By Terry Putney
The Rosenberg MAP Survey
We are in a fluid environment as firms adapt and learn more about what to expect. I think earlier this year there was hope that we would emerge from this economic environment by the end of 2020. It looks now like this could definitely have an impact through 2021.
MORE: 2021: You’ll Never See ‘Normal’ Again | SURVEY: We Adapted to Remote Work … Now What? | SURVEY: 2020’s Disruptions Are Only the Beginning | COVID Brought Us More and Better Client Communication
Exclusively for PRO Members. Log in here or upgrade to PRO today.
It is a mixed bag so far for M&A. Some firms have pulled back and I suspect that is because, although this may not make sense logically, it may be hard to internally sell buying a firm and hiring more staff when the firm is laying off people and cutting back on partner draws. However, we are also seeing very motivated buyers and sellers because of the opportunities that appear to be available. One thing that can’t be avoided is the difficulty of negotiating and evaluating targets when you can’t meet face to face regularly.
Real estate is now a bit of an issue. Many buyers are considering cutting back on their own space and are reluctant to take on long-term leases from sellers unless they are seeking to open a new presence through the acquisition.
I think the way firms manage their real estate is changing permanently. Mobile workforces and a more virtual relationship with clients reduce the need for office space. There is a theory that social distancing requires more space. But if firms address that through different office layouts now, I don’t think that will be permanent. The virtual environment will create a lot of new opportunities to access staff in new places. That will lead to new types of staff compensation.
New career paths. New management systems. We could see some real change as a result.
I think as client relationships become more virtual, the personal touch will be diminished. That will lead to the need for firms to differentiate themselves more in the services they offer, their expertise in non-compliance areas and the way in which the service is delivered. A personal relationship has always been the true differentiator that CPA firms have relied on. Although this is a myth, many partners feel like their personal relationship with their clients can’t really be replaced. That is what they have relied to maintain their book of business. I think we’ll see that will no longer work.
Firms that have delayed investing in robust technology will need to bring their technology infrastructure up to speed. Even though right now compliance services have become a safe haven to ensure ongoing revenue for many firms (everyone still needs to file a tax return), in the long run firms that want to grow and compete will have to get back to building stronger advisory practices.
2019 was a good year for the profession. We saw good growth and a lot of M&A activity. Many firms were shooting for 20 percent growth with as much as 60 percent of that coming from M&A. Geographic expansion was emphasized and executed through M&A for the most part.
2019 saw a concerted effort to acquire and grow advisory services. We saw a lot of acquisitions of nontraditional firms. Valuations of traditional accounting firms continued to decrease as the supply of sellers was in some cases overwhelming the demand from buyers. Firms seeking an upstream merger with solely compliance-based practices continued to be less attractive, especially to the larger firms.
Partner succession continued to be a huge issue for small to medium-size firms. Many of these firms had not invested in a bench and had not developed a plan to replace their aging partners. As a result, we were seeing more and more firms seeking upstream mergers to gain an instant solution. One trend was not only the issue of bench strength generally but more specifically the talent necessary to replace the leading partner in the firm. As firms tried to transition to a new leading partner or in some cases an entirely new governance system, partner compensation systems became a problem when the previous leadership was trusted to make fair and equitable, but often also substantially subjective decisions. Sometimes the new leadership didn’t have the same foundation of trust. Buyouts for retiring partners in many firms that were based on obsolete assumptions of value and terms continued to plague too many firms facing significant partner retirements as well.