Great Selloff for Accounting Firms
“Great Selloff” of professional service and CPA firms is on a runaway here, downhill slope. 2021 was a record year for acquisitions, mergers or sale of firms worldwide[SS1] . 2022 has already started with a material increase in activity, and tax season is not slowing down anything.
Merging into Specialized Consulting Firms
A major driver accelerating Mergers and Acquisitions is the need to add non-accounting businesses. Firms are looking to diversify their revenue streams by expanding the advisory services and one such method is to merge or acquire-in specialized consulting businesses.
Accounting and CPA firms’ clients are asking for specific services such as automation, cybersecurity, ERP advisory, SOC/ Sox reporting, etc. or specialty providers in industries such as IT, healthcare or construction. The critical element to identify when adding a non-accounting business is to ensure that there are professionals coming in that can continue to deliver those specialty services. Most small and mid-sized CPA firms do not have in-house teams in place to take over a specialty practice.
Drivers of Transaction
The perfect storm has been brewing for years and has gathered strength because the individual factors that fuel M&As are converging at the same time.
There are three main drivers to every transaction, and they revolve around succession issues. These include:
Each of these factors are major contributors, when these three elements are amalgamated, the heat increases forcing an explosion, which is where we find ourselves today.
The heat referred to is ‘the age factor’. It keeps inching forward and generating the heat that is creating the explosion of the three elements. Firms can balance staffing issues and shortages and avoid worrying about leadership succession when there still is time on the clock to push off.
Eventually “later” arrives and the time required to fix the succession problem does not exist anymore. For many professional services firms, “later” has already arrived. Another factor tossing gas onto the fire are succession plans that fell apart.
The increased appetite for non-accounting services is simple. CPA firms need to become less dependent on a shrinking pool of accountants and CPAs and they want to capitalize on their installed base of clients who need other services. Many firms struggle to get their advisory services off the ground because they are trying to use in-house resources to make it work or just trying to conduct advisory work in the slow time.
The problem with in-house resources is the slow times[SS2] [SS3] are less frequent these days and the CPAs tasked to do the consulting are either not trained for it or not comfortable with consulting roles. Consulting often requires an intense degree of active engagement with the client that involves asking sometimes uncomfortable questions and dealing with complex, abstract issues rather than the rule-driven processes involved in audit, tax, and accounting procedures.
Evaluate before you Proceed
CPAs are difficult to find and redirecting their efforts away from tax and audit and into consulting should be avoided. As a recommendation, evaluate these options to expand your advisory services:
Some M&As are driven by a need to grow and are not succession-solution-oriented. The reality is that a small to mid-sized accounting firm will need to plug into the foundational investments that a larger practice has already established. These foundational investments include but are not limited to being part of a large association of CPA firms, having cyber or transactional advisory or other specialized consulting in place and key leadership established such as a CISO, COO, or professionals already leading a specialty service niche.
The cost and time for a small to mid-sized CPA firm to develop that infrastructure can be tedious and extensive. The other option of bypassing the pain and cost to develop this and merging into another firm that has resources already in place may look like a realistic way forward. If your firm is already pressed for time, would you still be able to grow your advisory sector?
What makes this worse is we are in an adapt-or-collapse situation. COVID was an accelerant to an already underlying problem. It spurred a remote workforce movement that led to accounting professionals electing to leave the profession, being famous for “The Great Resignation”.
This factor, combined with the reduced number of CPA applicants last few years, just pushed a high activity level of M&A into the “Great Selloff” we are experiencing in both CPA firm transitions and now in the non-accounting growth sector.
In five years from now, Professional Services and CPA firms will look quite different, and if change is not a part of your mindset today you might be in a compromised position. Change is the only constant.