U.S. accounting firms are storing up equity as they prepare for a number of financial challenges over the next few years.
That’s one of the findings of the 2014 Management of an Accounting Practice (MAP) Survey from the AICPA Private Companies Practice Section (PCPS) and the Texas Society of CPAs (TSCPA).
Nearly 1,750 firms participated in the 2014 MAP Survey, which is the largest benchmarking study of U.S. accounting firms. This article touches on the overarching theme from the 2014 MAP Survey, while the January JofA will provide a deeper look at the results and an analysis of what they mean for the profession.
The 2014 survey found that accounting firms of all sizes posted small gains in net client fees from 2012 to 2013. The increases ranged from 4% to 8% for the seven revenue categories of firms tracked by the survey. Firm sizes ranged from single-owner operations with less than $200,000 in annual revenue to multiowner firms with yearly revenue of $10 million or more.
The modest increases in net client fees mirror the trend from the 2012 MAP Survey, which also reported single-digit percentage, year-over-year gains. The 2012 survey, which reflected 2011 financial results, indicated that firms were recovering from the Great Recession. The 2014 survey indicates that while recovery continues, firms are saving more cash to invest in the future.
Evidence of this is apparent when comparing partner compensation to net revenue per owner (NRPO), a profit measure for firms. In the 2012 survey, partner compensation was larger than NRPO in all but one revenue category—an indication perhaps that partners were catching up on pay after compensation dropped due to the Great Recession. In the 2014 survey, NRPO was larger than partner compensation in all but one revenue category—an indication that owners are keeping cash in the firm instead of paying it out in partner compensation. Based on discussions with the managing partners of PCPS member firms, the following explanations were offered for this trend:
- Firms, especially midsize to large operations with 10 to 74 CPAs, are storing up earnings to ensure they have enough liquidity to pay for upcoming partner retirements. Firm leaders realize that insufficient cash flow and liquidity are forcing many firms to turn to the mergers-and-acquisitions market to finance buyouts of retiring partners (see “Mergers Emerge as Dominant Trend,” July 2013, page 52). To keep internal succession as an option, firms are building up the necessary capital resources to fulfill buyout obligations defined in owners’ agreements (see “How to Price an Owner’s Interest in a CPA Firm,” page 24). On the flip side, it may be that in some firms, a disproportionately large share of the equity is held by senior partners, who are incentivized to keep firm profits as equity. This structure, however, does not support long-term firm sustainability.
- In addition to stockpiling cash to pay for partner retirements, large firms also are building liquidity to fund mergers and acquisitions.
- Smaller firms, those with one to nine CPAs, may be saving cash for multiple reasons. Small firms may be looking to hire help to deal with heavy workloads, though the trend for now is to slog forward with current resources. Firms on the upper end of the small spectrum may be eyeing smaller firms as acquisition possibilities. In those cases, the potential acquiring firm would look to stockpile equity to ensure that there is enough cash on hand to meet additional balance sheet obligations that come with the acquired firm.
Jeff Drew is a JofA senior editor. To comment on this article or to suggest an idea for another article, contact him at email@example.com or 919-402-4056.