Learning from One Firm’s Successful Experiences
JULY 2007 - Recent
years have seen increased demand for public accountants and accounting
services. Midsized public accounting firms are finding companies
looking to them to conduct work that the Big Four are no longer
able to do because of the limitations imposed by the Sarbanes-Oxley
Act (SOX). As a result, some firms are struggling to obtain and
retain adequate staff to service and grow their businesses. In
response, some midsized public accounting firms are repositioning
themselves to better serve a growing client base.
for diversification and market positioning is growth through acquisition
(i.e., a larger public accounting firm acquiring the net assets
of a smaller firm). In some cases, this merging of firms leaves
both entities in a better position, proving that 1 + 1 can sometimes
equal 3. To illustrate this phenomenon, the author chose as a
case study the public accounting firm of Larson, Allen & Weishair
(LarsonAllen), a national midsized company. LarsonAllen began
operations in 1953 in Minneapolis as an accounting firm offering
specialties beyond traditional services. The firm’s recent
growth has been achieved primarily through a series of well-planned
acquisitions of smaller firms. Because of these acquisitions,
LarsonAllen now serves six core industries (healthcare, manufacturing,
construction, public service, auto dealers, and financial institutions)
through 15 locations nationally.
acquisitions are generally categorized as either upstream, downstream,
or lateral. In an upstream merger, a smaller firm seeks out a
larger firm and is acquired by it. The smaller firm’s name
does not survive and the larger firm’s policies and procedures
prevail. In a downstream merger, the larger firm seeks out and
acquires the smaller practice. Lateral combinations are the only
true mergers of equals: Combining firms are generally the same
size, and the result is a pooling of resources and recognition
of partners from both firms. It has been said there is no true
merger between public accounting firms, as one firm usually remains
dominant after the blending of the companies.
recognizes that its firm combinations are upstream or downstream
mergers (i.e., acquisitions). The newly acquired entity is renamed
LarsonAllen and becomes a member of the LarsonAllen team, obtaining
all rights and privileges of the larger firm.
accounting firms often combine is to retain and obtain adequate
staff to service and grow their business. Geographic dispersion
can also be achieved through the amalgamation of two or more firms.
Additionally, combinations can serve to enhance expertise in various
specializations or industry niches.
Niches and Specialization
the organizational structure of accounting firms comprised three
distinct service areas: auditing, taxation, and consulting. In
the early 1990s, however, larger firms changed their structure
such that services in these three areas were offered in broad
industry sectors or niches. Differentiation by industry sector
enabled auditors to compete on dimensions other than price. The
reaction to this change was positive, as many companies preferred
the value-added benefits provided by auditors with specialized
industry sectors in which to develop expertise, accounting firms
should first conduct a self-analysis of their existing strengths
and weaknesses. It is necessary to ask tough questions. Is there
a current dominant industry served by the firm? What are the areas
of commerce most enjoyed by existing partners? Given the existing
knowledge base of the firm, what new industry specialization areas
can be reasonably achieved? What untapped niches exist in the
firm’s marketplace? What are the costs of expanding into
new markets? The answers can help firms focus on their reasons
for niche specialization, which could include increasing the client
base by lowering fees, increasing fees by offering a premium product,
or increasing firm reputation by creating a unique position in
services through industry niches can result in increased business
through lower fees. This fee reduction is made possible, without
compromising quality, through the economies of scale that specialization
allows. Specifically, accounting firms are able to differentiate
service to a large group of clients all possessing the same basic
characteristics. Audit personnel are assigned exclusively to the
industries they serve and become very adept at identifying and
addressing industry-specific audit issues. Industry training costs
required for staff serving a particular industry are spread out
among more clients. Additionally, clients end up spending less
time explaining industry-specific practices and trends to the
auditors. The costs of performing audits decrease, so fees can
decline as well.
can also be done to increase audit quality and allow premium pricing.
Industry expertise is likely to lead to identification of misstatements
more effectively. It has also been suggested that industry-specific
expertise results in increased ability to detect anomalies, which
better helps to identify audit risks. Such higher-quality audits
could command higher fees.
niches can be pursued to enhance a firm’s reputation. In
determining industry specialization, firms seek a unique position
in the market along some dimensions that are widely valued by
buyers. Firms look for one or more attributes that are perceived
as important and uniquely position themselves to meet those needs.
