by Roger Russell
Small practitioners of under $1 million in revenue are looking to gain a stronger foothold in their markets by joining forces with like-sized competitors.
Industry observers say that "merger mania" has spread to the ranks of small practices, with more deals in the works that will likely surface after tax season is over.
Accounting industry consultant Donald B. Scholl, president of D.B. Scholl Inc., of West Chester, Pa., said that although the primary driver in many of these mergers is the impending retirement of one or more senior people, "many firms are looking at merging to be able to enhance their service offerings in ways they couldn't do on their own. This is so of smaller firms in general."
This is true of Pittsburgh CPAs James Chemel and Gregory Kornick, who recently left a larger-area firms to found Chemel Kornick & Co. LLC. "Starting our own firm gives us the flexibility to implement our own ideas and strategies to make the firm grow," said Kornick. "Rather than go out on our own as sole practitioners, we realized that we had a combination of competencies that complement each other very well, and we were well received in the business community because of that."
Kornick's expertise is in the technical compliance issues, while Chemel has experience in planning and structuring transactions. "By combining together we can focus on providing a complete package, from beginning strategies in the planning process all the way through to the compliance stage," said Kornick.
A primary motive for many smaller-firm mergers is the impending retirement of one or more senior people.
Chemel, who is 15 years older than Kornick, sees in the age differential, "a clear path for transition of ownership of the practice. I'm fortunate in that I don't have to go out and look to sell my practice or abandon it when I retire."
The Pittsburgh merger is representative of what observers say is a much wider trend. "It can work both ways," said La Jolla, Calif.-based consultant Robert Martin. "Some are CPAs in larger firms who want to have the flexibility to go out on their own, while some are practitioners in a sole proprietorship or a one- or two-partner firm who find it's too heavy a load."
Martin expects to see more of Chemel-Kornick type of mergers, in which partners leave a larger firm to form a firm that better suits their own needs and talents. "We'll probably see a lot of this in the fallout from Andersen," he says. "My guess is a lot of Andersen partners will leave - I suspect many of the partners and managers will start their own firms with two or three acquaintances."
Martin said it's becoming more socially acceptable for a partner to leave a firm. "The only difficulty is the non-compete agreement." However, according to Martin, "While most firms say they do have a non-compete agreement, in many cases, the agreement is not signed or there's something else that makes it susceptible to a challenge in court."
Martin added, "Many times they'll waive the agreement or renegotiate it in ways that makes it acceptable to both parties when a partner decides to leave. In many cases, the partner breaks the agreement and says 'sue me,' but, more often, they'll renegotiate."
The other type of merger, where sole- or two-partner firms merge to form a larger firm, is fueled by the difficulty of running a practice on a small scale. "It's hard to get and keep good staff," said Martin. "The sole proprietorship or two-partner firm is difficult to run, and its size reduces the odds that you'll have internal succession when it comes time for an owner to retire."
Smaller firm mergers may become much more prominent now, with baby boomers reaching retirement age, grappling for exit strategies in bulk. "There've been a lot of these mergers in the last five years, and the trend will grow," says accounting industry consultant Allan S. Boress of Eustis, Fla.-based Boress & Associates. "As they get closer to retirement, a lot of partners are getting desperate."
Part of the problem is that there were 25 percent less accounting school graduates in 2000 than in 1995, and the outlook will not improve in the near future, according to Boress. "The five-year (150-hour) rule, the fact that accounting is increasingly looked on as a boring profession and the perception that accountants work too hard don't make the profession attractive to the generation graduating today - they have a different work ethic," he said.
The net result is that there are fewer people to buy out a retiring partner and the total number of firms will decrease. "For many the solution is 'let's merge and maybe there'll be someone there to buy us,'" Boress said.
He noted that a larger firm is more attractive to college graduates, since it can offer more varied levels of job experience. "It's more impressive to work for a merged firm since you'll get more experience and benefit from growth in the profession," he says.
The same rationale for merging one- and two-partner firms is also driving the mergers between larger CPA practices, according to Jay Nisberg, a Connecticut-based consultant. "It will be increasingly more important for firms to increase the sophistication of services they provide as well as have a wider range of client handlers," Nisberg said.
A case in point is the January 2002 merger of two Norfolk, Va.-based firms, McPhillips, Roberts & Deans and Edmondson, LedBetter & Ballard.
"We did a similar merger in 1999," said managing partner Ed Amoroso. "In both cases, what we were trying to do was broaden the range of services we could make available to our clients and become more specialized at the upper management level. If I'm not a specialist in a particular area, one of our partners is, so we can expand from our traditional accounting market to nontraditional services."
Industry observer Allan Koltin agrees. Koltin, president and chief executive of Chicago-based Practice Development Institute (PDI), says the increased merger activity among smaller firms is due, in part, to the broad array of what a practitioner can now do to make a living.
"Ten years ago a CPA hung up his shingle and did accounting, tax and 'other,'" said Koltin. "Now, the accountant can take a week off, get a license and show up the next week as someone who can manage clients' assets, sell life insurance, facilitate a strategic planning retreat, be an investment banker, a profit improvement consultant or coach CEO/entrepreneurs. With all this new stuff out there, practitioners are saying 'I've used the old model too long, I'm going to specialize.' So they merge with someone who wants to do accounting and tax, and this frees them up to concentrate in areas they want to grow."
"We're clearly starting to see more of the two- and three-partner firms getting together," he said. "Because competition is getting more intense. To compete you need a greater depth of capital and resources." Even small economies of scale can be advantageous, he noted, "since it costs so much more in labor and overhead to run a small firm."
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