Merger-and-acquisition (M&A) activity for accounting firms is surging in 2021, Joel Sinkin, the New York-based president of Transition Advisors LLC, said in a session at AICPA & CIMA ENGAGE 2021. In 2020, M&A activity slumped because of the COVID-19 pandemic, he said, observing that the market for CPA firms was the slowest he had seen “since the early 1990s.” Firms were reluctant to make deals remotely, and negotiations that had started before the pandemic “initially came to a screeching halt,” he said.
That led to pent-up demand, leading many firms to pursue M&A once the pandemic slowed in 2021, he said.
Succession issues are also driving the increase in M&A activity, Sinkin said. According to the 2020 AICPA Succession Survey, he noted, the number of firms experiencing succession challenges has more than doubled since 2016.
Smaller firms are particularly struggling with succession because they “lack bench strength” due to their size, he said. He gets several calls a week from owners of small firms looking to merge with younger CPAs they can train to be their successors. But that’s “like looking for a needle in a haystack now,” he said.
Many firms are looking to acquire niche practices right now, he said. The most popular niches include client advisory services (CAS); wealth management; IT services, including cybersecurity, data analytics, and cloud consulting; forensic services; health care; HR consulting; and services to other specialized industries.
Making deals with niche firms can be challenging, Sinkin cautioned, because they have competitors in their own niches looking to acquire them, typically for higher valuations than accounting firms are accustomed to. For instance, CAS firms are mostly selling to other CAS firms right now, he said.
Sinkin said he’s often asked whether it’s a buyer’s or a seller’s market right now. That depends on your circumstances, he said. The supply of traditional firms with partners nearing retirement is high, as is the supply of firms seeking to alleviate short-term succession issues, making it more of a buyer’s market for such firms. Demand for CAS and niche practices is high, as is the demand for small practices in densely populated parts of the country that other firms can absorb with low overhead. The demand for practices in small markets is low, and so is the demand for practices that do a lot of compliance work and have partners seeking succession, he said.
Sinkin also gave advice for firms looking to improve their prospects of selling:
- Don’t ask that your buyers take over your lease. In general, the profession is moving toward using less office space, and buyers might not want to take on unexpired leases. “A lease is becoming an obstacle, and the longer the unexpired portion the fewer buyers will be interested,” he said in an email.
- Limit your list of “must-haves” or constraints on a buyer. Don’t request that they keep unprofitable clients with low-fee 1040s, for instance, or that they retain your name.
- Update your technology. Buyers are wary of firms that aren’t paperless, aren’t on the cloud, or don’t have remote-working technology that runs smoothly. They often have these technologies already in place and don’t want to go through the hassle of setting it up again.
— Courtney Vien (Courtney.Vien@aicpa-cima.com) is a JofA senior editor.