obtain a niche, acquire talent and more.
by marc rosenberg
the rosenberg practice management library
if an opportunity to merge in a smaller firm were presented to you, would you be interested in pursuing it?
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my guess is that in excess of 90 percent of all cpa firms would answer this question with a resounding “yes!”
why is this? the short answer is that it’s a great deal, almost a “can’t-lose” proposition – as long as you do it right.
twelve reasons why cpa firms want to merge in smaller firms:
- fast growth strategy. for the vast majority of firms, it’s easier to buy clients than to generate them internally. most cpas will be the first to admit that they don’t like to market and aren’t any good at it. so it stands to reason that any strategy that provides them with growth that doesn’t require them to sell is a strategy they will fully embrace.
- a great investment. if you calculate the return on investment (roi) of acquiring a cpa firm, the yield is an astonishing 30 percent to 70 percent, depending on the facts. the main reason for this high roi is that the cpa industry has saddled itself with a notion that paying one times fees for a cpa firm, or even a small premium on ones time fees, is a reasonable sales price. the fact is, firms should be selling at 1.5 to 2 times fees because they are worth it. but 90 percent of firms are sold for 90 percent to 130 percent of annual fees, which is a steal.
- merging in a cpa firm is low risk – #1. virtually all deals are structured so that buyers pay the sellers, over a period of years, based on revenues from retained clients of the acquired practice. therefore, there is very little cash flow risk to the buyer.
- merging in a cpa firm is low risk – #2. cpa firms are very high on the integrity scale. though there are certainly variations in the quality of work from firm to firm, it’s extremely rare to find a firm whose quality of work and ethical standards are so low as to create an uncomfortable amount of risk for the buyer.
- acquire talent. the most difficult problem facing cpa firms these days is the shortage of experienced staff. consequently, many firms value the personnel they obtain from the seller as much they do the acquired clients. the larger the buyers, the more likely it is that acquisition of talent is the #1 motivator to doing mergers.
- to obtain a niche or specialty. this is a huge motivator for buyers. larger firms understand the power of niche marketing and specialization and will jump at the chance to acquire this expertise. unfortunately, smaller firms rarely have well established niches and specialties.
- fill a geographic void. this is much more typical of large regional firms, who have exhausted the list of merger candidates in their own backyards. since the mid-2000s, regional cpa firms have acquired hundreds of firms in geographic areas totally outside of their traditional boundaries.
- huge number of sellers. baby boomer partners are edging closer and closer to retirement age, triggering the biggest merger boom in the history of the profession. hundreds of firms are merging into larger firms every year. it’s comforting to any buyer in any realm of business to know that the market is filled with many interested sellers. the opportunities are almost endless.
- mergers enable firms to afford “bigger firm things” sooner. larger firms are better able to afford a sophisticated, expensive management structure that includes marketing plans, hr directors, university-style training, high-profile staff recruiting and others. but smaller firms struggle to afford these large firm accoutrements. so, a $6 million firm that becomes $8 million overnight with a $2 million acquisition finds itself suddenly in a position to do more. same for a $4 million firm that acquires a $1 million firm.
- mergers give successful, profitable firms the opportunity to exploit their management knowhow. take a $10 million firm with an enviable income per partner of $500,000. this firm feels it has mastered the art of cpa firm management – they know how to grow, make money and develop good people. they feel that, with their superior management skills, they can take a $4 million firm with income per partner of $200,000 and grow them into a $6 million firm with ipp of $400,000 within a few short years by tapping into their management skills.
- bigger is better. studies of cpa firm metrics year after year show that the larger the firm’s revenues, the higher their profitability. this doesn’t guarantee that increasing the top line will automatically drop to the bottom line. but more often than not, it does. sound management, affordability of support services, their appeal to more sophisticated clients, more talented staff and economies of scale can make the “bigger is better” notion a reality.
- with mergers, firms make more money. this is the common thread to all of the previous 11 items on this list. arguably, this item could have been listed #1 on the list.