A variety of issues – including the increasing ability to work remotely and concerns over succession planning – are causing a rise in M&A activity among accounting firms, according to published reports, including an August article in the Journal of Accountancy. Does that mean it’s time to add smaller CPA firms to the Endangered Species list?
“Not at all,” say CPAs like Michael H. Karu , a member of Levine, Jacobs & Co. LLC who is in charge of the Business Valuation and Litigation Support Group at the approximately 30-person firm. “Even the one-and-two person firms will always have a niche. Without the overhead that larger firms have, their fee structures mean lower hourly billing rates. Small businesses do not always have the same need for [big-firm] services nor may they have wherewithal to hire mid-sized or larger firms.”
Levine, Jacobs has engaged in some dealmaking, and Karu said it “is a way to grow a practice,” but cautioned that “one needs to be exceedingly careful as to the merger partner.”
As he sees it, organic growth has some advantages, including offering the ability for “both the client and the CPA to grow together.” And natural growth gives a client the ability to stay with an individual CPA “based on criteria determined by the client.”
But organic growth usually means slower expansion, and “We are in an ‘I want it now’ society,” he cautioned. In addition, “If a partner nearing retirement brings a new client into the firm and leaves shortly thereafter, the client may decide to go with the [departing] CPA.”
Still, besides offering rapid growth, a merger or acquisition may give a firm the ability to “acquire talent along with the clients,” he noted.
Large or small, NJCPA has the back of CPAs
“Firms of every size need to build relationships with clients and advise them,” said NJCPA Chief Executive Officer and Executive Director Ralph Albert Thomas. “And the NJCPA helps them — particularly smaller firms that don’t have the resources of large ones — with advice and other assistance on issues like the PPP [Payroll Protection Program]. Particularly during the pandemic, we’ve been serving as a resource and liaison, helping to deliver clarity around technical issues.”
Even though many aging baby-boomer CPAs continue to practice, “some into their 70s and beyond,” enough are retiring and looking to monetize their partnership or other interest by merging or selling their practice, he added. “But smaller firms are still important and can attract clients. They can generally provide good guidance at a reasonable price, and clients enjoy having easy access to top partners. And if the firm needs more resources, some smaller ones join alliances that let them tap into additional talent. So yes, there’s definitely still a place for smaller firms.”
But M&A isn’t necessarily all roses. “Partners may have differing management styles and expectations, while some clients may not be a great fit for the merged practice,” warned Karu. “Also, there may be conflicts between existing and newly acquired clients, while there may also be differing internal compensation methods between the merged forms,” which could spark conflicts.
However, like the proverbial porridge that’s just right, Karu believes that Levine Jacobs – which he said is “on the small side of medium-sized firms” – is in a good spot. “Our corporate client base is mostly in New Jersey and New York, and as such, it is easier to pitch a local business.”
At the same time, Zoom video calls and other technology offer an extended reach for the firm. “Our individual clients can be located almost anywhere,” Karu explained. “We handle tax work in 30 or more states, including Florida, North Carolina, Colorado, California, Maine, Massachusetts and Virginia. Most were New Jersey residents who moved [but retained the firm’s services]; some came to us by referral.”
Phillip Goldstein — a CPA and CEO of Goldstein Lieberman & Co. LLC — also said the field is wide enough for a variety of players, but noted that “as the ‘pie’ of locally owned businesses shrinks, some firms feel they have to get somewhat larger.”
His firm, ranked by NJBIZ in 2021 as the ninth-largest in New Jersey with about 100 people, has completed some deals—the most recent one was completed earlier this year with Valhalla, N.Y.-based ABD Associates LLP.
“Organic growth is good, but to get double-digit growth you generally need M&A,” said Goldstein. “We have clients in every state and some overseas. Many of our national ones started here and them moved and took us with them.”
Organic growth is good, but to get double-digit growth you generally need M&A. We have clients in every state and some overseas. Many of our national ones started here and them moved and took us with them.
– Phillip Goldstein, CEO, Goldstein Lieberman & Co. LLC
The firm’s offices are in New Jersey and New York, but Goldstein said that “we’re registered to do business in many states, and we can access clients’ books and records electronically. Further, we can use Zoom and FaceTime for conversations. Our size enables us to be trusted advisers to clients. We know them, their family, their finances and as a result we’re friends as well as advisers, whether we communicate face-to-face or electronically.”