It’s time to pause and look around you. 2021, a year of fiscal and general economic uncertainties, might be an opportune time for you to do a self-assessment of your strategy.
Biden administration officials have set the stage for corporate and individual tax increases, and clients will need more advice about tax planning. If your midsized CPA firm hasn’t started to move away from a general “compliance shop” to either a specialized niche firm that has established a brand in the marketplace that transcends size and locations, or to a professional services firm that provides advisory, consulting, accounting, tax and assurance services to marquee clients in specialized industries, its valuation in the marketplace could diminish.
Is it time to move away from Plan A — staying independent for as long as you can — and pivot to Plan B, cashing out and merging up before the inevitable enhanced tax rates kick in and your general compliance shop’s worth diminishes?
In addition to fiscal and general economic uncertainties, you should consider some other factors in your Plan A vs. Plan B strategy:
Market share: If you have a specialized niche firm such as a bankruptcy or restructuring practice, or a litigation support or forensics practice, it’s relatively easy to calculate your share of the consulting fees spent by the client. If you have a professional services firm that serves marquee clients in specialized industries, it’s more difficult to calculate market share, but in many cases you can come up with a reasonable range for your market share.
If your market share is minimal, and you have no reason to believe it will improve in the foreseeable future, it might be time to move to Plan B.
Profitability: The gold standard used to be one-third of the firm’s profits would get distributed to the firm’s equity partners. How much has your firm moved away from this gold standard? Obviously, the further and further away you move away from one-third of the profits distributed to the firm’s equity partners, the less you will receive in your business valuation. The trend line can also be a meaningful bit of data.
Partner age: If the median age of your partner group exceeds, say, 52, and a good number of your partners are nearing retirement, there’s a high likelihood that your talent assets are diminishing in value. That’s particularly true if you’ve been unsuccessful in grooming the next generation of young partner stars who can attract and retain marquee clients. This would have a significant negative impact on the business valuation of your firm.
A meaningful succession plan: If you’re like many midsized CPA firm leaders, you don’t have confidence in your younger partner group’s abilities to lead the firm as senior partners retire and get paid out. You’ve been disappointed in your ability to develop the next generation, and it’s too late for you to attract a lateral who would be accepted by the partner group. This scenario is not a healthy one when it comes time to value the business.
Partner compensation: If your superstar partners are not getting paid market value, you run the risk of them leaving the firm. Here again, this scenario does not bode well for the future of your firm and for valuation purposes.
It might be time for you to pivot to Plan B if this scenario mirrors your firm. It would be wise to retain an outside consultant with experience in navigating the merging up or not decision. An outside consultant can benchmark your firm against others and provide you with recommendations on how to move forward. A consultant who has relationships with acquirers of midsized and small CPA firms can also be helpful in identifying the right potential acquirers for your firm.
There are approximately 14,000 CPA firms in the United States; most of them are sole practitioners. A large slice of them (firms generating annual revenues between $12 million and $20 million) are referred to as midsized CPA firms. If you are in that universe, your world has changed. In many ways, COVID-19 has accelerated the change. The world of public accounting has become a rapidly moving profession that is now providing untraditional services such as data analytics, cybersecurity, managed services and outsourced CFO services. It’s an exciting time in the profession, but also a time full of fiscal and economic uncertainties. Do the self-assessment laid out above and, with the guidance of an outside consultant, decide if it is time to pivot to Plan B.
