Vol. 7 No. 12, December 2015
The Leadership Forum is a panel of the most prominent thought leaders in the profession. This month we asked two questions and asked them to respond to the questions dealing with CPA firm management and leadership.
This month's question was:
What is your prediction for the make-up of the accounting profession in ten years given the significant number of mergers that are occurring at all levels? Is the future for merger activity pointing towards a buyer's market or a seller's market? Would you have answered differently three years ago?
Consultants and Other Prominent Observers
| August Aquila | AQUILA Global Advisors, LLC | www.aquilaadvisors.com [email protected] |
| It is interesting to note that the number of firms registered with the CPA has not changed over a 20 year period. Given that, I would predict (which is always dangerous) that the current rash of mergers will have little affect on the number of firms. There will always be partners who want to serve a different niche than the mega firms. These partners will go out and start their own firms.
It is both a buyer's and a seller's market. Good firms that are for sale find no problems in selling/merging their firms. Strategic buyers will also have opportunities. What we should be worried about are the average firms that are more difficult to sell. The best advice I can give is have a strategic reason for buying or selling your firm. If you have problems in the firm, fix them before you decide to sell/merge. If you don't, someone else will. |
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| William Carlino | Transition Advisors | www.transitionadvisors.com [email protected] |
| Three years ago it was most definitely a seller's market. But now with the continued volume of mergers - particularly in primary markets such as New York, Chicago, LA and Miami - it is gradually becoming a buyer's market because of the glut of firms who have not planned for succession and are now looking toward a merger as their solution. As a barometer of this shift firm valuations have been dropping steadily. | ||
| Terrence Putney | Transition Advisors LLC | www.transitionadvisors.com [email protected] |
| I think what will be missing in 10 years from the accounting profession is a preponderance of mid-sized firms. These are the five to fifteen partner firms. Many of these firms are facing significant succession issues and most are the target acquisitions of the Top 100 firms who will remain active in mergers. M & A remains a very effective and efficient catalyst for growth and the need for growth within the Top 100 firms just as strong as ever for their long term success.
Acquisitions of smaller firms will continue at same brisk pace it always has. However, those firms will be replaced with a constant flow of new entrants into the market. Technology has made it much easier to start up a new firm and the small business market in the U.S. remains strong and will continue to demand services from smaller accounting firms. We are already seeing many mid-size markets with a few large regional firms and a lot of small firms and a shrinking supply of firms in between. The market for mid-sized firms has clearly shifted from a seller's market to a buyer's market. This has been driven primarily by the plethora of firms seeking upstream mergers giving the acquiring firms many more options to choose from. However, the competition within the buyer side has also increased and we are seeing a leveling off of the trend toward a buyer's market and even some movement to more aggressive deal terms offered by some buyers. The same is certainly true with respect to acquisitions of smaller firms. However, the fact that so many more buyers are typically available to acquire a small firm means the market is more in balance between buyers and sellers. One thing that has happened in the last three years is the tightening of the labor market. We are now seeing some pressure on deals due to a lack of confidence in some buying firms that they can adequately replace the seller's labor that will be leaving in the short term. We saw this same issue in the mid 00's. Currently the consequence of this appears to be acquiring firms are much more reluctant to take on acquisitions of firms that need to immediately replace a good portion of their partner team. |
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| Marc Rosenberg | The Rosenberg Associates | www.rosenbergassoc.com [email protected] |
| The CPA profession in 10 years will resemble the law firm industry, with many more mega firms that are still a notch below the national or international firms. This movement is already well under way.
People have been predicting the demise of the "small" firm for decades. It hasn't happened and it never will. For the most part, large firms are unable or unwilling to service small clients. But small firms are ideally suited to serve small clients do to their lower fees, more personal touch and flexibility. However, the barriers to entry for small firms has been increasing in recent years, due especially to the dearth of staff, but also due to lack of a diverse service portfolio and less effective use of technology. Large firms have a tough time recruiting; think how tough it is for small firms to recruit staff. Describing the entire merger market as a buyers or sellers market is nonsense. The merger market always has been and always will be segmented. A successful small firm in a large market will always face a seller's market because of the abundance of buyers. Almost any firm in a small market will face a buyer's market due to the small number of buyers. Firms with young, talented personnel will always be in a seller's market because EVERYONE needs great people. I DO feel that buyers are getting smarter and more difficult to negotiate with. Many of today's buyers are larger, more sophisticated especially due to their merger experiences, and less inclined to "jump" at mediocre firms or firms that aren't a good fit. |
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| Joe Tarasco | Accountants Advisory Group | www.accountantsadvisory.com [email protected] |
| Never before in the history of the public accounting profession have so many factors contributed to mergers and acquisitions of accounting firms: baby boomer owners retiring at a rapid pace without succession plans, a low supply of quality staff, fierce competition for clients leading to slow growth, and a lack of strong leadership in many firms. For these reasons and many others, consolidation of the public accounting industry is in its infancy and will continue in the next 10 years.
Ninety-eight percent of the approximately 14,000 multi-partner firms in the country are below $8 million in revenue. Because so many small firms are facing these critical issues there is a strong likelihood that 50 percent or more of them will merge for strategic or succession reasons. Another driving force behind increased M&A is a harsh reality: Accounting firms have been slow to change internally and have not adapted to the dynamic trends in the public accounting marketplace. In other words, the rate of change in the marketplace for engaging new clients, developing new and innovative services and recruiting quality staff far exceeds the rate of change inside these firms in adapting to the marketplace. Transitioning from running a public accounting organization as a practice to a business has been very challenging for traditional and commodity services-driven firms. Besides forced M&A due to the lack of a succession plan, there will be more strategic mergers of regional and mega-regional firms, such as the merger of J.H. Cohn and Reznick Group. In addition, firms will continue to use strategic M&A to combine with consulting and advisory companies that complement their traditional services. This will enable firms to provide more integrated solutions and specialty advisory services to their clients. Many large firms will derive more than 35% percent of their revenues from consulting and advisory services. The market will continue to shift towards a buyer's market especially for firms with primarily commodity services and challenging succession plans. These factors will also cause more firms to split up. My response would have been similar 3 years ago. |
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