are used interchangeably in everyday vernacular, they are not the same thing. Referring to an asset purchase as a “merger” in internal or external communications can create an issue of fact as to whether an acquiring firm assumed the liabilities of an acquired firm. Plaintiffs’ attorneys may seize upon such mischaracterizations to allege that an acquiring firm is actually a merged entity and, thus, the acquiring firm is liable for the acts prior to the transaction date of the acquired firm.

This risk may be avoided by accurately referring to the asset purchase as an “acquisition” in all internal and, more important, external communications. The following actions are recommended:

  • Advise all owners, employees, and external advisers about the ramifications of inadvertently mischaracterizing the asset-purchase transaction as a “merger.”

  • Ensure your firm website, press releases, and marketing materials do not refer to an acquisition as a merger.

  • Do not refer to or characterize the transaction as a merger in communications with the acquiring or acquired firms’ clients.

  • When being interviewed by media outlets, use the proper terminology and correct any mischaracterizations by the interviewer.


Although you cannot control how others characterize the transaction, their characterizations will generally not create an issue of fact when disputing successor liability.
However, you can and should control how you characterize the transaction to avoid unintended successor liability.

Other risk mitigation tools to help avoid successor liability

Indemnity obligations
When negotiating the acquisition, consider adding an indemnification clause to the asset-purchase agreement, wherein the acquired firm partners agree to indemnify the acquiring firm for any fees, costs, and losses resulting from claims alleging that the latter is liable for its prior acts. To soften the financial burden to the partners, consider holding some of the purchase agreement proceeds in an interest-bearing escrow account to fund any potential defense of the acquiring firm, at least until the statute of limitation has run as to any potential claims.
Tail coverage
Professional liability risk associated with pre-transaction services may linger for years post-transaction. Maintaining professional liability coverage for services delivered pretransaction is important. The acquiring firm may not want to assume liability for services it did not render, and professional liability insurance carriers are unlikely to agree to insure an acquired firm for its “prior acts,” i.e., work performed prior to the transaction date.
Therefore, the acquired firm should purchase extended claim reporting period coverage, commonly referred to as “tail” coverage. This coverage effectively provides an extended period for the acquired firm to report claims arising from services it rendered prior to the acquisition date and the expiration date of its professional liability policy. The length of a tail policy can vary depending on your jurisdiction and may be offered in one-, three-, five-, or unlimited-year periods. The typical rule of thumb is to purchase tail coverage that extends to the length of the longest applicable statute of limitation for filing a claim against the acquired firm. Consider consulting your attorney if you are uncertain of statutes of limitation applicable in your jurisdiction.
Tail coverage for professional liability policies should go into effect only after the acquired firm has ceased providing services to clients. All engagements must be completed or transferred to the acquiring firm before the tail coverage period begins. If the acquired firm provides additional services after the tail coverage takes effect, additional exposure is created and any resulting claims may not be adequately covered by the tail. Any engagements in progress may be completed by the acquiring firm and engaged via a new engagement letter between the acquiring firm and the client.

Other risk considerations for the acquired firm

Firms should also consider other coverages and how they will be handled through these types of M&A transactions. Tail coverage for all lines, especially for directors and officers, employment practices and fiduciary liability, cyber, and general liability should be considered and given proper due diligence. Consult with an agent or broker on choices available to help mitigate this liability with appropriate insurance products.

Growing your firm through inorganic means such as M&A can be exciting. It can also be extremely stressful, particularly when you’re struggling to make sure there are no loose ends that may expose the remaining entity to risk. In the excitement and stress, remember to maintain proper terminology and consider available risk mitigation tools to avoid successor liability.

Big deal
For the first nine months of 2023, organizations worldwide agreed to 26,608 M&A deals totaling $2.1 trillion.
Source: Mergermarket data, M&A Highlights reviews M&A activity across North America, EMEA and APAC through Sept. 30, 2023.

Stanley Sterna is a vice president and Nicole Lazarz Graham is a risk consultant at Aon, the administrator of the AICPA Professional Liability Insurance Program since 1967. For more information about this article, contact
This article is provided for general information purposes only and is not providing individual guidance on legal requirements or potential exposures. You should consult with your professional advisers before taking any action discussed in this article. While care has been taken in the production of this article and the information contained within it has been obtained from sources that Aon believes to be reliable, Aon does not warrant, represent, or guarantee that accuracy, adequacy, completeness, or fitness for any purpose of the information or any part of it and can accept no liability for any loss incurred in any way by any person who may rely on it. Recipients are responsible for the use to which they use this document.

This article originally appeared in the Journal of Accountancy.

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