April 18, 2022
By Anita Dennis
After deals dropped dramatically during the pandemic, the mergers and acquisitions (M&A) market is hot once again in the accounting profession, according to Terrence E. Putney, partner, Whitman Transition Advisors LLC, which advises CPA firms on M&A issues. Economic uncertainty and discomfort with making decisions based on video meetings caused many to put off dealmaking during the past two years. However, the market has heated up since late last year, given a more stable economy and strong firm profitability. "It's driving M&A to unprecedented levels," he said. "Even during tax season, firms are closing deals."
For CPAs considering jumping into this active market, Putney and Amber Goering, CPA, CGMA, an owner of Goering and Granatino PA, offer these tips on meeting some of the biggest challenges in buying or selling a firm. Both will participate in a session on small firm acquisition at AICPA & CIMA ENGAGE 22, which will take place June 6–9 in Las Vegas and online.
- Be prepared for a buyer's market. The market is flooded with owners seeking to retire in the next five years, according to Putney. Many firms have one to five partners, and no one within the firm is ready to take over. "Succession is a huge problem," he said. As a result, there is a greater supply of firms being sold than buyers, which has pushed prices down. That means retiring CPAs may be in line for a surprise. "Sellers are expecting to get 1 times revenues," he said. "Buyers are expecting to pay 0.8 times or less."
- Avoid pitfalls for inexperienced buyers. Even in this market, there may be hurdles for buyers. For example, many who are new to purchasing a firm may not understand the level of resources required. Firms that are used to operating off their cash flow will have to pull together the necessary capital. For a $2 million acquisition, the buyer might need $500,000 in capital, Putney said.
Deals may also run aground if all the partners aren't completely behind the idea of acquiring one particular firm or even of making any acquisition at all. "The managing partner may be on board, but others may hesitate," Putney noted. "But time kills all deals," he said, so those who aren't ready to strike may lose out on promising prospects.
- Make sure cultures are aligned. Goering's 33-person firm has acquired five firms during the last 10 years. She recommended that CPAs seriously consider how well two merged firms will mesh before moving forward with any deals. Buyer firms should investigate critical areas, such as a target firm's approaches to technology and client service, before sealing a deal, because incompatible cultures may cause problems later. Success may also depend on the selling partners and their attitude toward the merger. A merged-in partner who is a cheerleader for the deal can inspire his or her people to embrace change. If someone is unwilling to accept new processes or approaches, however, the employees they bring along are often not motivated to do so either, she said.
Transparency from the outset may be crucial in ensuring that employees become effective firm members, Goering advised. She has had success in incorporating new people when she meets with them before the merger to answer questions and reassure them about their place in the new firm.
- Be more flexible about being a good fit for the acquiring firm. Sellers often come to a deal with a wish list, Putney said. For example, they may not be willing to move their office, adapt their operations to new processes, or accept that some employees may not be hired by the buying firm. "All of those requirements eliminate a percentage of the buyer market," he said. "They drive down value because you're less likely to find an interested buyer."
In particular, sellers should remember that it's all about talent. A decade ago, M&A was driven by a desire to acquire clients, Putney said. Today, because of the talent shortage, buyers may no longer be interested in a firm if the owner plans on immediate retirement. The buyer may be gaining new clients but may also need to depend on the seller's help in serving them. As a result, willingness to remain with the new firm through and beyond the transition period may be a competitive advantage for a seller firm.