The “Great Selloff” of professional services and Certified Public Accounting (CPA) firms is in full swing. 2021 was a record year for mergers, acquisitions, and sales of firms worldwide. Already, 2022 has seen a material increase in activity, and the tax season is not slowing things down.

Merging into Specialized Consulting Firms

A major driver accelerating mergers and acquisitions (M&A) is the growing need to add non-accounting businesses; firms are looking to diversify their revenue streams by expanding the advisory services they offer and one such method is to merge or acquire specialized consulting businesses.

Accounting and CPA firms’ clients are asking for specific services such as automation, cybersecurity, ERP advisory, SOC/Sox reporting etc, or specialty providers in industries such as IT, healthcare, and construction. It is critical when adding a non-accounting business to ensure that there are professionals coming in that can continue to deliver those specialty services. Most small and mid-sized CPA firms do not have in-house teams in place to take over a specialty practice.

Drivers of Transaction

The perfect storm has been brewing for years and has gathered momentum because the individual factors that fuel M&As are converging at the same time.

There are three main drivers to every M&A transaction, and these revolve around succession issues. They are:

1. age of leadership;
2. talent shortage; and
3. lack of or gap in the succession team.

Individually, each of these factors is a major contributor to M&A activity; however, when combined, the heat increases giving rise to explosive M&A activity, the likes of which we are witnessing today.

The “age” factor is the key driver; it keeps inching forward, creating momentum for the explosion. Firms can balance staffing issues or shortages and avoid worrying about leadership succession when there still is time on the clock. But eventually, the clock strikes and there is no more time to resolve the succession problem. For many professional services firms, the clock has already struck. Time is up.

The increased appetite for non-accounting services is simple. CPA firms need to become less dependent on a shrinking pool of accountants and CPAs, and to capitalize on their existing client bases, which require other services.

Many firms struggle to get their advisory services off the ground because they are trying to use in-house resources to make it work or trying to conduct advisory work in the downtime. The problem with using in-house resources is that downtime is less frequent and CPAs tasked with consulting work are either not appropriately trained or uncomfortable with consulting roles. Consulting often requires an intense degree of active engagement with the client. This involves asking sometimes uncomfortable questions and dealing with complex, abstract issues rather than the rule-driven processes involved in audit, tax, and accounting procedures.

Evaluate before you Proceed

CPAs are difficult to find and redirecting their efforts away from tax and audit work into consulting work should be avoided. It is recommended you evaluate the following options to expand your advisory services:

• Determine what services you could deliver internally such as automation, digitization, fraud, forecasting, cash flow, etc and whether you have people with the skills, time, and desire to deliver those services;
• Identify which non-accounting services would be your strongest areas of growth and begin a search to identify firms that fit those areas to discuss the possibility of a merger or acquisition;
• In the long-term, align your firm with third-party advisors to create a revenue-sharing stream; and
• Step back to assess whether it makes more sense to merge upward into a firm that already has these services and networks in place.

Some M&As are driven by a need to grow and are not succession-solution-oriented. The reality is that a small-to-mid-sized accounting firm will need to work on the foundational investments that larger practices have already established. These foundational investments include, but are not limited to, being part of a large association of CPA firms, having cyber or transactional advisory or other specialized consulting in place, and having key leadership established such as a CISO, COO, or professionals leading a specialty service niche. The cost and time required for a small-to-mid-sized CPA firm to develop that infrastructure can be extensive. The option of bypassing the pain and cost to develop this infrastructure by merging into another firm that already has the resources in place may look like an attractive (and realistic) way forward. If your firm is already pressed for time, would you still be able to grow your advisory service?

Compounding the situation is the fact that we find ourselves in an adapt-or-collapse situation. COVID was an accelerant to an already underlying problem. It spurred a remote workforce movement that led to accounting professionals electing to leave the profession, giving rise to the now-infamous “Great Resignation”.

This factor, combined with the reduced number of CPA applicants over the last few years, has turned a high activity level of M&A activity into the “Great Selloff” we are experiencing in both CPA firm transitions and, more recently, in the non-accounting growth sector.

In five years, professional services and CPA firms will look quite different, and if change is not a part of your mindset today, you might be in a compromised position tomorrow. The only constant is change itself.