They are then rewarded for their distinctiveness with a good reputation
and, thus, a premium price.
is necessary regarding niche development: Just because a firm
can develop a particular industry specialization, and customers
exist in that market, doesn’t mean it is feasible. It is
important that the firm be able to turn a profit in that niche
as well. Many firms have found a market need and developed the
ability to address it, only to find that developing this niche
practice is not a sound financial decision.
earlier, LarsonAllen’s six core industries are healthcare,
manufacturing, construction, public service, auto dealers, and
financial institutions. These were chosen and sustained by a balance
of market demand and firm supply. Market sector needs are met
when LarsonAllen is able to provide unique services at the highest
level of quality, for a profit. LarsonAllen began in the Midwest,
but its expansion is moving toward both coasts. Offices have recently
been acquired in St. Louis; Scottsdale, Ariz.; Philadelphia; Washington,
D.C.; Charlotte, N.C.; and Naples, Fla. The plan is that new acquisitions
in Scottsdale and Naples will spark a new industry specialization
area in the hospitality industry, given the abundance of hotels,
restaurants, resorts, and golf courses in these regions.
Patterns: Hub/Spoke Growth
aspect of LarsonAllen’s expansion in the last five years
is the hub/spoke framework it has employed in its pattern of growth.
Minneapolis is the clear hub in the firm’s Upper Midwest
operations, representing the center for higher-level management,
training, and support for all six industry-specialization areas.
Growth from Minneapolis, however, has come in the pattern of spokes
on a wheel. From Minneapolis (the hub), expanded offices (or spokes)
have been acquired in Minnesota locations such as Austin, Brainerd,
and St. Cloud, as well as in Eau Claire, Wisc. Each spoke became
a part of LarsonAllen in a joint geographic/industry-specialization
strategy, with the idea that the new spoke would augment existing
industry specializations and allow LarsonAllen to expand its presence
in the region.
hub-and-spoke strategy has expanded to a national scale. As noted
above, new potential hubs have been acquired in St. Louis, Philadelphia,
Charlotte, Naples, Scottsdale, and, most recently, Washington,
D.C. LarsonAllen notes that these potential hubs contribute to
at least one of the six core industry specializations. From these
hubs, new spokes may emerge as smaller local firms are obtained
through friendly acquisitions.
the Right Firm: Merger/Acquisition Criteria
a firm combination, partners look at a number of factors that
might enhance existing skills or create synergies for the merged
entity. Often, firms merge because they lack specialization in
special services or industry niches, or there exists a desire
to expand quickly into new locations. A firm needs to first focus
on what its goals for the acquisition are. Merger and acquisition
criteria that determine a suitable candidate include the types
of services offered, types of clients served, liquidity of the
smaller firm, revenue and profitability growth, retention and
growth rate, resource potential, and firm culture.
firm should clearly understand the types of services offered by
the smaller firm. The larger firm must ensure it can still deliver
these services in an efficient and profitable manner after the
the larger firm needs to provide continuity for the smaller firm’s
clients, including minimizing how and where services are provided.
This can often prove to be a major problem in new-client retention.
Understanding these service patterns impacts staffing decisions,
time requirements, and the feasibility of providing the service.
types of clients serviced by the smaller firm need to be determined.
Determining the length of tenure each client has had with the
smaller firm is a good starting point. The longer a client has
been with the firm, the more continuity the client will demand
in the transition. The more continuity provided, the more likely
the client will stay.
is an additional consideration. All firms have slightly different
billing and collection processes. It is important to ensure the
collection of existing account receivables and also to determine
how much of the existing practice can be absorbed into current
overhead. Having to wait months for new cash flow can place a
heavy burden on the acquiring firm. An acceptable level of liquidity
relative to the smaller firm should be established.
revenue and profitability growth are additional acquisition criteria
sought by larger firms. It is important to note that a firm’s
existing net income is only a starting point for analysis. It
is quite possible that this net income base could increase if
the firm is absorbed into the larger firm’s current overhead.
