Parts one and two of this series have focused on how succession (mergers & acquisitions) will be affected in 2019 by the rapidly changing CPA environment. We discussed small firms defined as $1,000,000 or less in revenue and how the demand for these firms will remain strong in 2019 and beyond. We also discussed how larger firms see the future of M&A (mergers & acquisitions). These acquiring firms have a different set of variables that they want to consider before finding a merger candidate to move forward with. We discussed wealth management, which is one of these new variables, and how pursuing a wealth management option or at least being open to buyers who have a wealth management discipline will increase your chances of a successful merger or acquisition. In this portion of the blog, we will discuss some of the other variables that these multi-disciplined buyers will be considering as they analyze their buy opportunities.
Wealth management is just one of the new disciplines that CPA firms have tip-toed into. There are also firms with law, HR, IT, hosting platforms, insurance and other services. The larger the firm becomes, the larger the expectation that they will have some of these other revenue streams in place. Firms that are well over 1mm in size usually have multiple partners and often have moved into other disciplines. If you are a smaller company, we discussed that it is not necessary to have any of these and it should not affect demand. If you are a larger firm, however, it is the expectation of many of the larger buyers that there will be some sort of alternative revenue stream. The alternative revenue streams mentioned above are not exhaustive but represent the most common of alternative businesses. If you are trying to find a succession partner now and do not have these revenue streams in place, it is really too late to go down that path. As a seller you should be open to diversification and should make that point clear to any merger candidates. Sellers that are open to diversification will have deeper inquiries and will likely find a suitable successor, but they must be open to the new buyer’s desires.
Larger firms have a significantly more limited buyer pool. The number of firms that can buy a 10 to 20 million-dollar firm are much lower than acquisitions or mergers for small firms. For this reason it is really important for good sized firms to be strategically discussing the direction of the firm years before finding a successor. If you find yourself 4-5 years away from implementing your exit plan, there is time to make strategic decisions and move the ball in the direction of multi-disciplined firms. As artificial intelligence and robotics enter into the compliance sections of this business, buying firms are worried about these compliance-based revenue streams and simply require diversity.
One of the biggest misunderstandings of sellers is that the big firm just wants the clients. Strategic buyers don’t look past a quality book, but if the human capital side is weak or there is a resistance culture to change, technology and diversification, they will pass. Human capital is one of the most underrated value components within the firm. Buyers do not want a 65 or 70-year-old principal that wants out as soon as possible. They would much rather buy/merge a firm and pay more to get youth. A 55 or 60-year-old exiting partner is fine if they have 3-7 years of work still in them. In the past 12 months, we have had more buyers pass on a practice just because there wasn’t a youthful presence in the firm that could stay on for years to come. Finding younger CPAs within an acquisition target, will create a premium and can make up for not having other revenue streams.
In a nut shell, small firms will be fine during the next few years and should experience little to no change in demand and multiples. Larger firms wanting to exit, however, will face increased expectations from strategic buyers looking to grow. If you are a multi-partner firm in excess of 1mm, these expectations must be there in order to command multiples consistent with previous years. While there are things you can do to best position yourself for acquisition or merger, which we will discuss in part 4, expect a more buyer friendly market. Consider aligning yourself with a specialty intermediary that has experience and connections with buyers and has an international approach to potential succession partners. Berkshire Business Sales and Acquisitions is a firm that has experience selling and merging both small and medium sized firms into larger multi-disciplined entities. Ryan Gipple-602-614-3583 www.stepheno129.sg-host.com
