CPA and Accounting Practice Succession in 2019 – Part 1 of 4
The M&A world for CPA firms should continue to be strong in 2019. In a recent article in Accounting Today a panel of experts weighed in with their thoughts and predictions for 2019 and beyond. The overview on the market was that 2019 should be a very active year as the baby boomer population retires and transitions their practices to others. The panel also thought that buyers will become more selective in their acquisitions and will look to multi-disciplined firms full of IT, HR, wealth management and insurance services. Lastly, they predict a drop in the price of firms for the first time in 10 years. While this is the overview, the nuances of the market should be really interesting and fun to watch.
Before we look at some of the nuances in parts 2-4 of this blog, it is important to distinguish that size does matter in accounting firms. Small firms, which we will define as less than $1,000,000 in annual revenue, should perform well and should have ample buyer demand.
While it is true that most small firms do not have any succession plan and they will still need to unload the practice when it comes time to exit, the demand for smaller firms is still incredibly strong. Most experts focus on the supply side of firms and demographics to determine the level of opportunity in the market. While the number of small firms for sale are sure to rise given the aging population of CPAs, experts rarely comment on the demand side.
The demand side of the market is also growing. A decade ago, traditional CPA firms purchased other traditional CPA firms. The services provided within these firms were tax, accounting and audit for the most part. Over the last 10 years, the demand for firms has increased because the number of buyers has increased. In today’s environment, many CPAs have moved beyond their traditional compliance focus to a number of other services. Wealth management, IT, insurance, HR, law and consulting buyers have entered the market. Today’s buyer might be a wealth management company, a private equity buyer or law firm. This, in combination with an already strong traditional consolidation market, makes the small firm still very attractive.
Up through the end of last year it was still a sellers’ market for small firms, which is the vast majority of firms across the country. Many of these firms are still very traditional in the services offered. These firms are attractive for other small to medium sized firms for several reasons.
- First, they often act as a footprint into a market from which other services may be cross sold. In other words, a regional buyer in the SE wants to move west and finds a small traditional CPA firm in Phoenix for example. Once in the market, they can begin to launch additional services.
- In addition, many small traditional firms are also trying to grow. Small firms benefit from a tuck-in strategy used by many other small to medium sized firms and have the benefit of being attractive to other traditional buyers as well as regional and national buyers looking for a foothold in a market.
- In today’s market, you will find traditional buyers still looking for traditional firms. Small firms have not moved as quickly as medium to large firms have to diversify their income stream. These firms remain the primary target of new entrants to the CPA market and CPAs looking to get out of industry and into private practice, adding to demand.
- Small firms with limited personnel and limited product offerings are relatively easy to transition. Things become much more complex with multiple partners and multiple income streams. A lower risk profile keeps these firms in hot demand.
We believe that the demand will remain strong for small traditional firms. It is our belief that it will still be a sellers’ market for firms less than $1,000,000. While the number of exiting principals is bound to increase, the number of buyers entering the market will keep the seller side advantage in place. We do not see any downside pricing pressure at this level in 2019. For firms in excess of $1,000,000 the market may very well be changing.
Selling your firm in this market does take some planning and is filled with potholes and roadblocks. It’s always good to seek out an experienced intermediary that can consult with you on the sale of your practice. Berkshire Business Sales and Acquisitions has been selling firms for the last 10 years in the Arizona market and has first-hand market and deal experience. Contact Ryan Gipple at 602-614-3583. www.berkshirebsa.com