The smaller firm’s retention and growth rate should also
be considered. It is important to review the kind of new clients
a firm generates, how often they are generated, and how long they
are retained. Sustained growth and internal referrals are all
positive signs. An additional significant criterion is the smaller
firm’s resource potential. It is important to consider not
only the firm’s financial strengths but the partners’
financial strengths. A partner’s personal finances can negatively
impact future profit-sharing.
a firm’s culture is possibly the most important but most
difficult merger and acquisition criterion to evaluate. Wikipedia
defines culture as “values, norms, institutions and artifacts
that are passed on from generation to generation by learning alone.”
Values measure what is important in one’s life. Norms predict
how people will behave in various situations. Institutions provide
the framework in which values and norms are transmitted. Artifacts
are objects derived from values and norms.
It has been
said that people always take too lightly the human aspect of integration,
which involves issues of personality fit. The number-one reason
a merger doesn’t work out isn’t business or financial
reasons but a bad fit. Combining two different groups of people
is not a simple task. If an acquisition is to be effective, the
two teams must work toward the good of the new, combined firm.
Culture can include a firm’s core values, types of partners
and their respective roles, the type of work conducted by the
firm, the balance of work and personal life, and attitude.
determine what a firm stands for. They define the firm’s
permanent set of rules and beliefs. They are the heart of ethics
within the company. Accountability plays a key role in core values.
Do individuals do what they said they would? Finding a firm with
the same set of core values is necessary for an acquisition to
be a success.
also determined by the types of partners in the firm and their
respective roles. If one firm is seeking an acquisition in order
to bury the burden of an existing problematic partner, the combination
will rarely be an effective solution. Problems do not go away
just because an individual is a smaller fish in a bigger pond.
Other factors that have been determined to have an effect in this
area include the value attributed to chargeable versues nonchargeable
time, the degree of control delegated to employees, and the value
and expectations of community involvement.
of work the firm does also impacts a firm’s culture. Does
the firm serve SEC filers or not-for-profits? The balance between
work and personal commitments also impacts the culture of the
organization. Is it acceptable for a partner to have a personal
life separate from the firm? Finally, general attitudes within
the firm have a huge impact. Are partners friendly with staff?
Is there a feeling of camaraderie in the office? Merging a stiff,
hierarchical group of individuals into a more laissez-faire office
environment could be a recipe for trouble, and should be well
thought out beforehand.
to Finding the Right Acquisition Candidate
appropriate criteria of an acquisition candidate are determined,
finding the right firm to acquire can be a difficult and time-consuming
process. A good place to begin is with firms already familiar
to one or more partners. Otherwise, reviewing names in a phone
book or Internet listings can be a good starting point. Placing
an advertisement in a trade publication or a state society newsletter
is another way to initiate interest. Many studies suggest that
print advertising is the best way to get noticed. An effective
advertisement, however, needs to catch the reader’s eye.
Use an image that sets the firm apart and conveys its values and
personality. Repeating a variety of advertisements in a number
of venues will attract more attention and likely bring in more
suitable merger candidates.
has been quite successful at finding the right firm and making
the acquisition work effectively for both sides. The firm has
employed unique techniques worthy of note for similar midsized
firms seeking such a growth plan. LarsonAllen executive principal
Terry Enger notes that existing personal and business relationships
play key roles in finding firms to acquire. LarsonAllen finds
known professionals in the field (business and academic) to be
a great source of information on suitable acquisition partners.
The Internet is also a viable source of information in initial
searches. Much can be learned about a potential firm from its
website, including its size, affiliations with other larger firms,
and industry specializations.
Once a good
candidate is located, a call is made to the office managing partner
(OMP) of the potentially suitable firm. If a firm is not interested,
communication ceases. In these cases a file is created and a follow-up
is conducted one or two years later. If the OMP shows interest,
the LarsonAllen contact discusses the firm and previous successful
acquisitions. Interest often grows substantially the longer the
discussion continues. If interest continues after the phone conversation,
the LarsonAllen contact meets the firm’s management team
at its office. Many of these meetings result in a failed search.
