Ask the Expert: M&A for CPAs

Cheryl Goldenberg is a mergers and acquisitions consultant who serves the CPA community exclusively and nationally.

What are some of the trends you’re seeing in the CPA community lately?

There are a lot of CPA firms that are in desperate need of a succession plan because they never thought of the fact that one day, they’re going to need to pass their business on. There are a lot of CPAs who are baby boomers, and now there are some that are going to college to become CPAs. But CPAs in their 30s, or 40s? There’s no one in that age group.

In the old days, someone younger would come in and take the place of the older guys. Today, there’s no one to do that. So what ends up happening is the firms merge with a bigger firm, so that the older guys can get paid out, and the younger guys that are in the firm can still have a future.

So because of that, the M&A activity has been wild. I’ve been doing this for six years, and in six years I’ve affiliated over 226 CPA firms.

If a CPA firm is looking to grow by acquisition, what should they be doing to prepare?

In order to grow by acquisition you really have to be something special. When a firm calls me and say they want to grow by acquisition, I ask them 500 questions. And 9 times out of 10, they usually are much better served by merging up instead of buying a firm.

For example, let’s say there’s a small practitioner that’s really terrific and has a $1 million practice. He’s not going to merge into a firm that’s between $2 million and $5 million. That’s not enough. If he’s a young guy he wants to merge into a big firm so he has more opportunity, because a bigger firm will have higher billing rates, will have more services to share, they can cross sell to their own clients, they can pitch bigger clients because of the infrastructure of a bigger firm. If he’s an older guy, he wants the security of a bigger firm that’s not going to slow fold in this economy. A lot of firms are having trouble keeping clients to competitors, and staying in business themselves.

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What are the advantages and risks of merging with a larger firm?

CPAs are petrified of change, and they’re also very afraid of losing their independence. My buyers who really get a lot of deals done are the ones who kind of portray that they’re not going to take their independence away. Instead of taking their independence away, they’re going to take all of the work that’s not billable. So they take all the admin away, anything that’s not billable, then they do it in their firm so that it frees everybody up to go out and get the clients and do billable work.

When I talk to a firm that’s doing $5 million in revenue, I could probably double the income of the partners by merging up, and also, at the same time provide a succession plan, so they don’t have the problem that everybody else has.

When that firm merges into the bigger firm, the benefit is the older guys get paid out, so it doesn’t put a burden on the younger guys, and the younger guys have an opportunity to make more money. So it’s really a win-win.