IMGCAP(1)]It is a widely held view that the Giant Four, with Deloitte being the largest, have the brand permission to audit the Fortune 1000. They own that space.
It is also a widely held view that the Next Six (RSM, Grant Thornton, BDO, CliftonLarsonAllen, Crowe and CohnReznick) are the preferred providers in the mid-market space. All of the Next Six firms, RSM being the largest, are very high-quality firms. They have different strengths and weaknesses for sure, but not one of them is the obvious choice for owners/operators of mid-market companies. Not one of them is widely accepted as top of mind. Arguably, not one of them even owns a specific industry focus.
For the most part, they are about the same size and have a similar breadth of skills and credentials. Why is that? What’s required? Will one of the existing Next Six ultimately become the mid-market “category killer” and “disrupt” the marketplace? Or will one of the other Top 100 firms who aspire to be a Next Six ultimately own the bracket? The answer is not clear.
In our opinion, there are three major components to success in becoming a mid-market “category killer”:
• capital markets skills and credentials (at least in certain industry sectors),
• a national and global brand, and
• industry specialization.
This column focuses on building your capital markets skills and credentials (at least in certain industry sectors). Without them, your firm will never be a serious competitor to the Next Six or, for that matter, to the Giant Four when it comes to the mid-market, let alone the category killer. Subsequent columns will focus on both a national and global brand and industry specialization.
In today’s marketplace, when outside private capital, perhaps from private equity groups, is sought by clients, your firm becomes vulnerable without capital markets skills, credentials and a recognizable brand—at a minimum nationally and, ideally, globally. The question that is often asked of clients is: “Who or what is XYZ & Co.? If you want our capital, you have to retain a Giant Four firm or, perhaps, RSM, Grant Thornton or BDO.”
As a result of lacking market permission, your client who is in need of the outside capital is forced to change CPA firms. If you’re lucky, out of loyalty, you will retain some tax work. Very frustrating!
It’s a safe assumption to say there isn’t a week that goes by when a Top 100 firm doesn’t have to deal with this vulnerability—oftentimes with some of its best clients.
Bottom line is the mid-market “category killer” needs to be (arguably must be) closely aligned with companies (at least in certain industry sectors) that:
1. seek outside private capital (other than from commercial banks, family and friends), and
2. subsequently seek (at least potentially) public capital vis a vis an IPO.
Building capital markets skills and credentials is a two-pronged initiative:
• Firstly, it is a defensive strategy that enables you to retain your private company clients.
• Secondly, it enables you to attract both existing public companies and IPO candidates. This is your offensive strategy. Let’s look at the opportunity in the Fortune 1000 alone as of June 2015:
• The Giant Four audit 914 of these companies with an average market capitalization of $3.8 billion and average audit fees of $1.9 million.
• The Next Six and other Top 100 firms audit only 86 of these companies with an average market capitalization of $1.4 billion and average audit fees of $1.1 million.
For sure, the Next Six all have public company practices, but they currently revolve around micro-cap companies with higher levels of risk, less market capitalization and less market credibility. Here is a snapshot of those practices as of June 2015:
• Grant Thornton audits 241 companies with an average market capitalization of $1.3 billion and average audit fees of $1.1 million.
• BDO audits 247 companies with an average market capitalization of $594 million and average audit fees of $866,000.
• RSM audits 106 companies with an average market capitalization of $352 million and average audit fees of $607,000.
• Crowe Horwath audits 83 companies with an average market capitalization of $469 million and average audit fees of $526,000.
• CohnReznick audits 23 companies with an average market capitalization of $317 million and average audit fees of $389,000.
• CliftonLarsonAllen audits three public companies with an average market capitalization of $116 million and average audit fees of $358,000.
If the Next Six want to gain credibility in the capital markets space, they will have to step up their game and start adding public companies with greater capitalization and greater market credibility.
Certainly if one of these firms wants to become the mid-market “category killer,” they will be required to do so.
So how do you get traction with this initiative?
Here are some of the keys:
• Firm leadership needs to talk about the importance of this initiative in their communications with partners and staff. This needs to be one of the handful of important strategies for your firm.
• Marketing dollars need greater focus on your ability to help companies that seek private/public capital and those that will eventually do so.
• Your quality control effort has to have a mindset that appropriately balances risk and entrepreneurship.
• M&A and IPO readiness skills are a required complement to this practice.
• One of your partners needs to become the firm’s “market face” with investment bankers, attorneys, regulators and other centers of influence (such as the U.S. Chamber of Commerce).
There is a huge opportunity for one of the Next Six or one of the other Top 100 firms to “disrupt” the marketplace by capturing significant public company market share and ultimately becoming the mid-market “category killer.” Will one of them seize the opportunity? We think so. Stay tuned!
Dom Esposito, CPA, is the CEO of Esposito CEO2CEO, LLC. Dom, voted as one of the most influential people in the profession for two consecutive years by Accounting Today, authored a book, published by
