6 ingredients for firm value

should you merge? what can you offer your people?

by domenick j. esposito
8 steps to great

i am often asked two questions by small and midsized cpa firms:

how do we create significant firm value?
if we can get there, should we sell or stay independent?

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the answers to these questions, of course, depend on a firm’s particular facts and circumstances and one size does not fit all. nevertheless, i am happy to share my perspective based on best practices.

“willingness to change is a strength, even if it means plunging part of the company into total confusion for a while.”

– jack welch

a firm needs a number of ingredients to create significant value. presented below are arguably six of the most important:

a culture that breeds a firm first mentality. many firms put too much emphasis on the book of business and not enough emphasis that you are a team and, as a team, you are much more effective in the marketplace in attracting better clients and better laterals. to create significant value for your firm, you need to break down the barrier of the silo mentality and focus on the “firm first” mentality. easy to say but not easy to do and most small and midsized cpa firms can’t get there.
existing partners who have strong business development skills. today, probably more than ever before, organic growth is difficult to come by as the middle market economy continues to lag with no immediate change in sight and work for a cpa firm isn’t just coming in the door the way it used to before the financial crisis. as a result, probably more than ever before, firms need about 25 percent of their partner group with strong business development skills and knocking the cover off the ball with new business each and every year. about 50 percent has to have some moderate business development success and the remaining 25 percent has to be business development supportive by writing articles in trade journals, as an example.
potential partners who have the “right stuff.” too often, many firms make partners because of needs as opposed to qualifications. these admissions or promotions are referred to as “slot shots.” and while we understand why “slot shots” occur (partner retirements, organic growth, acquisitions, etc.), taken to an extreme, this practice truly undermines the value of a firm because more than likely it doesn’t breed for a strong succession plan. if your partner group has slipped into mediocrity and you wish that your firm were great again, start by raising the bar for your new partner admissions. moving from senior manager or principal to non-equity partner (yes, i believe in two classes of partners – entry level is non-equity, highest performers rise to equity) should be a consideration after functioning two, perhaps three years as a senior manager or director. potential partners with the “right stuff” demonstrate that your firm has a fairly good chance to enjoy a long runway – an ingredient that improves the value of a firm.
skills and services beyond compliance. by now, it should be pretty obvious that if your firm is only capable of providing plain vanilla, compliance services, you probably won’t be in business much longer as the margin in that work is flatlined at best. to create significant value for your firm, you must begin to pivot from a compliance shop into an advisory firm that provides consulting services such as international tax, transaction advisory services, litigation support, estate and trust planning, state and local tax advisory and cybersecurity. this is where the future is. this is where the better margins are.
several niches that give your firm market permission to do sophisticated work for marquee clients. if your firm’s attest and tax services aren’t distinctive in the marketplace, you are facing another red flag that doesn’t enhance market value. we strongly suggest that your firm select three or four industry sectors and specialize in them. examples include construction, real estate, professional service firms and hedge funds. as a byproduct of the attest and tax services, offering a memorandum that summarizes your observations to improve ebitda and working capital is a value-add that demonstrates a distinctiveness in the marketplace. and the stronger your people get in the industry sector, and the “better looking” your client list becomes, the better your chances are of attracting better quality laterals and marquee clients who are recognizable names in the marketplace. this enhances value.
critical mass or annual revenue base of $20 million to $25 million and at least 35 percent profits available to partners. based upon years of m&a experience, it is my observation that in every market or geography – including the largest such as new york, chicago and los angeles – we have found that firms that can achieve $20 million to $25 million in annual revenues with at least 35 percent in profits available to partners will get the attention of those top 100 firms that want to be in that market or geography. that attention translates into value.

let’s say you can get all of these components working for you and you can significantly enhance the value of your firm. now comes the tough question – should you sell, or should you stay independent?

it’s my view that you should sell to a larger firm if you believe that a bigger brand and a more developed platform will provide your people the opportunity to grow professionally and to exponentially improve their earnings potential. on the other hand, i believe you should stay independent if you have a huge runway with talent, age demographics and a history of steady organic growth. with that mix of positive factors, you probably can get larger and more profitable and that translates into even greater value somewhere done the line.

