Half of all firms may be in play. Is yours?
By CPA Trendlines Research
Hold on to your hat! A new tidal wave of mergers and acquisitions is about to swamp the tax and accounting business from sea to shining sea.
Three-quarters of tax and accounting professionals are calling the current M&A market for accounting firms as “active,” with 33 percent of them terming it “very” or “extremely” active, according to the new CPA Trendlines Mergers & Acquisitions Survey, conducted in conjunction with Capstone Marketing.
The survey, which delves into the attitudes and behaviors of the M&A phenomenon like no other study, is yielding a raft of surprising findings.
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Don’t underestimate the significance of an M&A frenzy. Some 10 percent of firms say they will "definitely" be involved in a merger over the next 12 to 18 months. Another 15 percent says they'll “probably” be part of a merger. Another 26 percent say a merger is possible.
Only 29 percent expect no M&A activity at their firms. But the survey suggests they may be in for a big surprise.
Think of it: In all probability, a quarter of the firms in your area will soon become bigger or be gone. And it could be as many as half of them.
Terrence Putney, CEO of Transitional Advisors, a firm that counsels firms on M&A, succession, and other strategic issues, foresees a moderate acceleration in mergers. He’s been through the process many times and is expecting to do it again. He has a good handle on motivations.
Not Just Hot
The market isn’t just hot. It’s getting hotter. More than half expect M&A activity to accelerate over the next year to year and a half. Only nine percent expect it to slow. Forty-six percent say the acceleration is toward more of a buyer’s market, though a solid 38 percent believe the shift will correct toward a balanced market. Only 16 percent figure the activity will turn to the advantage of sellers.
What’s driving the urge to merge? Survey respondents generally indicated demographics and competition for staff and clients.
As baby boomer partners in smaller firms age they are looking for an exit strategy, says Dan Fortman, managing partner at Weiss & Co., “In addition, smaller firms seem to have a harder time attracting staff causing them to merge to service clients.”
An anonymous principal with a firm in the mid-Atlantic region tells us, “As the market becomes more and more compressed and congested—especially in the northeast—mergers (and the quick growth and greater range of services, resources, and diverse staff that occur as a result) will grow increasingly important as the best solution for small to mid-size firms that want to successfully compete for clients and talent.”
A Whole New Field of Competition
Where will the merger mania leave your firm? Unless it gets snapped up and melded into another firm, it will be facing a whole new field of competition—some competitors will have gone away while others will have expanded in size and capability.
The new competition won’t just be for clients. For firms looking to merge, the competition will be for buyers. According to 38 percent of survey respondents, it’s very much a buyer’s market, though 44 percent say the market is more or less balanced. In either case, the buyers can afford to be picky, looking for bargains or for the firm with just the right combination of clientele, personnel, skills, and, possibly, location.
“Demographics of firm ownership are leading to succession challenges for seller firms,” Putney says. On the buy side, he sees firms looking for “ability to execute strategic growth strategies more easily and predictably.”
Irene Perer, a sole practitioner who has been through the M&A process before, identifies the driving force as “aging baby boomers and their clients.” However, she warns that “some practices do not have enough value to offer because CPA's waited too long to sell.”
Perer says a merger for her firm is possible, but she will be more careful about the process than the last time.
“My last merger experience was terrible,” she tells us. “The acquiring firm did nothing to welcome my clients into the firm.”
Roger Lukey, head of a small firm of under ten people, doesn’t really care whether it’s a buyer’s or seller’s market. Like several other respondents, he’s merging into the good life.
“My office already has a partner prepared to take over when I retire,” he says, “so why would I merge and take on potential baggage from another firm?”