An Often-Overlooked Benefit Of Doing M&A Transactions

In Our Opinion, Perspective #122—A Continuing Series for Leading CPA Firms

"I am convinced that nothing we do is more important than hiring and developing people. At the end of the day, you bet on people, not on strategies."     
    — Larry Bossidy (General Electric)

In Our Opinion, most U.S. small and midsized firms, about 14,000 in total, are a “cottage industry” that has always faced stiff competition and a complex business environment. Consider:

• An anemic economy with very slow growth and little, if any, prospects for improvement in the near term.
• Political turmoil creating lots of uncertainty in the markets.
• Lots of predatory pressure on fees and billing rates.
• Baby boomers retiring at a rapid rate.
• Many firms looking at alternative strategies to “going it alone”.
• A talent dearth --- particularly in the senior leadership and tax areas.
• Quality small and midsized firms position themselves to get “A” type services but lose out to larger Top 50 firms on brand recognition, presence, and market permission.

So, in 2020, what’s new; what’s different?

Well, to begin with, the COVID-19 pandemic and the work from home environment are probably hindering optimization of production hours and utilization and therefore potentially hurting partner profits. But this development, while different, is far from the biggest “new” challenge facing small and mid-sized CPA firms.

The biggest challenge facing these CPA firms is this:

Little by little as the years go by, the Top 50 firms are getting larger, stronger and better, in part, by gobbling up small and midsized firms thereby making it tougher and tougher for these firms to compete for both talent and clients. Consider: in 1991, of the Top 100 firms, the “median” firm was doing annual revenues of $10.3M. In 2020, of the Top 100 firms, the “median” firm was doing annual revenues of $110.2M. That is an increase of about 11 times. Additionally, in 1991, of the Top 100 firms, the “low” firm was doing annual revenues of $6.0M. In 2020, of the Top 100 firms, the “low” firm was doing annual revenues of $43.7M. That is an increase of about 7 times. Even after considering inflation, the Top 100 firms have little doubt that:

• Size matters.
• Brand recognition is critical.

This Perspective focuses on the war on talent and how small and midsized firms have boxed themselves into a competitive disadvantage when compared to the Top 50 firms. You see, the Top 50 firms, and many of the Top 100 firms for that matter, have focused on the talent dearth by adopting two strategies:

For internal partner candidates, launching a Partner Candidate Development Academy that helps their next-generation partners maximize their soft skills and strengths and minimize their weaknesses. It requires active participation by the firm’s senior management and partner candidates. To supplement the pipeline of internal partner candidates, the top firms have come to realize that M&A transactions not only build critical mass and achieve other strategies but also create a branding environment to “buy” senior-level talent as part of the M&A transaction.

And here is the cherry on top of ice cream! The Top 50 firms have come to realize that size and strength of branding, in part due to M&A transactions, are very important to potential lateral hires – particularly those that are jumping from the Big 10 firms who are looking for a “soft landing” into a solid, albeit, smaller quality brand.

And yet, it is hard to believe but it is true – here we are in 2020 and many small and midsized firms have yet to realize that they need to do M&A transactions to supplement their growth, buy talent, and help them get larger, stronger and better. With a brand that becomes more and more recognizable, in part due to M&A transactions, small and midsized firms can also attract quality senior level laterals – a good many out of the Big 10.

There’s no argument within the CPA profession that today’s economy is anemic, firm margins are squeezed and talent, particularly senior leadership and tax talent, is very scarce. On top of that:

The philosophies of: (a) finders, minders, grinders and, (b) a CPA firm model (principally low margin compliance services) are no longer sufficient and probably are counterproductive to the perpetuation of a firm. Clients have the upper hand in their CPA firm relationships. Technology will continue to create a lesser demand of lower level staff. It is widely believed that Google and Microsoft will soon become fierce competitors for certain compliance services.

IN CONCLUSION

If small and midsized firms want to “run with the big dogs”, go after greater margins, and perpetuate a sustainable brand, they need to take a hard look at their next generation of partners and ask:

• Are we doing our best to help our pipeline of future partners?
• Are we doing M&A transactions and, with that branding and additional critical mass, are we attracting quality laterals out of the Big 10 with the “right stuff”?

Remember at the end of the day, you bet on people, not on strategies.