“this will be the largest transfer of wealth the nation has ever seen in such a short period of time.”
by rory henry, cfp®, bfa
rory henry is a director at arrowroot family office and host of the wealth management forward podcast. he can be reached to discuss ways to integrate financial planning into your practice through the cpa partnership program at (310) 566-5865 or at rory@arrowrootfamilyoffice.com.
the financial advice business is undergoing significant change, particularly in the accounting and wealth management sectors. the arrival of private equity firms, combined with the rise of m&a and rapid advancements in technology, has shifted the landscape considerably. while these changes are unsettling to some practitioners, i view them as opportunities.
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in many ways, a cpa is a flywheel at the center of the financial advisory engine. all the other providers and advisors rotate around the cpa, and together they build momentum as the firm expands its offerings and as the advice engine gains speed and confidence.
the flywheel concept can be applied to the adoption of wealth management services and my own firm’s virtual family office model for firms looking to maximize their potential. thanks to the flywheel effect, private equity now sees huge opportunities in the accounting space as cpas can service clients to and through small and medium-sized businesses (smbs), as well as the employees who work there. a flywheel, in essence, is the virtual family office model that my firm follows.
a tidal wave of boomer partners retiring is coinciding with a declining number of young people entering the accounting profession. these conflicts are forcing firms to become more agile and adopt new ways of doing business. at the recent accounting today firm growth forum, allan koltin, one of the industry’s most influential consultants, said that for the first time, firms “have to think strategically after offering only two products for the past 132 years: tax returns and financial statements.”
that is why private equity (pe) firms see so much opportunity to invest in accounting firms because they represent a coupon play and a growth play. the coupon is their recurring stream of profitable work, and the growth comes from their potential to offer many additional complimentary services.
that’s where the flywheel concept comes in for accounting firms: they have tremendous room to build momentum from the tax and accounting services by adding so many integrated financial services offerings such as wealth management, insurance, estate planning and lending. pe also sees the opportunity for accounting firms to increase efficiency, alter the antiquated partner structure, cross-sell and upsell services to clients, and advise them on m&a.
by offering adjacent services, accounting firms can diversify their revenue streams, strengthen client relationships and enhance their overall value proposition.
here are some examples below.
- m&a advisory potential for retiring boomer business owners
over 10,000 boomers are retiring daily, one in five (19%) own small businesses, and three-fourths of boomer-owned businesses are profitable, according to statistics from guidant financial. what’s more, another 30% of owners are between the ages of 55 and 64, according to estimates from the census bureau annual business survey. data suggests that roughly half of america’s businesses will transition ownership in the next five to 10 years. this will be the largest transfer of wealth the nation has ever seen in such a short period of time.
accounting firms have the relationship: boomers are selling their businesses – primarily to outside buyers — and need solutions to manage their newfound wealth.
- additional integrated services
cpas start working with owners well before their planned exit to get the company financials standardized, and in a format potential buyers expect to see. that means adjusting for discretionary and one-time expenses and changing the focus from pure tax mitigation to one that shows the most growth and profit potential for the business.
from there, the cpa can advise on investment banking, estate planning, financial planning, investment management and post-sale retirement planning along with the owner’s other advisors. you help grow a business, so why not take part in the transaction when sold and help manage the wealth after the sale?
cpa flywheel effect: a real-world example
- client: owners of a $3.5 million dollar manufacturing business, let’s call them the jones family.
- current services: business and personal tax filings, accounting work for manufacturing.
- proposed additional integrated services: estate plan, succession plan, m&a advisory, wealth management and aum, serve the next generation of the family (see below)
- background: robert and kathy jones own a manufacturing company worth $3.5 million. they have two children: jacob and sarah. the joneses are currently using an outside accounting firm to file their business and personal taxes. they are also using the same firm to do their accounting work for their manufacturing company.
- integrated service offerings
- estate planning: the wealth management team works with the joneses to create an estate plan that protects their assets and ensures that their wishes are carried out after their death.
- succession planning: the wealth management team works with the joneses to develop a succession plan for their manufacturing company. this ensures that the company is in good hands after the joneses are no longer able to run it.
- m&a advisory: the wealth management team can advise the joneses if they ever decide to sell their company. the team would help the joneses get the best possible price for their company and ensure that the sale goes smoothly.
- wealth management: the wealth management team would manage the joneses’ investments and help them reach their financial goals. they would also be able to provide the joneses with financial advice on a variety of topics.
- serve the next generation of the family: the wealth management team can help the joneses prepare their children for the future. the team would provide the children with financial education and help them develop their own financial plans.
integrated solutions enhance your firm’s value
if you’re ever thinking of selling your firm, data shows your multiple will be much higher if you have an integrated solution. bob lewis, president of the visionary group, an m&a advisory firm for cpas, told me that multiples for traditional accounting firms are typically in the range of 0.7 to 0.9 times revenue and about 2x earnings, according to bizbuysell.
lewis said it’s important to remember buyers don’t want tax-heavy 1040 businesses. for instance, if you have a $2 million dollar firm, but $500,000 of that revenue comes from 1040 work, then you really have a $1.5 million dollar firm. however, if you are offering wealth management or other higher-margin, more defensible services, the multiples become much more interesting.
according to the latest data from advisor growth strategies, independent rias are fetching, on average 2.9x revenue and 7.2x ebitda. that’s about three to four times what typical small accounting firms are attracting.
as lewis explained in accounting today, having a well-defined niche also helps valuations since niches are highly desirable and profitable. “they also allow you to differentiate your firm, so you are not competing for new clients on compliance work, which is not always valued by prospective new clients,” he added.
in his business best-seller “good to great,” jim collins asserted that the flywheel effect occurs when small wins for your business “build on each other over time and eventually gain so much momentum that growth almost seems to happen by itself – similar to the momentum created by a flywheel on a rowing machine.”
so, if you make your clients happier, they’ll tell their friends and colleagues. then your new happy clients tell their friends, and it becomes a virtuous circle. wouldn’t you rather be on the flywheel than a fly on the wall?