Moving upstream

There has been a growing number of mergers within the accounting
industry worldwide in recent years. Carolyn Canham
speaks to three US industry experts about some of the drivers
behind the trend and where it is likely to lead in the years

The number of mergers and acquisitions in the US accountancy
market is “off the chart”, according to Allan Koltin, the chief
executive of PDI, a consulting firm with a client base that
includes the largest 500 accounting firms in the US. “I would say I
average almost one call per day now from a firm that is looking to
merge upstream. For every potential seller, there’s probably as
many has a half-dozen acquirers, typically top 100 firms [excluding
the Big Four, BDO Seidman and Grant Thornton US], that will have an
interest in that firm,” Koltin says.

Citing an example, Koltin says he recently had a $5 million firm
based in the Midwest approach him to enquire about merging
up-market. “I proceeded to send five e-mails to larger firms… I kid
you not, within one hour of sending the e-mail, all five responded
and were very interested,” he says.


Marc Rosenberg is a management consultant who works
exclusively with certified public accountant (CPA) firms in the US
and is president of his own firm, Rosenberg Associates. He has
noticed the merger trend pick up during the past five to six years.
“It is going on very hot and heavy now, it has been for a few years
and it is going to be even more frenzy-like in the coming years,”
he says.

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Rosenberg says demographics – most specifically, ageing partners
and a lack of students – are fuelling the trend. “There is a
tremendous number of what we call baby boomer partners at CPA
firms. They’re five to ten years away from retirement and they take
a look at their staff and their younger partners and they shake
their heads and they say ‘these guys cannot take over the firm’,”
he explains.

Rosenberg says partners in CPA firms, especially as they reach
their 50s, need to make a choice between developing the younger
people in the firm in the hope that they will buy them out, or
deciding to wait until they are ready to retire before approaching
a larger firm that they hope will merge them in. More partners seem
to be opting for the merger option.

“It’s not easy to be a partner of a CPA firm, and because there’s
been such a talent drain in the US, most small- and medium-sized
firms have just not been able to recruit and develop and retain
staff and bring them along to the point that they could be a
partner,” Rosenberg says. “CPA firms have never been strong at this
by the way… I’ve never seen any statistics on this, but if I had a
guess, I’d say that probably at least 75 percent of all CPA firms
never make it past the first generation. They’ve always been bad at
that, they’re very busy people and they have some very highly
specialised skills.”

Koltin suggests there are also significant financial gains for
partners who merge up-market. He says the majority of the firms he
has worked with which have merged up-market have seen their
individual partner compensation increase dramatically. “I would
guess that for every three firms, all three of them for the most
part have seen their compensation increase, probably one of those
three has seen their compensation increase by 50 percent, probably
[another] one of those three has seen their compensation increase
by 100 percent,” he says.

Jim Metzler is the American Institute of Certified Public
Accountants’ (AICPA) vice-president for small firm interests. He
provides some statistics on what he calls the greying of the
profession. “In 1993, 53 percent of [AICPA] members were aged over
40. In 2004, 68 percent were over 40, so I would guess that in 2007
it is probably pushing 70 percent over 40. So we have just a tonne
of firms out there where those owners, those partners who all came
into the business at the same time, are looking around the
partnership table and looking at what they’re going to do for
retirement and saying ‘holy smokes’, all of us are going to have to
leave at the same time, or none of us can leave, and so we have a
huge initiative on succession,” he says.

Changing work ethic

One reason that has been regularly cited for the lack of suitable
successors for retiring partners is a change in work ethic. Many
young accountants are not willing to work the long hours their
predecessors clocked up, preferring instead to maintain a family
and leisure-friendly work/life balance.

Metzler explains: “Those baby boomer partners… say the next
generation is not ready – they don’t quite have the work ethic,
they don’t have the leadership skills, they don’t have the
entrepreneurial skills. [On the other hand] if you go to the next
generation in those same firms, which those ageing partners are
talking about, the younger practice leaders will say, ‘are you
kidding me? I don’t want to be like those guys, I don’t want to
work night and day, I don’t want to fund a buyout and live in
poverty until I buy out the old partners’. They don’t follow that
carrot that many of us followed many years ago, rightfully so. You
know families are different, the drivers are different.”

Rosenberg says another main reason for the lack of successors is
that between 1995 and 2000 there was a one-third drop in the number
of students achieving a degree in accounting. “That’s anywhere from
12 years ago now. The seven-year people would probably be the solid
manager core now, the step just below partner, but the 12-year
people, they’d be in their mid-30s right now and would be prime
candidates for partner,” Rosenberg says.

Koltin suggests that even though the graduation rate for
accountancy students is on the rise, it is not necessarily a
solution. “The problem isn’t just the graduation rate, it’s making
sure that those kids, if you will, stay in public accounting and
right now the pendulum is swinging in a way that a lot of private
companies are offering these kids chief financial officer
positions. As long as they can make comparable money in private
industry to what they can get in public accounting, and not have to
work the crazy hours, they’re going to continue to leave public
accounting and go to private industry,” he says.

