The “Great Selloff” of CPA and professional service firms is here on a runaway, downhill slope. 2021 was a record year for upward mergers or sales of firms nationwide. 2022 has already started with a material increase in activity, and tax season is not slowing anything down.
A major driver accelerating M&A is the need to add non-accounting businesses. Firms are looking to diversify revenue streams by expanding their advisory services and one method is to acquire or merge in specialized consulting businesses. Our clients are asking for specific service companies such as cybersecurity, ERP systems, SOC reporting, etc. or specialty providers in industries such as health care or construction. There are key elements to identify when adding a non-accounting business, but the critical one is ensuring there are professionals coming into the firm that can continue to deliver those specialty services. Most CPA firms do not have in-house teams in place to take over a specialty practice.
The perfect storm has been brewing for years. It has gathered strength because the individual factors that fuel mergers or acquisitions are converging at the same time. There are three main drivers at the heart of almost every transaction and they all revolve around succession issues. They include age of leadership, a lack of or gap in the succession team, and the talent shortage. On a standalone basis, each of these factors are major contributors, but when you mix the three elements together and then keep increasing the heat in every sector, it forces an explosion, which is where we find ourselves today.
The heat referred to is the age factor. It keeps inching forward and generating the heat that is creating the explosion of the three elements. Leaders can balance staffing shortages and avoid worrying about succession when there still is time on the clock to push off those issues until later. Eventually “later” arrives and the time required to fix the succession problem does not exist anymore. For many firms, “later” has already arrived. Another factor tossing gas onto the fire are succession plans that fell apart. My team fields inquiries daily from firms who tell us they had an agreement with younger professionals that did not work out.
The increased appetite for non-accounting services is simple to explain. Firms need to become less dependent on a shrinking pool of CPAs and they want to capitalize on their installed base of clients who need other services. Many firms struggle to get their advisory services off the ground because they are trying to use in-house resources to make it work or just trying to conduct advisory work in the slow time. The problems with this are slow times are less frequent these days and the CPAs tasked to do the consulting are either not trained for it or not comfortable in a consultative role. Consulting often requires a deep level of active engagement with the client that involves asking sometimes uncomfortable questions and dealing with abstract issues rather than the rule-driven processes involved in audit, tax, and accounting procedures.
Why take your CPAs who are difficult to find and redirect their efforts away from tax and audit and into consulting? Evaluate four options to expand your advisory services:
- Determine what services you could deliver internally such as fraud, forecasting, cash flow, etc. and honestly evaluate if you have people with the skills, desire, and time to sell and deliver those services.
- Identify what non-accounting services would be your strongest growth areas. Then begin a search to uncover companies that fit those areas to start acquisition or merger discussions.
- In the interim, or possibly as a long-term solution, align your firm with formalized agreements with outside advisors to create a revenue-sharing stream.
- Finally, step back and assess if it makes more sense to merge upward into a firm that already has these services and networks in place.
Some mergers or acquisitions are driven by a need to grow and are not succession-solution-oriented. The reality is a small to midsized firm might need to plug into the foundational investments that a larger practice has established. Examples of foundational investments include being part of a large association of CPA firms, having cyber or transactional advisory or other specialized consulting in place and key leadership established such as a COO, CGO, or professionals already leading a specialty service niche. The cost and time for a small to midsized firm to develop that infrastructure can be extensive. The other option of bypassing the pain and cost to develop this and merging into another firm that has resources already in place may look like a more reasonable and realistic path. If you are already pressed for time, how are you going to be able to grow your advisory sector?
What makes this worse is we are in an adapt-or-die situation. COVID was an accelerant to an underlying problem. It spurred a remote workforce movement that led to accounting professionals electing to leave the profession. This factor, combined with the reduced number of people sitting for the CPA exam every year, just pushed a high activity level of M&A into the “Great Selloff” we are experiencing in both CPA firm transitions and now in the non-accounting growth sector. In five years, firms are going to look quite different and if change is not part of your mindset today you might be in a compromised position.
