also: for mergers, it’s a buyers’ market.
by marc rosenberg
there have been four babe ruthian story lines that have driven the cpa industry evolution for 10-20 years.
more: 2020 outlook: focus on business development | innovate and anticipate | balance advisory and compliance | talent shortage drags on | demand is high | business development goes borderless | data import on the rise | becoming the most valuable advisor | top three tips for 2020 success | where do you want to be? | dicey disruptions | upstream mergers | staffing gets creative
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just because they don’t go away, that doesn’t mean that changes aren’t occurring.
1. shortage of staff and lack of experienced partner-ready staff at firms. cpa firms seem powerless to solve this issue, though not surprisingly, firms over $10-15 million in revenue seem to have a tad less difficulty – it’s never “easy” but “easier” – attracting and developing staff because they have more to offer job candidates in the way of training, mentoring, advancement, technology, etc., than smaller firms.
in a segue to #4 – technology, with the momentum shifting from compliance to consulting services coupled with the huge changes coming in technology – cpa firms’ demand for traditionally trained accountants will very likely slacken off while the hiring of non-traditional personnel/consultants will grow. this may be the long-term answer to the shortage of traditional accountants – change the ecosystem so that firms need fewer traditionally trained staff.
2. the deluge of baby boomer partners retiring. these retirements continue unabated with no end in sight. in a segue to #3 – mergers, coupled with notoriously weak succession planning – retiring partners are rapidly finding that the fallback solution to their exit strategy, selling to a larger firm, is falling away because buyers have become exponentially more selective in choosing merger partners – at any price.
3. merger frenzy by sellers, fueled by boomer retirements, ineffective succession planning and buyers’ voracious appetite for growth. there are still tons of sellers in the merger market, but major changes began to take shape about three years ago and have been increasing in intensity ever since. what are these changes?
in the past, buyers’ interest in sellers was directly linked to the lucrative acquisition of smaller firms’ clients along with the related profitability. today, many buyers simply aren’t as interested as they used to be in good, solid, traditional/compliance firms with excellent (though usually not spectacular) profitability. instead, buyers seek merger partners that are a good “strategic fit.” specialties. niches. wealth management. young talent. access to new markets. consulting vs. writeup/1040 shops. a different location. for the past year or two, if you follow the media, it seems like 30-50 percent of all mergers (at least those that are announced) are the ones in which a consulting firm is acquired.
a confounding complication related to the merger market has arisen. despite the regional firms getting all the press and attention with their glittering acquisitions, the vast majority of buyers in recent years have been local firms with revenue in the $8-30 million range. but these buyers have themselves been gobbled up by larger firms. the result is that in many markets (like chicago where i reside), the number of buyers has shrunk by about half. to say that the cpa firm merger marketing has shifted from a sellers’ to a buyers’ market is an understatement. so, between the increased selectivity of buyers and a sharp reduction in the number of buyers, it’s no wonder that more and more sellers are having a tough time finding some love.
4. technology: the changes that have come and will continue to come. you must have been living in a cocoon to be unaware of the technology changes that are at our door (if they haven’t already crashed in and taken over!). but the full impact of these changes on the typical local firm – say firms under $20 million – is still three to five years away, based on a survey we conducted of a few dozen firms. remember amara’s law: “we tend to overestimate the effect of technological change in the short run and underestimate the effect in the long run.”
though these four issues have been a constant for a very long time, nonetheless, observable and impactful changes are rapidly taking place.