Mergers and acquisitions (M&A) have long been a part of the accounting profession. The number of “big” global firms and their slight changes in firm names is proof positive of these consolidations over the last four decades. Today, you can pretty much tell an accountant’s age by whether they describe their time in global public accounting as being from the Big 8, Big 6, or Big 4.
In today’s environment, the M&A tradition not only continues, but also appears to be accelerating. Industry fragmentation is high, with well over 80,000 accounting firms existing in the United States, with 75% of CPAs, many of whom are firm owners, meeting the age of retirement within the last few years. And, most interestingly, massive amounts of investment have entered the profession in the form of private equity transactions, with one firm even recapitalizing using a $1.3 billion dollar debt financing.
All of this adds up to a rather frothy M&A market within the accounting profession that appears likely to produce more transactions in the near future.
Have you chosen to stay out of the M&A fray and stick to purely organic growth models? Are you actively pursuing acquiring another firm, or to be acquired by someone else? Are you still undecided? At some point, I’ve been in each of these camps, but ultimately our firm, Acuity, decided to pursue the M&A path. I’ll share our experience and a few learnings we had along the way.
For the last few years, we’ve had a combination of large firms and investors offer to acquire or merge with our firm. And like many of the firms I speak with, there is no shortage of unsolicited emails and calls that come in with such offers each and every week. Out of curiosity, my partners and I have had numerous conversations with these groups just to better understand why they were interested in us, what they believed was possible through a transaction, and to hopefully get a sense of how valuable our firm was.
While the conversations were always interesting, our decision was that taking on an investment or being acquired wasn’t of interest to us at that point. However, through those discussions, we developed an interest in doing a transaction where we took the lead as the acquirer or merger. Within a year of this determination, we had made our first acquisition, and then followed up less than 12 months later with a merger. Here are our learnings from doing those two M&A transactions:
Modernization isn’t appealing to everyone, but tech stacks matter
Our first acquisition was a more traditional accounting practice with desktop and server-based software. The previous owner had been very interested in moving to more modern cloud-based tools, but hadn’t had the time or capacity to make the switch. Acuity was well recognized as a modern accounting practice—working in the cloud, for example—so we seemed like the perfect new owners to make that transition.
We ultimately made that migration, but it was much more challenging than we had anticipated. Once we had migrated the systems, we expected everyone to be ecstatic, but we actually found the opposite. The employees from the new company struggled to learn and adopt the new tools because they had such a steep learning curve in such a short period of time, and we hadn’t been able to implement enough training.
So they struggled. And then, very surprising to us, the clients also didn’t like the change. We had eliminated manual tasks such as them having to drop off paperwork to the office, but now they were upset that they didn’t get a chance to come by and hang out at the office.
The second merger, however, had a nearly identical cloud-based tech stack like ours. We were speaking the same technical languages, had the same software partners, and very similar employee software training programs from day one. Our combination was drastically more efficient than the first one because we were not trying to bring one of the partners up to the other's technical ability.
The bottom line is that the tech stacks matter when combining firms and would be one of the first places I’d spend time evaluating if we were to do another transaction.
Deals get you noticed, but the team bears the weight
There’s nothing like an M&A announcement to draw attention to your firm. Any social post or article written about your deal will likely be the most popular piece of content you ever put out! Within the first 30 days of our first acquisition, we had three firms reach out to us asking to be acquired. In a very crowded market like accounting, it can be difficult to stand out, but an M&A transaction will definitely get you noticed, especially if you’re a firm owner.
The problem is that all of the attention can be very distracting, especially now that you’re in the process of integrating the new firm. And most challenging is the simple fact that it’s not the owners doing the integration; it’s the rest of the team. So while the firm owner is getting all kinds of attention and accolades, the rest of your team has just had a significant amount of work added to their plate.
In the annual company meeting following our last merger, I remember highlighting that one thing we didn’t do over the last year was acquire another firm … and the team stood up and cheered. M&A transactions can really put a spotlight on your firm, but it’s important to recognize the cost it places on your existing team.
Focus your due diligence on customers and engagements
When acquiring another firm, there are endless places and depths to which your due diligence can go. How do you pick what to look at, and to what extent? While there are a number of great resources on due diligence, my experience points me toward putting much greater emphasis on the target’s customers and engagements.
In a small- to moderate-sized transaction, you should be able to learn a little bit about almost every single client that your firm is serving. Start by assessing how closely they look like your existing client base in terms of size, industry, and complexity. While it can be exciting picking up a new vertical or industry, the less these new clients look like your current clients, the more work you should do in understanding their specific needs.
The same type of diligence needs to be done on the types of engagements that the target firm is providing. For example, we learned later that the bookkeeping services our first acquisition had been providing to clients were drastically different from the bookkeeping we performed for clients. Bookkeeping for them was essentially an after-the-fact write-up practice that was helping get clients prepared for their year-end tax return, while bookkeeping for us was a true outsourced accounting model where we performed the critical day-to-day accounting functions our clients needed to operate their business.
Those are two very different types of engagements that have different client expectations and employee workflows. Having a very clear understanding of who the clients are and the work being performed for them is critical. If we were to do it all over again, we would have made the entire prospective client base go through our current new client onboarding process to really get these expectations right. What you might find is that even though your current organic customer acquisition process is slower than adding a large chunk of new clients through an acquisition, it might be much more cost effective on a per client basis.
M&A Is a skillset we wanted to develop as a firm
If you’ve read this far, you probably sensed that our second deal was more successful than our first. By and large, that's true. We’ve retained much more of the clients and team members from our second transaction than our first. But I’m not sure the second deal would have happened if we had not done the first deal.
One very strongly held conviction by our team is that we want to be prepared and adaptive as a firm to have a sustainable company that serves clients and team members well into the future. Are M&A transactions often costly, time consuming, and stressful? Absolutely. But we didn’t want to shy away from learning firsthand what it was like to be part of an M&A deal. We want to have as many strategic tools as possible, so that when challenges appear or opportunities arise, we can draw upon experienced-based options to guide us appropriately.
Our accounting profession seems to have a very consistent relationship with M&A activity and I don’t believe that should change. Whether a firm decides to participate in this activity is very dependent on the unique needs of each and every firm, so I’m not here to say what we’ve done at Acuity is right for anyone else.
What I will say is that while we were going through this process, we thought we were gaining more insight about the profession and these potential target companies, but in reality we were actually learning a great deal about ourselves. Where did we have huge gaps? What were our hidden strengths? What makes us different from other firms?
This M&A process pressure tests some of your internal beliefs about who you think your firm is, and forces you to face the reality of how your firm actually operates. That simple reality check is valuable, no matter how you measure the ultimate success of the transaction.