Want your firm to remain independent? Get bigger, stronger and better
While conventional wisdom tells us that bigger isn't better, that’s plain and simple nonsense when it comes to midsized CPA firms and a convenient excuse for less-than-stellar growth by a firm’s partner group.
Look through the lens of the marketplace for both existing and prospective clients and talent. To the marketplace, bigger is better and that means size sells and matters. Make no mistake about it. Your existing and prospective clients and people respect big and, more important, buy big, known brands. The supposition is that if you are big, you must be good. If you are big, you must have client and staff credentials that are impressive, and those credentials attract better quality prospects and people. With better clients and talent and a brand that is known for certain niches, your firm has pricing power when it comes to fees, and that translates into better profits per partner. At the end of the day, the scorecard for measuring success is profits per partner.
So, while you might not like to hear it, to the marketplace, if your firm is big, it is an easier client buy than if your firm is better.
Even though your firm might be better, if the marketplace doesn’t recognize your brand, there is always going to be buyer skepticism. And you don’t need buyer skepticism in making the sales pitch. Now that is not to suggest that your firm doesn’t need to deliver on the sales pitch with quality services. Of course you do. It makes absolutely no sense to bring clients in through the front door and have them leave you through the back door.
If you are not growing into a bigger, stronger, better and more profitable firm at an acceptable rate (say 6 percent to 8 percent per annum, which is difficult to do organically in this economy by simply providing compliance services), there is no better time than today to expand into consulting and advisory services as companies move toward working at home, thereby reducing their lease obligations and outsourcing their infrastructures. I’m particularly bullish on outsourced CFO, accounting department and tax department opportunities.
Jump all over the many merger opportunities bubbling out there as founding partners (Baby Boomers turning 65 every eight seconds since 2011) pursue exit strategies. COVID-19 pandemic has not stopped mergers and acquisitions among accounting firms. If anything, they may be accelerating. Blockbuster deals this summer include:
- Chicago-based BDO USA, one of the Top 10 Firms, acquired Piercy Bowler Taylor & Kern to expand its footprint in Nevada and Utah;
- Baker Tilly and Squar Milner joined forces to become a Top 10 firm with a combined annual revenue of almost $1 billion; and,
- Connecticut-based Blumshapiro expanded regionally by adding The Brighton Co., which is based in Massachusetts and specializes in outsourcing financial services.
More than one out of every two midsized CPA firms are either discussing a merger combination or are planning to do so soon. In many cases, this is occurring because CEOs are not confident in the leadership talents and financial wherewithal of younger partners. In many other cases, it is occurring because these firms are unable to attract and retain talent. And in still other cases, these firms are finding they are not able to hold onto their growing clients as they seek capital. At the current pace, a large percentage of the approximately 14,000 multi-partner CPA firms (a majority of which are under $20 million in revenue) will be looking at an upward merger in the next few years.
Making the deal
Let’s take a look at the M&A process. When approaching the market, most CPA firms retain a professional consultant who has significant credentials with M&A and strategy and who will follow a process similar to that outlined below.
The initial steps consist of a collaborative preparation of a confidential executive overview describing the acquirer (on a no-name basis) today and its strategic vision for the future (including potential acquisitions of firms currently providing data analytics, business process optimization and CFO advisory services), what differentiators the acquirer has to offer a merger candidate, and what attributes the acquirer is looking for in a M&A candidate. The executive overview, the sole property of the acquirer, will be used as an introductory teaser that will be sent by the professional consultant to potentially qualified candidates for merger and/or acquisition in advance of an initial telephone call or a meeting.
Following the above, the professional consultant will present a “short list” of qualified candidates to the acquirer for consideration. The acquirer will decide which two or three candidates it would like to arrange for initial Zoom calls. Such calls will be arranged by the professional consultant, who will distribute nondisclosure agreements that need to be signed. From those initial Zoom calls, the acquirer will decide which firms it would like to meet in person (presuming CDC guidelines allow such in-person meetings). Alternatively, Zoom calls would be arranged.
If the professional consultant decides that one of the candidates might be a good cultural and strategic fit, some preliminary due diligence will be performed. Presuming the results of the due diligence efforts are satisfactory, the professional consultant will help develop a list of “deal points” that need to be considered before a letter of intent is prepared. These deal points will be discussed with the qualified candidate (the potential acquiree firm) and, if both firms are mutually satisfied with the resolution, a non-binding LOI (subject to further due diligence) will be prepared with the professional consultant’s assistance.
Upon the execution of an LOI, legal and financial due diligence will occur and, if the results are satisfactory, closing documents will be signed.
From an acquirer’s perspective, there are wonderful opportunities to grow firms through merger combinations. As long as the marketplace believes in bigger is better, there is no better time than now to capitalize on the opportunities. A word of caution, however: No matter how tempting it may be, don’t do a merger combination if 1 + 1 doesn’t at least = 3.