By Domenick J. Esposito
8 Steps to Great
The new administration faces global uncertainties. Biden officials have set the stage for higher corporate and individual tax increases.
At the same time, if your midsized CPA firm has not at least started to move away from a general “compliance shop” to either:
It’s time to pause and take a look around you. The year 2021, a period of fiscal and general economic uncertainties, might be an opportune time for you to do a self-assessment of your strategy.Is it time to move away from “Plan A” – staying independent for as long as you can – or pivot to “Plan B,” cashing out and merging up before the inevitable enhanced tax rates kick in and your general compliance shop’s worth or valuation continues to diminish? In addition to the fiscal and general economic uncertainties impacting your decision, some other factors that you should consider in your Plan A/Plan B strategy include the following: Your market share: If you have a specialized niche firm such as a bankruptcy/restructuring practice or a litigation support/forensics practice, published material usually makes it easy for you to calculate your share of the consulting fees spent by the consumer. If you have a professional services firm that serves marquee clients in specialized industries, while more difficult to calculate market share, in many cases, you can come up with a reasonable range for your market share. If your market share is “de minimis” with no reason to believe it will improve in the foreseeable future, it might be time to move to Plan B. The profitability of your practice: The gold standard used to be 1/3 of the firm’s profits would get distributed to the firm equity partners. How much has your firm moved from this gold standard? Obviously, the further and further away you move away from 1/3 of the firm’s profits distributed to the firm equity partners, the less you will receive in your business valuation. The trend line can also be a meaningful bit of data. The ages of your partners: If the median age of your partner group exceeds, say, 52, and a good number of your partners are nearing retirement, there is a high likelihood that your talent asset is diminishing in value. This would be particularly true if you have been unsuccessful in grooming the next generation of young partner stars who can attract and retain marquee clients. This would have a significant negative impact on the business valuation of your firm. A meaningful succession plan: If you are like many midsized CPA firms, you do not have the confidence in your younger partner group’s abilities to lead the firm as the senior partners retire and get paid out. You have been disappointed in your ability to develop the next generation and it’s too late for you to attract a lateral who would be accepted by the partner group. This scenario is not a healthy one when it comes times to value the business. Your partner compensation: It’s problematic if your superstar partners are not getting paid market value. You run the risk of them leaving the firm. Here again, this scenario does not bode well for the future of your firm and for valuation purposes. It might be time for you to pivot to Plan B (cashing out and merging up before the inevitable enhanced tax rates kick in and your general compliance shop worth or valuation continues to diminish) if this scenario mirrors your firm. It would be wise to retain an outside consultant with considerable experience in navigating the “merging up or not” decision. The outside consultant can benchmark your firm against others and provide you with recommendations on how to move forward. A consultant who has considerable relationships with acquirers of midsized and small CPA firms can also be very helpful in identifying the right potential acquirers for your firm.
There are 14,000 CPA firms in the United States. Most of them are sole practitioners. A large slice of them (firms generating annual revenues between $12 million and $20 million) is referred to as midsized CPA firms. If you are in that universe, your world has changed.In many ways, COVID-19 accelerated the change. The world of public accounting has become a rapidly moving profession that is now providing untraditional services such as data analytics, cybersecurity, managed services and outsourced CFO services. It’s an exciting time in the profession but a time full of fiscal and economic uncertainties. Do the self-assessment I have laid out above and, with the guidance of an outside consultant, decide if it is time to pivot to Plan B.