Obstacles Prevent Many Accounting Firm Mergers and Sales
JUNE 2007 - Based
on demographics of the accounting profession, it’s commonly
accepted that a sizable number of CPA firms should be merging or
selling. Many of these firms—ones with maturing ownership
and others that need to combine with another firm in order to realize
their growth potential—say they recognize the need to merge
or sell, and indeed many say they want to. However, only a small
percentage follow through. Meanwhile, the list of firms that could
or should be selling or merging grows larger by the month. The good
news is that there are solutions for both sellers who want to overcome
their discomfort and for acquiring firms that are frustrated by
their inability to close a deal.
indicate the types of firms that should be or could be merging
or selling at this point are:
Aging firms without successors;
Small or midsized firms that have mergers or acquisitions as
part of their growth strategy;
Firms with strong specializations that want to provide a fuller
range of services; and
Firms with other significant challenges, such as recruiting
and retention or a need to invest in technology.
the standard answer of “We can’t find the right fit,”
several fears that rarely get fully articulated prevent CPA owners
from speaking with potential buyers or from moving forward once
they begin discussions. Unmasking these major stumbling blocks
that prevent mergers or sales speaks to the difficulties involved
in CPA firm mergers, but allows for the development of practical
ways to manage and overcome these obstacles.
Do Firms Hold Back?
on discussions with hundreds of small and midsized CPA firms that
previously indicated at least some interest in selling or merging,
the author quantified these often unspoken obstacles, asking acquirers
why they believe sellers are reluctant to move forward with deals.
Simultaneously, sellers were asked about their biggest concerns
and compared the two sets of answers in the Exhibit.
research illustrates a significant disconnect between the perceptions
of sellers and acquirers. The fact that acquirers may not fully
understand the obstacles limits the number of deals that are completed
and creates a barrier between the buyer and seller. Sellers and
acquirers can take steps to bridge the gap.
1: Don’t want to give up control/be “managed.”
The issue of control is real and perhaps at the crux of almost
every potential seller’s ambivalence. Stepping away from
making all firm decisions, such as signing off on financial statements,
tax returns, bills, and the like, is quite difficult. Acquiring
firms have an existing structure that the seller will need to
work within. But for the right firm and the right “fit,”
this is a small price to pay.
important to remember that during the sale or merger process,
everything can be negotiated. In the right merger or purchase,
firm owners may be able to better manage how much control they
retain or give up, and the transition time for this change. Perhaps
for the first six months, the acquired firm operates as a “division
of.” Perhaps the owner retains certain management duties
for an even longer time.
some cases, despite initial apprehensions about a loss of control,
former firm owners find they are relieved not to have certain
management tasks. The right acquirer will work with a firm looking
to sell in order to be sure its management does not feel marginalized.
2: Can’t find the right fit. CPA firm owners
who say they can’t find the right fit usually mean they
aren’t ready. They haven’t determined what they really
want or haven’t documented what they can offer another firm.
Most likely, they haven’t taken time to analyze and document
their business. They need to ask and answer: What are the percentages
of the various services offered to clients? The percentages of
work done in specific industries or other niches? What kind of
role do they want or could they accept in a new firm?
solution is all about planning, preparation, and motivation. Devote
time to the process just as for any other significant project.
Like any other project undertaken by the firm, this has an ROI
attached to it—a very strong one if done properly. First
and foremost is to prepare fully by documenting exactly what the
firm has to offer and what is most important to the owners, the
clients, and, if applicable, the staff. Because being objective
about one’s own firm is difficult, being guided through
the process by an expert consultant is helpful.
all of this is taken into account and the CPA takes the time to
identify potential targets, a series of meetings, and ultimately
a transaction, will occur. This is not easy, but simply a structured
way to address a very important business task.
3: Can make more money by not selling. Sometimes
aging CPA owners think they can make more money if they let their
practices self-liquidate. This rarely works, however, because
clients and staff start leaving, resulting in a loss of both current
income and overall firm value. Even for younger CPA owners, determining
which path will result in a larger long-term financial payoff
is an important evaluation.
bottom line here is that both the buyer and seller need to come
to a conclusion—and the terms of a deal—that allows
both of them to make more money together than apart.
is fairly common knowledge that most practice sales where the
prior firm’s leader will be retiring in 12 to 24 months
are retention-based. In the right situation, a transaction can
be structured where the “retiring” partner does not
make less than at present. That would be contingent on client
retention and similar efforts relating to billable hours, as if
the practice was not being sold. A buyout would commence at an
agreed-upon reduction of billable time. Similarly, an arrangement
could be negotiated where the seller stays on indefinitely post-buyout
and gets paid a percentage of revenue collected.