Sarbanes-Oxley impact

Rosenberg points to the Sarbanes-Oxley Act as another reason for
the talent drain. “Sarbanes-Oxley work is absolutely the pits,”
Rosenberg says. “There’s long hours year-round, not just in the tax
season, there’s some travel involved in it and the work is as
boring as it can get. These young kids who are joining these large
firms are getting burnt out, they’re quitting. What normally
happens when many young people join a large firm, they work there
for a few years, get some good education, good experience, but
then… they’ll go to a smaller local firm, that’s the normal
migration. And that’s not happening, they’re just leaving the
profession altogether, so we’ve just had a tremendous drain of

The talent drain not only creates an incentive for partners of
smaller firms to merge upstream to secure their retirement funds;
it also provides incentive for larger firms to look for smaller
merger partners to boost their ranks.

Koltin relates a recent encounter in which a managing partner of a
top 50 accounting firm told him, somewhat sarcastically, that the
perfect merger for his firm would be a firm with 50 staff and no
clients. “The whole paradigm shift that’s going on in the last
decade is it used to be you merge or acquire a practice, grab their
client base, and then maybe get rid of the people. Today it’s all
about getting the talent, and the clients are a distant second,”
Koltin says.

Buying people as well as clients

Rosenberg says the bigger firms have a “tremendous appetite” to
merge the smaller firms in. “By merging a firm in, that’s a way of
buying people as well as buying the client base,” he says.

Koltin suggests the demand from the larger firms for smaller firms
to merge with also stems from a vacating of the “whole middle
market opportunity base” that followed the demise of Arthur

He illustrates the upward movement in the accounting profession
with figures: “In 2007, to make the top 100 list of accounting
firms your gross fees had to be $26.5 million. In 1997 the 100th
largest firm had gross fees of $6.5 million. So it has quadrupled
and what’s happening is all of these top 100 firms have figured out
that if they truly can become bigger and cover a broader geographic
landscape, they too can go after larger clients, more profitable

Koltin estimates that at least 90 of the top 100 accounting firms
have defined merger strategies. This excludes the Big Four, BDO
Seidman and Grant Thornton US. “Those six firms today are just so
inundated with public company and Sarbanes-related work that their
merger strategy is either non-existent or has been put on hold,” he

Metzler suggests that by acquiring more people, large firms acquire
more skills they didn’t have before, which gives them the capacity
to serve public companies well. “Years ago there was the Big Eight,
and we’re seeing large firms position themselves to kind of become
a Big Eight again,” he says.

Metzler says firms are joining international associations for the
same reason. “I guess that’s not quite a consolidation, but joint
venturing, partnering, alliances, you know that is kind of like a
consolidation in a way. A lot of that is going on today and if
you’re a forecaster of the future you’ll see a new worldwide firm
[somewhere in the top ten largest firms] get announced, not too far
off in the future. You kind of see the market forces shaping up,”
he says.

Metzler observes that the very smallest firms are involved in what
he calls “pseudo-consolidation”. “The smallest firms are aligning
with other small firms like crazy around the country,” he says.
“What keeps them up at night is they don’t want to have a client
out-grow them.”
He explains that years ago small firms tried to be “jacks of all
trades” in order to keep clients. Now they are more likely to team
up with a “firm across town” to jointly serve a client. Those types
of alliances are up in gigantic amounts, Metzler says, adding that
an AICPA survey of firms found these alliances grew 68 percent
between 2004 and 2006.

Rosenberg believes the merger trend is going to “heat up even
more”. He predicts that it will heat up so much that it will shift
from being a sellers’ market to a buyers’ market. “At present it’s
still a sellers’ market from the standpoint that if you’re a firm
that wants to merge up, to a larger firm, and there’s no skeletons
in your closet, you’re in a fairly major area and are reasonably
profitable. You can pick up the phone and call five bigger firms
and all five of them will be foaming at the mouth, wanting to have
a meeting with you,” he says.

“That’s going to change, because there’s going to be so many firms
looking to merge that it’s going to become a buyers’ market and
these bigger firms are going to say ‘oh we’re not going to get
married to every single firm that calls us, we’re going to be a
little bit more choosy now because there’s so many to choose

Rosenberg suggests this swing will occur in about four to five
years, though admits that it’s very hard to predict the behaviour
of people. “These entrepreneurial partners in five, six, eight, ten
partner firms, they’re used to being their own boss and having a
nice tight cadre of colleagues… I sarcastically joke that one of
the main reasons why partners like being in smaller firms is that
they don’t have to be accountable… when you get to be a bigger
firm, by golly, there is accountability. So on the one hand, they
sort of, in the back of their mind, know that they can always merge
into a bigger firm, but to actually pull the trigger and take that
action, that remains to be seen whether or not they are going to do

Metzler predicts the merger trend will continue for about ten to 15
years. He agrees it is going to swing towards being a buyers’
market. “In years to come, there is definitely going to be more
sellers than buyers, so a lot of the dreams partners had about the
value of their firms are going to diminish a bit because the
acquirers or mergers of firms will look to the best and the
brightest and merge only that way,” Metzler says. “So, bottom line,
you’d better be building a good firm, if you have an exit strategy
that can run without any individual stars, that has processes and
client service in place that does not reside in one person. I mean,
getting ready for succession is at least a five-year

Addressing the challenges

Rosenberg believes there are a number of things accounting firms do
to address the demographic challenges. One idea is to look at the
pay structure for partners.

Rather than the traditional formula of allocating the income based
on how many clients a partner has, or how many billable hours they
have worked, firms should change the pay and incentive programmes
for partners so that they are motivated to put their focus on
developing people, Rosenberg says.