When interest is sparked, however, the acquisition process can
“For LarsonAllen, two key cultural philosophies must be
present in a candidate: The newly acquired firm must hire and
retain the best employees possible and seek to serve clients well.”
If the firm passes this initial test, the next step of evaluation
is to conduct due diligence on the files and working papers of
the new firm with a focus on quality of work. At the same time,
a team of tax experts conducts due diligence on tax work. At the
conclusion of this analysis, the firm receives either a pass or
a fail grade.
If the outcome
is a pass, then a new panel is formed to continue the acquisition
process. This panel includes leaders from all major LarsonAllen
divisions, including information technology, human resources,
learning and development (training), marketing, as well as the
principal (partner) who will be in charge of the newly acquired
office. An existing LarsonAllen principal is moved into the new
office upon completion of the acquisition. This is done to facilitate
the union of the two firms as quickly and efficiently as possible.
Finally, an executive principal for that geographic region or
the CEO of LarsonAllen sits on the acquisition team.
special attention in this stage of planning include compensation
and retirement plans for the acquired firm, its fee structures,
and the management team. LarsonAllen recognizes its acquisition
team’s goals are to establish transitional policies and
procedures for business accountability, billings, management,
and the crucial announcement of the acquisition to employees,
clients, and the business community. The issue regarding the acquired
firm’s clients is an important one. How seamlessly existing
clients are brought on board relates directly to the comfort level
the new firm has with the notion of being acquired.
to a Successful Acquisition
one firm into another does not come without its pitfalls. Troubles
can arise for both parties for any number of reasons. Strategists
have documented problems that include errors in due diligence
of a firm’s work, poor matchmaking from the beginning, varied
miscalculations during the transition period, and an egocentric
mindset of new or existing partners.
the partners of an acquired firm becomes an issue, LarsonAllen’s
experience has been that it usually results in the deal ending
before finalization. More commonly, however, new partners realize
that they and their firms can grow better with LarsonAllen than
either can separately. Their income and the safety of their investment
are more likely protected in a larger firm, with a bigger group
problem occurs when the acquired firm uses different key software
than LarsonAllen. The resolution to this conflict has usually
resulted in the acquired firm adopting LarsonAllen’s programs,
but in some cases the larger firm has adapted some of the smaller
consistent deal-breaker issue for LarsonAllen is when the acquired
firm’s work quality is not up to expected standards, something
the firm tries to ascertain early in the acquisition process.
Proper planning, full information, and due diligence in the evaluation
process have enabled LarsonAllen to produce a strong record of
success with acquisitions.
if an acquired firm changes its mind? How does a firm undo all
the complexities of the acquisition? If this change of heart takes
place before the settlement of the deal, both sides can just walk
away. LarsonAllen employs a contractual one-year window in which
either group can back out of the acquisition after it is complete.
Previous research has suggested some form of merger “prenuptial
agreement” should exist. Key elements of any such agreement
include who gets each of the original clients and how postmerger
clients are distributed. In LarsonAllen’s case, this “merger
divorce” has never happened, but if it did, both sides would
return their practices to their original, premerger state. Enger
notes this key feature is instrumental in instilling confidence
and reducing stress for both players in the acquisition.
by LarsonAllen should not expect immediate and dramatic financial
growth. Rather, they should expect to become a participant in
long-term, substantive growth of the firm as a whole. Acquired
firms can in many cases expect their staffing abilities to increase
immediately as part of a top 20 midsized national firm rather
than an independent facing a limited applicant pool.
acquisition for midsized public accounting firms seems to be an
effective strategy. Midsized firms obtain benefits not only for
themselves, but also for the smaller firms that they acquire.
Both sides benefit from the increased visibility and resources
that make them more attractive to current and potential clients.
Staffing issues are also eased and financial rewards increase
beyond what would have been obtainable independently for both
firms. LarsonAllen has a proven track record in this strategic
process. The author hopes that readers will learn from LarsonAllen’s
experiences and apply these strategies to their own firm’s
M. Lindquist, PhD, is an associate professor of accounting
at the University of Northern Iowa, Cedar Falls, Iowa.