Trends likely to accelerate merger mania among firms

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The frenzied pace of CPA firm mergers and acquisitions has not slowed down one bit.

We continue to witness a perfect storm caused in part by clients that continue to experience slow growth, if any. They aren’t in need of CPA services beyond the basic compliance services. Net profits per partner continue to be not as healthy when compared to what they were circa 2006-2007. Average collected rates per hour continue to trend downward by 10 to 15 percent because of the mix of services and predatory pricing throughout the marketplace.

Partner demographics continue to be in an inverse pyramid: top heavy with baby boomers and lean with “under 40” superstar partners. Firms continue to lack enough rainmakers and business people. Partner-level talent, particularly tax talent, is nearly impossible to find.

Marquee clients are demanding higher quality services. Leadership and corporate governance aren’t properly aligned. As a result, many smaller firms aren’t able to capitalize on the opportunities presented to them.

Over half of the transactions consummated in the recent past have been closed by the bigger, stronger Top 100 Firms who are generally perceived as more profitable. So, the big firms keep getting bigger, stronger and more profitable—making it even harder for small and midsized CPA firms to remain independent.

It is not unreasonable to mistakenly conclude that “merger mania” will slow down sooner or later, but while it is true that “merger mania” can’t go on forever, we don’t see any end in sight. Anecdotally, we observe that more than one out of every two CPA firms of any significant size is either discussing a merger combination, acquisition or sale, or is planning to do so in the near future. And, as if it hasn’t been hard enough for the small and midsized CPA firms to compete, we now see a fast-moving freight train named technology that will more than likely accelerate the merger frenzy. Multiple mergers and acquisitions, including one or two among the top 20 firms, below the Giant Four, possibly even a merger of equals between a top 10 firm, are in the cards, at least in the near term.

There isn’t a day that goes by without a technology impact discussion among the leaders in the profession. Take, for example, the presentation at the 2017 AICPA Engage conference when AICPA chair Kimberly Ellison-Taylor and president and CEO Barry Melancon made the following points:

  • Accountants will be negatively affected by changes in technology—losing over 1 million jobs!
  • The very biggest CPA firms have invested hundreds of millions of dollars in new technologies in the audit and other areas.
  • There is a danger of dividing the profession between those who have modern audit tools and those who don’t.
  • Technologies like artificial intelligence, blockchain, and data analytics have the potential to completely reshape the landscape in all of the profession’s core services and create new challenges and new competitors.
  • The profession must make investments in transforming its services. What is a CPA’s competitive advantage? What are CPA firms doing to maintain the trusted advisor role?
  • Recruiting and retention of staff will become even more challenging.

How does the small practitioner compete? This perfect storm, coupled with freight train named technology, begs the question: Does your firm have enough critical mass, talent and profitability to stay the course and deal with all the challenges coming at you? If you are doubtful that your firm can weather the storm, is now the time for your firm to carefully evaluate “Plan B” alternatives such as merging up, merging with an equal, or acquiring another firm?

Don’t wait until the last inning of the baseball game when your key partners are nearing retirement. As long as the economy stays anemic and your clients aren’t demanding an awful lot of advisory or consulting services from you, valuations aren’t going to get better in the immediate future. In Our Opinion, if you’re not sure your firm can survive and prosper through all these challenges, you should consider pursuing one of the “Plan B” alternates:

Acquire smaller firms if you have a quality senior management team who can devote time to integrating any new firms. Remember that integration of partners, staff and clients is considerably harder than consummating a transaction and that accretion to partner profitability usually doesn’t takes place until year three post merger—maybe year two if things fall into place quickly.

Merge with an equal if there is a strategically good fit that can give you an opportunity to propel your firm’s growth rate. Remember that a merger of equals requires you to blend two cultures that are different despite some similarities.

Merge up if you are convinced that your people and your clients will find a home where they would be better served than if you remained independent. Remember than merging up will create an environment that some of your partners will not be comfortable with, so there will be some collateral damage, including client losses.

Trends like artificial intelligence are a reality for the accounting profession, and if your firm is going to deal with it head on, you are going to have to make some significant investments in time and dollars. If you are not sure that you will able to make those investments, revert to “Plan B”. A word of caution, however: No matter how tempting it may be, don’t pursue a “Plan B” transaction if 1 + 1 doesn’t at least equal 3. If your gut tells you that this will not be the case with a particular transaction, pass on it. It probably isn’t right for your firm. There will be others.

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M&A Integrations Artificial intelligence Practice structure Dom Esposito Barry Melancon