The troubled economy and the credit crisis do not appear to be tempering the ambitions of growth-oriented CPA firms seeking to fulfill their aspirations for mergers.

"We're busier now than any time in the last two decades," revealed Allan Koltin, chief executive of Chicago-based PDI Global, the country's largest "marriage" broker for accounting firms.

Koltin said that he expects the pace of M&A activity to accelerate in 2009 - at least among the types of regional and super-regional firms that call upon his services.

Brokers specializing in single-owner and sole practitioner firms, meanwhile, expect the pace of transactions (and prices) at that end of the market to hold steady.

As Koltin sees it, the dynamics behind the M&A boom among the larger firms boils down to a growing recognition that mergers work. "There's a track record that proves the point," he said.


One of the more active and visible M&A players recently has been Cleveland-based cbiz Inc., a publicly held firm that operates in an alternative practice structure with Mayer Hoffman McCann PC.

cbiz, one of the original accounting consolidators of the 1990s, had been dormant for a number of years, but resurrected its M&A roots in the closing months of 2008. In December, it acquired Tofias PC, a firm with offices in Massachusetts and Rhode Island that ranked No. 78 on Accounting Today's 2008 Top 100 Firms list with revenues of $37.5 million.

That deal came on the heels of the firm's November announcement of its planned acquisition of Mahoney Cohen & Co., a New York-based firm ranked No. 52 on the 2008 Top 100 roster with annual revenues of just under $50 million.

Not coincidentally, cbiz also reported in December that it had expanded its unsecured credit facility from $150 million to $250 million in order to "provide the company with greater flexibility in implementing its strategic growth plan."

Wall Street's support of cbiz's strategy may presage the emergence of a new breed of accounting firm acquirer: private equity firms.

"They like the fact that, in general, accounting firms have positive cash flow and typically are not risky investments, if they manage their audit risk," said Koltin, who had been working with a private equity firm that was trying to combine roughly five large public accounting practices into a single "mega-firm" with aggregate revenues of about $500 million.

But when the market began to tank, it caused some of the parameters to change and the deal collapsed. However, Koltin said that when markets stabilize, private equity players will re-enter the picture: "They're probably going to be the next wave of buyers of accounting firms."

Meanwhile, David Sibits, president of cbiz Financial Services, said that his firm and Mayer Hoffman McCann each "share a vision to strategically expand via acquisition in targeted markets."

But cbiz and Mayer Hoffman McCann aren't just bolting their name plates onto stagnant firms, their leaders maintained. "We're not looking for firms whose partners are looking for an exit strategy," said Bill Hancock, president of Mayer Hoffman McCann. "We're looking for firms where the key individuals share our vision for growth."


The story is similar at J.H. Cohn LLP, a super-regional CPA and business advisory firm in the Northeast. Because it's inevitable that some partners will be pondering retirement, you have to look at the next tier of management, said chief executive Thomas Marino.

"Are they going to be the future of that firm? Can they capitalize on a larger presence?" Marino asks before pursuing a merger. "Too many deals are done just for the exit strategy, and if there's not much left behind [in human capital at the acquired firm], it's not going to work."

Last July, J.H. Cohn combined practices with Frederick Kantor & Co. PC, a Manhattan-based firm specializing in high-net-worth individuals. That transaction came only one month after a combination with Southern California-based Good Swartz Brown & Berns.

"But we're not trying to become a nationwide presence," explained Marino. "We're sticking to where we know how to do our knitting, the New York Metro area and Southern California."

Even in a strong market, however, combining forces with an established firm doesn't ultimately guarantee financial success - for either party. Koltin cautions the senior partners of firms thinking about selling or merging not to get swept away by the prospects for cashing in. "There are three acid tests to see if a deal is good," he explained. "First, would it be good for your people? Second, would it be good for your clients? And third, if you get past those two, would it be good for you?"

If the partners aren't focusing on those issues, "There's just no reason to talk," he warned. "If it's all about 'show me the money,' don't do it."

Koltin has had to dispense that advice often following the cbiz-Mahoney Cohen deal, the price of which "went well beyond" the benchmark one-times-revenue multiple. But Koltin added that the transaction had unique characteristics, including Mahoney Cohen's high profitability and its New York base that had been urgently sought by cbiz. Therefore it's not indicative of a general run-up in CPA firm valuations.

For J.H. Cohn, meanwhile, a thorough vetting process precedes any merger. Ideally, that includes social interaction with key players in the firm, Marino said. "You spend time with them to find out what they're about."

Proper vetting and giving a prospective merger "enough time to bake" before consummation have contributed to J.H. Cohn's ability to boast that it has never had a deal that went sour.

While cautioning that the firm's deals aren't "cookie-cutter" in nature, they tend to conform to a general pattern. "We don't do cash deals; we don't buy out partners," Marino explained. J.H. Cohn will, however, guarantee the merging firms' equity partners' compensation for varying periods "at a minimum of what they made the year before" - assuming revenues don't decline.

Because the firm doesn't pay cash up front in its mergers, it hasn't needed to borrow to finance its growth strategy. And as noted, cbiz, despite the tightening of credit markets, secured a credit line sufficient to maintain its acquisition strategy.


The story had been somewhat different in the market for sole-practitioner and other single-owner small firms during the height of the credit crunch, according to John Ezell, CPA, the president of Pro Horizons, a Sunnyvale, Calif.-based consulting and brokerage firm. He said that about one third of the transactions he facilitates involve some financing, and about half entail a down payment. "The financing issue created a little hiccup," he said. "But most just hesitated, re-evaluated, but then went forward."

Moreover, most banks have confidence in CPAs' ability to run a tight ship financially, added Larry Wald, co-owner of Strategic Alliance & Equity, a broker based in Fort Lauderdale, Fla. "If we prove the cash flow is there to support the debt service," most banks will lend, he said. And the borrower's personal guarantee on the loan also greases the skids with lenders.

In addition, in smaller transactions, sellers typically agree to finance a significant portion - often as much as 50 percent - of the sale by accepting deferred payment in installments over several years. These deals often include look-back provisions allowing for a reduction in the purchase price if revenue goals are not achieved. "We try to put together transactions that have equal risk on both sides," Wald said.

And it is that perception of risk that is fueling a lot of the CPA practice sales in the small practice market, noted Cindy Ragan, Walsh's partner. Some buyers are coming into the market because they're worried that they'll be losing some business clients to recession-induced bankruptcy, she revealed. Also, she noted that some CPAs currently employed as management accountants for large companies are trying to move into public accounting practice by buying an existing small practice because they're worried that they may soon lose their corporate job.

In Ezell's experience, CPA practice sales are, more often than not, driven by a practice owner's own desire to retire for personal reasons. As a result, Ezell anticipates that 2009 will keep him just as busy as 2008, regardless of the state of the economy as a whole.

And among the top-tier firms, economic conditions do not appear to be impacting the pace of M&A activity, according to Koltin. "The Top 100 Firms have not flinched a bit in terms of strategy, because most of them haven't felt the recession."

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