in conclusion

it is not easy to stay independent these days as organic growth is hard to come by and strong, quality partners are not easy to find and develop. nevertheless, it can be done and is in fact being done by many of the top 100 firms today. paying attention to the six factors above will help you create significant value for your firm.

if you can achieve success with these factors and you have a huge runway ahead, my best advice to you is to stay independent. if, on the other hand, you are a bit concerned about the future, even though you have created significant value for your firm, “plan b” – merging up – might be a very viable option for you.

posted on december 14, 2018

dom esposito

about the author

domenick j. esposito was the ceo of grant thornton, vice-chair of bdo, and national growth director at cohnreznick.

he is the author of "8 steps to great: the eight essential strategies driving success at the world's largest cpa firms. and how to apply the lessons at firms of all sizes," published by 卡塔尔世界杯常规比赛时间.

a life in public accounting

in 2016, esposito, then a former ceo of bdo, moved from a 46-year career in public accounting into the next phase of his professional life – consulting to cpa firms, launching a boutique advisory firm, esposito ceo2ceo, that provides advice to ceos, managing partners and other senior partners of cpa firms focused on the mid-market throughout the u.s.

with the launch, esposito authored “8 steps to great," a guide for ceos, managing partners, and other senior partners on how to move their firm to the next level.

cohnreznick national growth director

esposito was one of the most qualified individuals in the country to advise cpa firms on growth and profitability. through 2015, he was national practice & growth director and an executive board member of cohnreznick, llp, a mid-market sustainable brand and the tenth-largest cpa firm in the united states. he oversaw cohnreznick’s go-to-market industry specialization and consulting and advisory service lines. he was also intimately involved in the firm’s mergers and acquisitions and strategic and tactical activities for its public company and capital markets initiatives. dom joined the predecessor firm of j.h. cohn in 2002 as the chief operating officer and executive board member.

dom was also an independent director of ethan allen interiors inc. for several years (through 2014), dom was a member of the nasdaq listing and qualifications committee to the organization’s board of directors. he formerly served as the leader of the new york state society of cpas committee for large and medium-sized firms practice management. he also was an adjunct accounting professor at c.w. post/long island university.

bdo and grant thornton

through october 2002, dom was vice chairman at bdo, a mid-market sustainable brand and the seventh-largest international accounting and consulting firm in the u.s., with almost 50 offices and 3,400 employees. during his brief time with bdo, he was responsible for the alliance distribution network (at the time consisting of over 80 cpa firms, 10 law firms, and 25 consulting firms). he was also responsible for attracting and servicing a number of clients.

from 1979 through 2001, dom was with grant thornton, another mid-market sustainable brand and the sixth-largest international accounting and consulting firm in the u.s., with over 50 offices and 4,500 employees. he joined grant as an audit manager, became a partner in 1981, led the long island office from 1984 to 1986, became assistant managing partner of the new york office in 1986, and from 1988 to 1999, led the new york office. in 1999, esposito became a regional managing partner and for two years, through 2001, was the firm’s chief executive officer.

cpa, partner, mba, leader, influencer, media celebrity

between 1996 and 1998, and while he was ceo, esposito was on the partner board and was also on the board of grant thornton international – the worldwide umbrella organization. in these capacities, he developed strong experience in strategic thinking and execution, international relationships, corporate governance, partnership matters, branding, expense control, client relationships, and new business development.

as ceo, he took grant thornton to record earnings, consummated the largest line-of-business sale in the firm’s history, developed a major joint venture with axa financial, and made the largest practice acquisition in the firm’s history. from 1969 to 1979, esposito was with price waterhouse (now pwc), servicing ibm when he was promoted to manager in 1976.

dom was a cpa, has been quoted in national and local media, and has appeared on radio and cable tv.

esposito also testified before the securities and exchange commission.

he received his m.b.a. from st. john’s university and his b.s. from ferris state university. accountingtoday, one of the leading trade journals for the accounting profession, named esposito one of the most influential people in the profession for two consecutive years.

he passed away in 2021 at the age of 74.

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