Selling Accounting Practices & CPA Firms in a Tight Labor Market
Selling Accounting Practices and CPA firms in a tight labor market has produced some interesting challenges. Labor shortages are not unique to the accounting practice industry as the entire country is experiencing these difficulties. The search for credentialed and degreed staff is at an all-time high within the accounting industry however, as it is hit with the perfect storm. For years, the number of new CPA certifications and Accountancy degrees have fallen behind demand. Now the boomer population is desirous of an exit. The sheer demographics of this effect are causing real problems in the merger and acquisition space for both buyers and sellers. The retiring principals are tired, burned out, and frustrated with their inability to find good help as well as the relentless pace of change. These exiting principals find themselves wanting to exit sooner rather than later. The buying principals have many of the same issues, but they also have additional problems. In most small firms, the principals are also heavy lifters especially when it comes to tax compliance. Buying firms are left with a huge hole in production when the selling principal leaves. They are also left with a significant leadership gap and face significant risk of additional staff loss/client loss as the selling principal retires (no one likes change). This blog will discuss three distinct, yet complementary, strategies that sellers (exiting principals) and buyers should employ to make the acquisition more tenable in this rapidly changing buyers’ market.
Exiting sellers must address the capacity issue head on in the years leading up to exit. They simply cannot try to squeak out one more season short on labor with the intention of selling next year. Pushing existing staff in the years leading up to exit will only lead to burnout. In addition, much of the existing staff on board the team are also aging and potentially ready for retirement themselves. As the aging staff is presented with the fact that the owner is retiring and that they will have to learn new procedures, new software and adjust to a new leader, they are also considering retirement themselves. This creates an obstacle that is very difficult for a buyer to overcome. Buyers will not be interested in acquiring the book of business if there is an insurmountable hole in capacity. In a sellers’ market where demand exceeds supply buyers will take that chance, but in today’s market there is a plethora of available acquisition targets to choose from. Sellers must make the sacrifice to come into the selling season with full capacity or even a small amount of excess capacity. There are several tactics to deploy. Invest in technology to automate some lower-level job functions, consider outsourcing the front end of your practice, and use division of labor to ensure that the credentialed staff are focused on the highest level of need. They must also go overboard to show their existing staff that they are interested in improving their quality of life. Lastly, take the time and spend the money to recruit heavily with a focus on age diversity. These are several things you can do right now in the years leading up to a sale. If you find yourself in a position where you are short on capacity in the year of sale, you will need to cut off the bottom 10%-20% of your client base to right-size your firm for sale. This will, of course, impact the sale price but its better than being left holding the bag.
Sellers must realize it has become a buyers’ market. They must remain flexible as to their own role after the sale. While tired and frustrated and dreaming of time in Barbados, the salability of the firm could very well be at stake and therefore a portion of your retirement coffers. This flexibility will be seen as a welcome extension of production and leadership to hold the existing staff in place until the new reporting structure can develop relationships with the staff and the key clients. This doesn’t mean that you must continue with the same pace. Sometimes part-time production work is enough to offset the fear of the human capital conundrum, if you’re reading this and you are ready to sell, you probably just let out a heavy sigh (or maybe you even want to scream). Staying on gives buyers some time to find, hire, and replace you. If you are looking to exit 3-7 years from now, you need to consider pulling the trigger early. The most attractive sellers are willing to take a managing partner position, with some cash now and some later, or at least staying on in a production role.
Buyers need to consider their own strategy to address the lingering capacity problem. First, they should consider firms that have the age diversity we mentioned earlier. Then, they should consider an “all your love” strategy when it comes to the existing staff. Improving working conditions, hours worked, and pay scale will go a long way to show the staff that your company is going to consider their quality of life. In today’s market workers are demanding remote capability and so deploying a cloud-based approach that gives staff the option of working from home several days a week will go a long way. Buyers and sellers should also consider stay bonuses for staff in their negotiations. The price of the firm is not necessarily the most important thing. While many of these suggested approaches will have an economic impact on the seller or the buyer, careful forethought can balance the costs of these tactics with the offer price and other terms negotiated.
The world for exiting sellers has changed. The salability of firms is now directly related to the items discussed above. Berkshire has 15 years of watching these trends develop. Working with an accounting practice broker like us will help you understand what to expect, maximize your price and terms, and meet as many of your exit goals as possible. If you would like help in this process, please contact Ryan Gipple at 602-614-3583 or visit https://berkshirebsa.com/.