look forward 10 years and be realistic about succession.
by terry putney
there appears to be an emerging mindset among buyers that because of the possible demise of compliance services like tax return preparation, smaller firms with significant 1040 practices should be avoided. right now, there is no evidence the demise of the 1040 business is imminent for other than the simplest returns.
the migration of simple returns from paid preparers to digital diy has been going on for some time. the firms we work with aren’t dealing with 1040 clients at that level. but perception is reality in many cases and the profession pundits’ predictions are starting to affect the attractiveness of firms with significant 1040 practices in the eyes of potential acquiring firms.
many of the firms we worked with to execute expansion plans geographically have either fulfilled those objectives or have shifted to new strategic goals. because of the emphasis on niche consulting, many of our clients are telling us they don’t care where a consulting firm is located. they can manage a virtual relationship with the staff.
the trend is for a much more proactive approach from “sellers” to pursue upstream mergers for their firm. they aren’t waiting for a phone call. many firms understand they will likely become less attractive as the second or third merger in a market with a specific firm.
there continues to be concern about a tight labor market. buyers want talented staff and even ready-made partner-level talent with any merger or acquisition they do. way too many firms seeking to be acquired are short on talent, which is why they need an upstream merger. some are finding out the hard way they waited too long to find a solution.
four-partner firms with three of the partners reaching retirement age in five or fewer years (as an example) are going to be lucky to find any quality firm to talk to. if such a firm finds an interested party the terms might be less attractive than they expected.
it is advisable that firms look out at least 10 years and be realistic about their ability to provide succession. if you don’t have a robust partner development system in place now, you aren’t likely going to be able to acquire the necessary talent in time. firms that have only five years or less time left before a significant turnover of partners occurs are in a much more desperate position in this market than they realize.