Partners in Top 100 Firms overwhelmingly express a preference for their firms to remain independent. Not surprisingly, there have been very few recent mergers combining Top 100 Firms. This period of calm is highly reminiscent of the climate among the Big Eight firms in the 1980s. Few predicted the upcoming spree of mega-mergers that created today’s Big Four.
Now, like then, it’s only a matter of time — and probably not very long — until this changes. The case for growth by large merger is compelling, and once the dam breaks, there will be a race to merge with the better firms. With this change on the horizon, it’s time for Top 100 Firms to rethink what it means to remain independent. The choice is likely to become picking the right merger partner soon or losing independence to an upstream merger later. Given this choice, the way to remain independent is to merge with another Top 100 Firm now when you can pick a favorable merger partner and control your destiny as a merged firm. Several factors will drive this change.
Good Smaller Acquisitions Disappearing
A lot of the growth by Top 100 Firms has been driven by acquiring smaller CPA firms to expand geographically, acquire new clients and add more talent. The firms that have done this well have prospered by adding revenue, leveraging existing infrastructure over a larger base, and expanding into new service areas and industries. Their partners are earning unprecedented levels of income. But this opportunity is coming to an end. In the last six months, three managing partners of Top 100 Firms have told us that their ability to find acquisitions that will have strong business benefits has diminished. The best firms have been acquired, and the lion’s share of the remaining acquisition opportunities involve buying out retiring partners without getting strong active talent and great new clients in return. In addition, they feel that future acquisitions need to be strategically focused on adding new services that will drive organic growth, especially advisory services.
Running in Place
As Top 100 Firms have grown, so have their competitors. The current state of growth often feels like a zero-sum-game where you need to grow just to keep pace, rather than gain a true strategic advantage. Measured by revenue, several Top 100 Firms make acquisitions for growth only to see their rankings slip as competitors grow faster. As one managing partner recently expressed to us: “I’m not exactly sure what we’ve accomplished. Size aside, only about three of the last eight acquisitions we’ve made have really enhanced the firm. But if we don’t keep up the momentum, it will feel like we don’t have a strategy. If we found the right larger deal that met our strategic priorities, we’d be much better off. But if we pursue this unsuccessfully and don’t grow, it will be worse. So we keep doing the smaller deals that are available.”
Best Way to Build an Advisory Business
There is an acute awareness among managing partners and industry experts that firms that add significant advisory services will be the successful firms of the future. There are some real challenges to doing this. Bottom line: To be successful at this, you need to acquire a substantial existing advisory firm and make it your advisory service line. One option for getting this done is to merge with a Top 100 Firm that has already made this investment. There are several benefits to this approach. First, you will know in advance that you are adding an advisory business that is culturally compatible with traditional accounting services. Second, your merger partner will have experience at cross-selling advisory services to tax and accounting clients. Third, the merger will give you strong advisory leadership that has been vetted for some period of time by the leadership of your merger partner.
In addition to these advantages, the investment in the future growth of the advisory business will be spread over a larger firm, and there will be more cross-selling opportunities to the larger client base of the merged firm.
Advantages to Going National
There are major advantages to becoming a national firm:
• Making the firm attractive to clients who have or intend to develop a strong national presence;
• Expanding the geographic recruiting base for talent;
• Having broader access to larger channel partners such as banks and law firms;
• Achieving protection from a “stress” upstream merger later because you waited too long to grow;
• Gaining access to new industries;
• Diversifying your service offerings which, along with geographic breadth, will provide some countercyclical protection against economic downturn;
• Gaining greater economies of scale for technology and support functions.
Becoming a national firm through multiple small acquisitions is very difficult. It takes a long time to accomplish, and many of the best acquisition candidates are likely to have already merged into other firms. This makes it likely that you will be acquiring weak firms. If the acquired firm is far away geographically, you may struggle to manage it effectively. If you only acquire firms that are close to home, you will limit your ability to expand geographically.
In contrast, a single merger with another Top 100 Firm can quickly create a combined firm that has a national presence. Since both firms will have made many past acquisitions, the merged firm will benefit from the combination much more than by trying to get to the same place through small acquisitions. The integration work from prior acquisitions will be complete, most likely with firms that were acquired at a time when strong acquisition inventory was available.
Deepen Leadership Strength and Succession Possibilities
Most Top 100 Firms are short of great leaders for their industries and service lines. By merging, the size of the leadership pool can be doubled, addressing this important issue.
Likewise, the merged firm should bring a future leadership pipeline that is far deeper than either firm had before the merger. A stronger merged leadership should be able to do a better job at identifying and developing future leaders.
Top 100 Firms have a big opportunity to find merger partners that will satisfy their highest priority strategic aspirations. Merger activity of this type is likely to dominate the Top 100 Firm landscape over the next decade. Smart firms will lead this trend rather than be followers, and the advantages to these firms will be enormous.