answer here is to qualify, qualify, and qualify some more. The
owners should have meaningful and detailed conversations and meetings
only with firms that share their vision of how the owners would
like to transition and what their role will be. Firm owners considering
a sale need to do a serious reality check by making sure what
they want is realistic in the current environment. Outside consultants
are often helpful in providing that unbiased view of a firm’s
4: Don’t have time to deal with it. The “no
time” excuse is a major smokescreen. All people make choices
about what to do that reflect their priorities as well as their
fears. Why do some people work 12-plus hours a day rather than
“nine-to-five,” or exercise regularly instead of merely
thinking about going to the gym? People make time for what they
firm owners who have said they “don’t have time”
need to examine closely what they have time for, and determine
where the sale or merger of their firm stands against these other
tasks. Most likely the time isn’t right or the motivation
simply isn’t there. It’s never just the lack of time.
5: Fear of change. Moving away from the status quo
prevents more mergers and acquisitions in the accounting profession
than any other obstacle—yet it is often unspoken. Most people
don’t handle change well. Think about CPAs who have managed
their firms for anywhere from 20 to 40-plus years. They need to
consider what will happen to their family, staff, and clients
when (not if) they are unable to work. It is a rare person, CPA
or not, who can coolly and calmly think through all of the alternatives
and map out a plan. This is true even for younger CPA firm owners
who have built a practice and created something of which they’re
proud. The idea of moving in a different direction is often paralyzing.
determine whether the fear of change is rational or not, firm
owners need to become comfortable with the idea of change by speaking
with other accounting professionals and firm owners who have done
it successfully. First, speak with other CPAs who have sold or
merged their practices. They should solicit input from their closest
advisors about a possible sale or merger. Another option is to
speak with a consultant who handles these kinds of issues daily
and who can provide an unbiased, third-party opinion void of attachments
to the subject firm. This sort of expert should be able to provide
examples of firms that have successfully completed numerous mergers
and could facilitate discussions with these firms’ merged-in
6: Have no other significant interests. A lack of
outside interests could be a significant underlying reason many
CPAs hold back taking steps to transition their practices. Although
not readily admitted, it needs to be addressed. Even in the case
of the new firm that has a great record of merged-in partners
staying active for an extended time, having more free time than
before is almost guaranteed.
best question a practitioner can ask himself is: “What will
I do if I slow down or retire and have a good deal more free time?”
Dr. Phil, the popular TV psychologist, might say, these CPA firm
owners need to ask how they define themselves. Is it in their
best interest to redefine themselves at this point in their lives
and careers? Or can they?
all it takes is some deep thinking about the options, which can
Spending more time with spouse, children, or grandchildren
Reconnecting with a passion from earlier in life, such as music,
literature, golf, or collecting memorabilia
and getting in better shape
Volunteering, which could involve working with a state CPA society,
mentoring, or participating in college accounting programs.
options are unlimited and, for many individuals, quite exhilarating.
On the other hand, many CPAs (and people in general) have defined
themselves so much by their work that they can feel lost without
it. For these individuals, it will be best to find a firm that
will be comfortable with a long-term attachment.
firm owners who don’t have a successor and are one to seven
years from wanting to retire, or who want to consider a merger
for long-term growth, should ask themselves if they are totally
happy now with:
The work they are doing;
Their work/home balance;
Their earnings; and
The future prospects of their practice.
“no” answer to even one question is reason to begin
determining a way to act on it and plan accordingly. CPA firm
owners should get their spouses behind them, line up close advisors
to guide them along, and confide in fellow CPAs.
look at the alternatives. If the firm owner became ill and otherwise
unable to work, how would the family be provided for? Will clients
leave? (Of course they will, if they need work done and only the
firm owner can do it.) If there is staff, could the firm be “stolen”
by long-time staff members in the absence of an agreement by which
they purchase the practice?
how unpleasant these thoughts are, it’s surprising that
more firm owners are not moving forward on their stated desire
of selling or merging. Conversely, if that stated opinion has
not been fully thought through, don’t start the process.
It’s very time-consuming and could have a negative effect
on a firm’s leadership, its staff, and potential acquirers.
consideration is the current marketplace. The demographics are
such that, over the next several years, more and more firms will
need to sell or merge. Valuations will go down as supply increases
and buyers become increasingly discerning. This will lead to pricing
pressure and result in lower payouts for a merger or sale.
many CPA owners, now is the time to start actively considering
long-term options by accepting some of the realities contained
in this article, and starting the process.
Fligel, CPA, is president of RF Resources, which focuses
exclusively on helping CPAs and firms plan and implement successful
growth and succession strategies.