IN OUR OPINION, PERSPECTIVE #121— OCTOBER 26, 2020
(A Continuing Series for Leading CPA Firms)
Want To Remain Independent? Need To Get Bigger, Stronger, Better!
"#1, cash is king...#2, communicate...#3, buy or bury your competition.
—Jack Welch (Former General Electric CEO)
This perspective has been written for CEOs at CPA firms doing $20 million to $100 million in annual revenue with quality profits per partner who want to make their firms bigger, stronger, and better! All of which, make the firm more profitable.
While conventional wisdom tells us that better is better, we believe that is plain and simple nonsense when it comes to midsized CPA firms and a convenient excuse for a less than stellar growth by a firm’s partner group. We believe this because we look at better through the lens of the marketplace for both existing and prospective clients and talent.
There is no doubt in our minds, that 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 importantly, 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 people 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. And at the end of the day, the scorecard for measuring success is profits per partner.
, 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 firmSo 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. Ever hear of the old saying --- “be safe, it will be difficult for anyone to criticize you if you buy IBM”? Sure, you have. We all have heard it many times over the years. The same is true with accounting, tax, and advisory services. 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.
In Our Opinion, if you are not growing into a bigger, stronger, better, and more profitable firm at an acceptable rate (say 6% to 8% per annum, which is very 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 towards working at home, thereby reducing their lease obligations and outsourcing their infrastructures. We are 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. Thomson Reuters recently indicated that the 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 largest accounting 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 Blum, Shapiro & Co. 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 is either discussing a merger combination or is 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 that they are not able to hold onto their growing clients as they seek capital. At the current pace, a very 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.
So, 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 who will follow a process very 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 optimalization, 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 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 “shortlist” 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 NDAs that need to be signed. From those initial Zoom calls, the acquirer will decide which firm(s) 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 an LOI is prepared. These deal points will be discussed with the qualified candidate (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. 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 and as long as the marketplace buys bigger is better, there is no better time than now to capitalize on the opportunities. A word of caution, however: we implore you – no matter how tempting it may be – don’t do a merger combination if 1 + 1 doesn’t at least = 3.