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Taking advantage of the shrinking middle tier of CPA firms

The bevy of CPA firm M&A in recent years has changed the size and composition of firms in the market. Even private equity firms looking to pick up accounting practices look at $10 million as a minimum port of entry for making the case to align.

This activity has created a growing community of larger CPA firms while shrinking the middle tier of firms in the $5 million to $10 million revenue range. 

Yet, for many successful, closely held businesses, the comfort zone for accounting and advisory guidance comes from CPA firms that are not too big and not too small. Entrepreneurs in this community tend to choose a firm of 25 to 50 people.

Talented practitioners looking for new opportunities also want firms in this "just right" size. This is often because these kinds of firms can support an infrastructure that has professionals dedicated to HR, marketing, technology and efficiency — along with expertise, chances for development and growth, and a comfortable culture.

So how do you get your firm into this sweet spot? Here are some pathways to opportunity.

Traditional mergers of relative equals

For years, the term merger has been used to conceal the sale of a practice or the full terms for a sale. True mergers of firms of similar size have been infrequent for many reasons, including control, egos, demographics and geography.

However, despite the challenges true mergers can sometimes bring, the timing looks right to make them popular in the current market.

True mergers offer all parties the chance for real input and many of the same benefits that come with an upward alignment, including access to better technology, more enticements for recruits, fewer administrative tasks, better access to training, deeper services, and greater appeal for more sophisticated clients.

Firms that are similar in their service offerings could see merging as a way of streamlining and improving efficiencies, becoming more attractive to certain clients and industries, and appealing to employees and leaders who want to belong to a deeper firm with a specific focus — creating a larger boutique firm. 

Firms that are disparate in their services, or in different markets, can benefit from offering more services to a broader audience, and a greater region from which to pull talent. They become better positioned to add new services and expand their appeal.

The more a firm can be a one-stop shop, the more connected their clients will be. They will also potentially be more appealing to staff who want diverse opportunities and don't want to be locked into working for an ultra-large business. Partners in firms that are not alike may find it easier to comfort egos when merging. 

Staged collaboration

Firms with potential synergies might agree to work together now on specific projects or in particular ways while working toward a joint venture or a combination in the future. This goal might hinge on achieving a revenue milestone or a number of projects — or both.

Firms should be careful to scope out the framework, timeline and terms to set the stage for the future, but this staged collaboration can allow firms to gain the size and power to achieve that $5 million to $10 million sweet spot. 

Acquisition

Of course, acquisitions or acquisitions disguised as mergers can help firms hit the middle tier they seek. Planning will be essential. Vision and synergies should be fleshed out, along with a timeframe for successful integration. Infrastructure may need to be enhanced.

Diversification

With more comprehensive service offerings, the more value you create for clients and your team. Building your firm into the middle tier may mean adding nontraditional businesses, such as HR, financial services, technology, valuation and CAS. 

This avenue of diversification of your own firm will take more investigation and will place you in a more competitive bidding process. Suitors will be very broad. However, it can build your firm into a stronger force in the market and make it more appealing to staff and clients. 

Organic growth

Growing without M&A means selling more business — or growing organically in other ways. This path is more realistic with a highly committed and productive team, including marketing and business development. 

You must be prepared to track, evaluate and spend money on research, communications, and visibility. While it may take longer to reach the size you want, organic growth allows more selectivity. 

Find your path to success

How far is your firm from where you would like — or need — to be? Clearly, the closer you are to hitting your mark, the less effort may be required. Once you make your way, it is likely that continuing your growth will become more natural and more compelling. 

The advantages of filling the void merit strong consideration of how to implement a plan, which will make your firm stronger and more compelling.

Create a team to explore various pathways and potential partners. Negotiate wisely, transact, integrate well, and the rewards of success will follow.

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Practice management M&A Business development
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