As the sun rose over the Chicago skyline, Sarah Thompson, managing partner of a mid-sized accounting firm, sat in her office, reviewing the final details of a merger agreement.
After months of negotiations, her firm was about to join forces with a larger regional player. Sarah’s excitement was palpable, but so was her apprehension. “This is the right move,” she thought, “but there’s so much to consider.”
Sarah’s story, while fictional, reflects a real trend in the accounting profession. Across the country, accounting firms of all sizes are riding a wave of mergers and acquisitions (M&A)—even as a way to combat the shrinking hiring pool.
“Why look for talent that might not exist when you can just absorb someone else’s?” goingconcern.com
As firms seek to expand their reach and enhance their services—all while adapting to a rapidly changing business landscape and ever-present accountant shortage—one thing’s clear: The merger and acquisition trend shows no signs of slowing down.
Why do accounting firms merge?
The motivations behind mergers are as diverse as the firms themselves:
- Geographical expansion: Firms can quickly enter new markets by merging with established local practices.
- Industry specialization: Mergers allow firms to gain expertise in specific industries or service areas.
- Talent acquisition: Combining firms can address staffing shortages and bring in new skilled professionals.
- Economies of scale: Larger firms can often operate more efficiently and offer a broader range of services.
- Succession planning: Mergers provide an exit strategy for aging partners looking to retire.
- Competitive advantage: Increased size and capabilities can help firms better compete in the market.
- Technology investments: Larger firms can more easily afford and implement advanced technologies.
What should accounting firms consider before merging with another practice?
Successful mergers and acquisitions benefit all parties involved. Consider these factors before joining forces with another practice:
- Cultural alignment: Open communication is crucial to avoid potential conflicts, so ensure all partners are on board and address any concerns early. When it comes to everyone else, assess the compatibility of firm cultures, including work styles, client service models, dress codes and office norms. Consider how the merger will impact your staff; how will the roles and career paths of your employees change? Communicate all of this information to your entire staff (whether or not you have plans to change their day-to-day).
- Strategic vision: How does the merger align with your long-term goals, such as expanding services, entering new markets or addressing succession planning? Share this vision, then share it again. Include how exactly it enhances or complements existing services or niches. And if it helps expand your firm into new areas, plan for managing multiple offices (or remote workers).
- Financial and legal due diligence: Conduct thorough due diligence on potential lawsuits or legal risks that could affect the merged entity. Is the prospective firm meeting all regulatory requirements in its practice areas? Review financial statements and retirement commitments and ensure the deal structure creates positive cash flow for both parties.
- Technology and operations integration: Plan for harmonizing billing practices, compensation structures and administrative processes. And technology integration? Not as straightforward as you may assume. Arguably, in fact, one of the most challenging parts of M&A. Evaluate the compatibility of existing systems and plan for integration or migration of software and databases. And make sure your practice is prepared to make system integration as smooth as possible with our comprehensive merger and acquisition IT checklist.
- Client and market strategy: Once you’ve officially announced the merger, what’s your GTM (go-to-market) strategy? You’ll need to communicate these changes effectively in order to retain clients (and staff). Deciding on the combined firm’s name is the fun part; don’t forget to develop a cohesive marketing strategy before the deal’s ink is dry.
What makes a firm more attractive in an M&A deal?
While other factors such as strong staff, efficient time management and a commitment to quality and ethics are also important, the following top three elements make a firm a more attractive M&A target:
- Advanced technology: Firms with state-of-the-art technology infrastructure are significantly more appealing to potential buyers. According to the Journal of Accountancy, technology has become one of the most critical issues in accounting firm M&As. Investing in advanced software, cloud-based solutions, and data analytics demonstrates a commitment to efficiency and modern practices, making them more valuable in the eyes of acquirers.
- Strong operating metrics: Superior financial performance naturally makes a firm more attractive. Key metrics such as high net income per partner (NIPP), above-average productivity, strong realization rates and healthy profit margins are particularly important. The Growth Partnership notes that these metrics are often the first things potential buyers examine when evaluating a firm. However, it’s crucial to balance profitability with necessary investments in technology and talent.
- Quality client base: A stable, diverse and high-quality client base is extremely valuable in M&A deals. Clients who pay on time, provide information promptly and have the potential for additional services are particularly attractive. This indicates a well-managed practice with reliable cash flow and growth potential. A strong client base can significantly increase a firm’s valuation and make it a more appealing merger partner.
Conclusion: M&A success hinges on careful, cautious planning
Merger and acquisition activity has no chance of slowing down. Whether you’re in it for the geographical expansion or to get a few more staff members, you must position yourself for success with careful, conscientious evaluation.
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