Many observers of the accounting profession predict falling valuations of accounting firms because there is a strong and growing need for upstream combinations. Some reasons:

• Competition for new clients is making the practice development effort more demanding.
• Technology has reduced the need for traditional services. Therefore, many firms have added specialty niches such as financial advisory services, IT consulting, litigation support, business valuation, etc. One way to acquire the skills for these services is through merger.
• Staff shortages also contribute to the desire for merger.
• Many firms can’t develop an internal succession plan because they don’t have the talent within the firm.
• Partners are aging. In a small firm, the loss of one partner can precipitate the need for a merger.
• Acquiring firms sometimes need staff and clients but are not interested in acquiring new partners.
• Firms over $1 million in revenue have fewer potential buyers simply because of demographics. They will have more difficulty in succession planning.

On the other hand, there are some factors working in favor of small firm sellers:

• Firms in the $1 million to $10 million size range are growing and the partners are using technology to manage larger books of business. These firms often acquire firms under $1 million.
• The consolidators have slowed down dramatically since 2000. Because of this, larger firms are less likely to sell and are more interested in merging in smaller firms.

Buyers of firms will, however, have more choices as baby boomers age. Small firms need to take action to become more attractive to buyers. Here are some suggestions:

• Buyers will be looking for firms that have efficiencies, and whose clients are loyal to the brand and the staff, not to the retiring partners. Firms whose clients can’t be retained by other partners will have diminished values.
• Firms with skills beyond compliance will be more attractive to buyers.
• Internal succession planning should start 10 years in advance of partner retirement.
• Upstream mergers should be planned long in advance – at least five years. Transactions can take place that defer the actual sale until the selling partners retire.

From Insight, The Magazine of the Illinois CPA Society, August 2006. For the complete article, click on the following link:http://www.icpas.org/hc-insight.aspx?id=1162