The crisis has not passed, but CPA merger and acquisition discussions are already increasing. Calls are coming in from firms that are not sure what to do. Firms we spoke with last year who were set are now reconsidering acceleration of their exit strategy or need to merge for growth or perhaps survival.
To gain some perspective let’s digest pre-COVID-19 CPA M&A. Several core factors had been in place. First, the average Baby Boomer was, and still is, about 65 years old. Second, small to midsized firms have been struggling to have the same technological advantages of larger firms. Third, the movement to a more consultative client base was, and still is, difficult for many firms. These factors are still causing discomfort for partners evaluating either their exit strategy or with their growth planning.
Add COVID-19 to the equation. This is a wildcard that will change the way deals are done. Prior deals had guarantees using a floor to share risks for both parties. With coronavirus, the acquired or merged-in firm’s revenue stream may not be as predictable as in the past. The quality of the firm is not the question, but a firm’s value can drop if the incoming firm’s client revenue shrinks due to the impact of the pandemic.
There has been a hidden factor in CPA M&A the entire time. With or without the coronavirus, there is a concern that succession teams do not have the selling skills to bring in business. This has been forcing upward mergers or sales because partners do not want to risk their payout on a team with no record of selling. COVID just adds more concern that the firm’s “unplanned revenue runoff” will increase creating an even bigger need for professionals who can sell.
Here’s how to look at firm value in any CPA M&A deal, pre- or post-pandemic. Value has been, and will always be, what the buyer/acquirer feels it is worth. A seller or upward-merger firm does not have to accept their opinion of value, but the major difference post-COVID-19 is the guarantee or floor needs are likely to be lower or eliminated. As an example, an all-restaurant CPA firm has very high risk right now. The buyer/acquirer has no way to predict which clients could be impacted by COVID. If a seller/upward-merger firm wants the buyer/acquirer to accept unclear risk, there will be no deal.
Does it make a difference if your deal is not guaranteed? No, it does not. If there is no risk of revenue loss, then the seller or upward-merger firm should not be worried about getting paid in full. If you remain independent and your revenue decreases, your compensation will drop. If you merge into a firm and your revenue drops, your payout will decrease anyway. Lack of guarantees will be the new norm at least for a while. The only difference is if you merge up, you now have more resources and services to keep clients and more time to bring in new work. You need to objectively evaluate if you can accomplish on your own what you would like, given your remaining time before retirement, the selling skills of your succession team and your internal infrastructure.
How do you increase the value of your firm? To maximize value, you need to understand the market value of your firm in today’s environment and the drivers that increase or decrease firm value. You need to be valuable whether you are transitioning internally to a succession team or externally to an outside party. If you are uncertain as to what to do, consult an expert. These are unusual times and moving quickly rather than later might be to your advantage right now.
