The M&A wave currently sweeping the accounting profession is being driven by changes in the business environment that require additional resources and expertise that buyers today don’t necessarily have.
Speaking Sunday at the Scaling New Heights conference in Orlando, Joe Woodard, head of CPA coaching and consulting firm Woodard and the host of the conference, noted there has been a significant increase in mergers and acquisitions activity within the accounting world. This, he said, is easy to notice and “you would have to be an ostrich, in a cave, under a rock not to.” He estimated that, if he asked his audience who has received meaningful outreach from a company looking to buy them out, about half the hands would be raised. Looking at the “actual math in the industry now, it’s actually higher than 50%,” he added. And while the more headline grabbing examples involve major international firms combining to become even more major and even more international, this does not represent the typical deal.
“It’s not just the very large ones combining forces these days… What you see a lot of is Top 20 Firms buying firms that are in the Top 100 to Top 500 in size,” he said.
To put this in perspective, he said that the 500th largest CPA firm in the country (of those that report their numbers) makes less than $5 million in revenue per year, which means some of the people in his audience likely are even larger than that. He said that they represent the kinds of firms that people want to buy.
One of the biggest things feeding this, he said, was client accounting services, or CAS. It is generally understood, he said, that CAS will eventually “own the accounting industry in the next decade,” overtaking tax and audit as the largest revenue centers for most CPA firms, making up the majority of revenue for such practices not just in the U.S. but the world. If the industry is going to be defined by client advisory services, he said, private equity is eager to back their acquisition.
What, exactly, are they acquiring? One, according to Woodard, is leadership and expertise. While there is a large number of people who specialize in CAS, many of whom were in the room, he said the skills and experience to actually run a successful practice centered around it are rarer than one might think.
“I don’t know if this sounds strange to you, because this room is packed with CAS experts, but you are more rare than you know. You don’t understand, when you get into a CPA firm, even a top 100, they don’t know what you know. They are acquiring CAS practices to get you. Your knowledge, your leadership, your teams,” he said.
The second thing buyers are typically seeking are CAS platforms. He asked his audience to think of their own R&D efforts over the years and all the work and time put into them. Firms that want a CAS platform themselves likely do not want to devote the same amount of effort to make their own when they could just as easily buy someone else’s.
“If I’m a Top 50 Firm sitting on a pile of cash, more cash than I have runway … I don’t have time for my own R&D. I need to buy someone else’s. I need to buy CAS platforms. They already know how to do the fractional CFO, they know how to do FP&A, they need your platform for accounting automation, back office process, outsourcing. …. It’s what you’ve already built, that is what they want,” he said.
Along these same lines, buyers are also looking to outright buy books of business. Similar to platforms, a firm could decide to slowly and painstakingly build its own CAS practice over years, cultivating contacts, developing skills and building infrastructure — or it could just buy it from someone else and save itself the trouble. Such purchases, he said, typically are large-scale deals.
“Large-scale acquisitions are typically books of business buys. Not talking about mergers but when you have a scaled operation that wants to have inorganic growth, double digit, so they will just buy up client accounts,” said Woodard.
Dawn Brady, founder of Essential Bookkeeping Solutions, who spoke Monday, had this very experience with a client. There were four partners, she said, with the end goal to sell in about eight years. They came to her and discussed wanting to open up to a third market and asked how they might go about doing that.
“They’re talking about budgets and how do I do this. I say, why don’t we just buy a firm in that location versus trying to start fresh? We’ll save so much money and time. And they looked at me and said they never thought of that. And that is what we did and, within six months, during COVID, this was the highest-earning department location,” said Brady.
Woodard noted that while the profession is currently riding this M&A wave, it cannot last forever. The time for companies to take advantage of this unique moment is limited.
“About five years: that is what I predict for when the money is flying around the room,” he said. “And it’s tens of billions of dollars of private equity investment they’re pouring into scaled firms to buy firms. … The large-scale acquisitions are buying books of business, smaller scale they are buying up leadership and expertise, and in the middle there is a CAS platform that intersects both. Somewhere there is you. The only question is, what do you want to do with it?”
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