In part one of this blog, we discussed how we believe that small CPA firms will remain in a seller’s market in 2019 and why. The nature of small firms, which we described as less than $1,000,000 with a single partner, carry a very different buyer pool, risk profile and complexity. This creates a completely different demand as compared to larger firms. These small firms are also the vast majority of firms across America.
As firms reach $1,000,000 and more of annual revenue the demand equation begins to change a bit. Large firms have grown to larger firms and medium sized firms have been growing through acquisitions into strong regional firms for years. As more resources (human and financial capital) are deployed within a larger sized firm, the ability to focus on a multi-disciplined approach increases. Buyers are looking to grow in 2019 and there are still plenty of buyers as we discussed in part 1, but they will be more selective and will likely offer lower multiples than in prior years as they believe the succession choices will be limited for firms of $1,000,000 and more. In addition, there are just fewer firms that can buy firms of $1,000,000 and greater and transition the clients effectively.
Larger firms that have been strategically run for the last several years are facing a number of technology challenges and a more complex operation with multiple revenue streams. Large firms today are focused on the loss of audit function to robotics, the fallout of the new tax reform and managing their diversified portfolios. As we discussed, IT and hosting services, law, insurance, HR and wealth management are now additional revenue line items that make up a growing portion of the top line of most large firms. As they look to buy, they will be looking at firms that are $1,000,000 and greater for acquisition. These firms must be smart and really begin to think about succession planning. The majority of buy side demand will focus on firms that are moving in the diversified direction or at least are open to those ideas. The balance of the blog will discuss the importance of wealth management to your existing book and how your succession opportunity will be directly affected by it.
Wealth management has been the number one new discipline for firms for several years. The ROI (return on investment) for this business is incredibly strong and creates an annuity for many years into the future. Many small CPA principals are still traditional in their thinking and some believe that you cannot be for your client and also be selling securities to them. We’re not here to weigh in on that or to determine if it is “the right thing to do”. We are here, however, to educate those considering sale. If you are a firm in that 1 million plus range looking to exit, we highly suggest you remain open to new income streams as they are developed by the acquiring firm or that you consider developing them now in preparation for sale or merger in the future. Active large buyers today almost always have a wealth management business. Traditional accounting firms over 1mm sell for 1-1.5 times the gross recurring revenue. The wealth management business sells for roughly 2-2.5 times net fee income that is usually fiduciary in nature. Many small firms have been pleasantly surprised when they turn to sell their wealth management business.
If you are one of those CPAs that believe it is wrong or conflicted to sell financial products (wealth management), We highly suggest you consider changing your position in exit. Eliminating wealth management buyers from purchasing your firm will cut the buyer pool by 50%. With demand falling and multiples likely dropping, you could find yourself with a firm that must be sold at a discount even though filled with great clients and tax compliance revenue.
Parts 3 and 4 of this series will focus on other multi-discipline revenue streams, how those play into the succession dilemma for exiting baby boomer CPA firms and how to properly position your firm for exit.
If you are considering a sale this year or in the next several years, consider talking to an intermediary that specializes in CPA mergers and acquisitions. Berkshire Business Sales and Acquisitions has been selling CPA and accounting firms in Arizona for 10 years. We would love to be your partner in exit. Ryan Gipple – 602-614-3583 www.stepheno129.sg-host.com
