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The Urge to Merge Continues

With 2013 in our rear view mirror, many want to know what the merger and acquisition marketplace will look like in 2014. I have been involved in anywhere from 75 to 100 M&A deals a year over the last 4-5 years, and over 1000 deals since 1990. My firm’s involvement may include deals which we develop ourselves, or deals in which we are brought in to consult upon.

What we’re seeing is a very steady M&A market with potential for growth in the future. With baby boomers gearing up for retirement, the M&A market among CPA firms could certainly heat up and my firm is fielding a number of calls from practitioners looking for guidance.

I’m finding that the primary drivers for the M&A surge for CPA firms in recent years have been succession and growth via the cross-selling of services and expansion into new geographic markets. However, it’s expected that attracting and keeping talented CPAs will be an additional driver this year.  

As the economy continues to rebound and firms cope with the retirement of senior partners more firms are seeking younger talent with established books of business. Such talent searches will likely be driven by a desire to:

  • groom talent to replace retiring partners and further build their book of business
  • manage senior and partner-level work
  • create strong internal succession teams, so practices can remain independent , if partners wish

What’s interesting about the uptick in mergers my firm is seeing is that they are spread among firms of all sizes. While many mergers involved Top 100 firms, CPA firms ranging from sole practitioners to those just below the Top 100 threshold have jumped in with both feet.  

Partners May Want to Reduce their Commitments; But Who Will Take Over?

According to the AICPA’s 2012 Private Companies Practice Section Succession Survey, it’s projected that in 2014, as many as 40% of multi-partner firms will have at least one partner who seeks to reduce his or her time commitment over the next five years. However, many practitioners don’t feel they have the staff to rise up and take over.

Many firms may not fully recognize the talent they have to execute an internal succession plan.  If they wait too long to initiate their transition plan, they risk losing the opportunity to test emerging practitioners’ abilities to run the firm. 

What complicates the issue further – especially for small regional firms – is that in most cases, the strongest solution to their succession issues is through an upstream merger. However, in many markets, there may be dozens of firms in this same position, but fewer than a handful of suitors large enough to rescue them.

What had been a “seller’s marketplace” just a few years ago has already shifted. Those who wait too long to find the “right” long-term succession solution are usually left with limited options. Couple that with the fact that we’ve seen values of firms drop over the past few years for both internal valuations (partners buying out partners) and external sales, and that will create problems for those firms who are unprepared for succession.

Brand Loyal Vs. Partner Loyal

Small firms also face a unique set of issues when it comes to the M&A marketplace. When a Big Four partner retires, their clients are usually “brand loyal” and shifting business to a new partner in the same firm is not as challenging. However, small firms tend to be “partner loyal” and generally require a longer transition period. Unfortunately, some small firms don’t address these issues far enough in advance to create a strong and workable plan to retain clients.

Resources that Can Help with Your Firm’s M&A

The AICPA’s PCPS is dedicated to helping practitioners navigate through the challenges of running a firm. The PCPS Succession Planning Resource Center and Human Capital Center (HR Resources) help you find the information you need to plan the strategic course for your practice and build your team to take the helm. 

In addition, my partner, Terry Putney, and I recently completed the book CPA Firm Mergers & Acquisitions: How to Buy a Firm, How to Sell a Firm, and How to Make the Best Deal. It shares detailed information on alternative deal structures, internal succession readiness, how to value a practice, transition the clients, roadblocks to avoid and much more. If you are entering or considering the M&A marketplace, you may find this a powerful tool.

If you or your partners have the urge to merge, what’s your plan for moving forward?

Joel Sinkin, President, Transition Advisors, LLC. Joel exclusively consults CPA practitioners on ownership transition.

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