Accounting practices don’t stay static. They have a lifecycle that starts on the first day of business and ends when the owner decides to sell, hands off to a successor, or simply closes up shop. Smart owners can control how their practices grow and how they eventually make a graceful exit.
Here are some insights on growth strategies and what to consider when planning CPA firm lifecycle transitions.
The state of the industry
Doug Lewis, managing director of the accounting advisory firm The Visionary Group, describes the profession today as “shockingly interesting.” In the last five to six years there has been growth in private equity investment and mergers and acquisitions activity, advancements in technology with artificial intelligence, and a changing of the guard as baby boomer generation owners exit their practices.
Private equity investors continue investment interest. For example, The Visionary Group is seeing an uptick in smaller transaction sizes, even though mid- to large-sized deals get most of the press. There’s a renewed emphasis on these smaller downstream “tuck-in” types of transactions, and it’s not unusual to see a $1 million to $5 million firm contacted directly by a PE buyer.
With all this activity, a lot of people are trying to get a piece of the M&A advising market right now. But, what are the important things to look for in an advisor? The Visionary Group’s CEO Bob Lewis says that M&A advisors need to do more than just introduce firms. They need to help figure out the structure of the deal, what the firms are worth, and how to best market them.
And of course there’s a massive amount of activity around AI. As the profession tries to figure out the best way to implement AI in practice, professionals are inundated with AI conversation events, strategy efforts, and proposals going out on how to best deploy this new technology.
Strategies for growth
Here are several insightful strategies CPA practice owners can take to grow their businesses:
- Manage client capacity: Many firms say they can’t take on new clients because so much of their time is taken up servicing existing ones. But many of those clients are “low fee, high volume” accounts. They take up an inordinate amount of time for staff, or even partners, but don’t bring in commensurate revenue.
- Upscaling pricing: Many practices are hesitant to charge more for their services, especially with existing clients. As a result, the practice’s revenue is held down because large amounts of work are billed at rates set in the past. The fear of charging more may stem from poor selling skills or a lack of confidence in one’s work.
- Reducing billable hours by equity partners: The most successful firms The Visionary Group sees “have low billable hours at the partner level because they push that work down.” It’s a red flag when they see partners logging high amounts of billable hours when they could be bringing in new work.
Preparing for transitions
Certain signs indicate a firm is ready for a transition. It could be that growth has flattened and current ownership just doesn’t have the energy or vision to take the business to the next level. It could be that leadership is aging out, and they want to prepare for retirement. The question then becomes, “Do we stay independent through internal succession, or do we accept a private equity offer?” If owners wait too long, internal succession may not be an option due to the time required to prepare G2.
Doug said that “every single firm out there starts with the intention of ‘I want to remain independent’” but not all recognize what staying independent requires and commitment needed to develop G2. He recommends that partner groups have direct, honest conversations, trying to stay focused on hard data and not emotions. Internal succession can be a good option, but everyone needs to be open about the differences in selling prices for a PE acquisition versus an internal succession. They need to be realistic about the abilities and interests of potential successor(s). Do they have the sales skills to keep the firm profitable and successful? Do they really understand the costs and responsibilities of ownership?
It’s crucial that owners begin the transition process well before their planned departure. In an internal succession scenario, starting five to seven years before a target exit date provides time for training successors in the ownership skills they’ll need. With a PE transaction, buyers often expect a three- to five-year commitment post-close, so owners need to factor that into their timeline. If owners don’t start planning for succession early enough, they risk running out of runway and having to make a less-than-ideal transaction under a time crunch.
Summing up
Whether it’s growth, selling, or succession, CPA firms today need to keep their practices moving. There are plenty of good options, and working with a trusted advisor can help a firm make the best choices.
ABOUT THE AUTHOR:
Rick Dennen is founder and CEO of Indianapolis-based Oak Street Funding, a First Financial Bank company, with customized loan products and services for specialty lines of business including certified public accountants, registered investment advisors and insurance agents nationwide. Dennen is a certified CPA with a decade of experience working in public accounting.
Photo credit: Richard Bell/Unsplash
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