Ira Rosenbloom, chief executive officer of Optimum Strategies LLC in Spring House, Pa., joins us to examine the signs that it might be time for a CPA firm to think about a strategic merger. Among the signs he points to are weak new business, clients getting restless, and referrals beginning to run low.

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By: Bill Hayes

Podcast Transcript

Ira Rosenbloom, chief executive officer for Optimum Strategies LLC in Spring House and a member of the Pennsylvania CPA Journal Editorial Board has offered us numerous episodes and series helping CPA firms determine their top priorities when it comes to personnel, operational efficiency, data metrics, and so much more. Today, he's here to explore the top signs that your CPA firm may be ready to enter into merger discussions.

Taking a look at some of the signs that a merger should be a priority for your firm, let's start here: So new business is weak, right? How weak are we talking? This will become a little bit of a theme in the questions we ask: how can you tell if this is just a flagging period or something more sustained that might move you to think about that merger?

[Rosenbloom] All businesses clearly are cyclical, and there are points in time that the cycle is related to the economy at large. And then there are points in time where the cycle is about something that is not tied to the economy, but it's really tied to where your placement in the market is vis-a-vis opportunities, competition, and reputation. Practitioners and folks who own CPA firms who have been at it for a good number of years, and I'm going to say let's talk about owners that have been owners for 10 or more years, know the difference between an economic bad time and flags of concern within their own practice. I think that that is something that comes with your own tolerance and your own history of experience. There are those people who are extraordinary rainmakers and if they don't have a good quarter, they become depressed.

This is about more than just a quarter. This is, generally speaking, you're seeing within a six-month period, there is a significant sign that it's a very, very minuscule amount of new business. Again, in the summer months, new business is not necessarily going to be significant, but in the times where you are expecting new business and you see that it's not the economy, and it's not because there aren't opportunities because the government is in the business these days of changing tax laws. Therefore, there are possibilities of picking up clients, but yet you're not getting them. That speaks volumes. I would say from the standpoint of locking into a timeframe with which to measure it, you'd certainly want to look at six months. There are some firms that might look at it over the course of a year, but this is not something you look at over many years.

You see the sign, and then you have to say to yourself, what do we do about this? What is the cause for this drop in new business, drop in inquiries about new business? We may have had leads, but we can't close them and we may have had no leads at all. We have nothing to pursue. That is certainly a tell-tale sign, as you do your research, that maybe you just don't have the firepower that the marketplace thinks their next accountant should have. That's what people think of you. That's something you have to dig deeper on, but that's a very important flag to start saying, we're doing our homework here and maybe part of it is to research whether or not we should explore a transaction.

When new business is weak, that's going to bring on financial worries, right, and clearly that's going to be a reason why a merger would be prudent, or at least something that you certainly have to explore. Again, how do you tell that the financial worry isn't something that's going to pass, but something that should stir you to that action of looking into the merger?

[Rosenbloom] I think the financial worry is something that you have to, again, put the particular line items under the microscope. Number one, if you are sending out bills and you're getting pushback from clients about not seeing value in what you've done and therefore pushing back on accepting that invoice or paying the invoice in total, that is a very relevant financial worry. It may not have anything to do with new business by the way. New business might be coming in, but as good as new business is coming in, the existing clients are giving you pushback. That's an important sign. Why are they pushing back?

The other thing that would be important to look at is how long is it taking for you to turn your accounts receivable? Again, if it's a bad economic time period, then we would understand that the clients themselves are under duress and under stress and you want to work with them, but if it's not an economic difficult time period, and it's taking longer for them to pay, it's a sign most likely of unhappiness that there's a mismatch in the value equation. Obviously, it's going to affect the pocket book of the CPA firm because the cash flow is now declining. It may be the sign of something very deep, which is malcontent clients. It could be all about you don't have the right team to respond timely. You might have brilliant accountants on board, but you don't have enough of them.

The theme that is very much at play today in accounting firms is there's enough new business out there. We just don't have the people to get the business done. That's a predicament that we're beginning to get uncomfortable with. It's no longer bring in the business and we'll figure out how to get it done. It's “We're at our capacity, and we don't want to push people because if we push they'll leave and we'll make our problem even greater.” So, the financial woes that you're seeing in the statistical areas are an important sign. You can cut expenses to keep your P&L in a comfortable place, but you don't grow a business by cutting expenses. You control a business, but you grow your business by growing your top line in a profitable fashion. If you're not able to deliver the goods in a way that the clients expect and appreciate, you have to think about whether or not somebody else has a better mousetrap that you can be aligned with to improve your situation.

Clients getting restless: when do you know that that's not something that can be conquered, can be smoothed over, and instead it's something where you have to be making a more serious move?

[Rosenbloom] I think that there are some clients that they're complaining does a great justice to the CPA firm. The right CPA firm is going to listen closely because they're in a service business and say to themselves, well, that client called me and he complains all the time, even with things that are so ridiculous. But in the same week, I've gotten similar complaints from clients who never complain. That is really how you have to begin to connect the dots. No firm is blessed with the happiest of clients, but firms are blessed with very loyal clients. You could have loyal clients that just enjoy complaining, but when clients who don't complain begin to complain, then you know that there's something that needs to be explored. The issues that are attached to the complaints are very important.

You also will have, and I go back to the loyalty factor, clients who are very loyal and very satisfied who will come to you and say, “We think we're outgrowing your capacity, and we think that we have to begin to either put work in another accounting firm's office or move all of our work, because it takes longer for you to get us the work.” People are questioning whether the approach is in line with some of the other ways of handling things. That kind of commentary from a client is really helpful to the CPA firm. Number one, every CPA firm wants to be a quality firm. If there's something that's not in the quality zone, you want to take care of it, but number two, you want to be able to be that trusted resource to your clients. If these people are coming to you and saying, “We can't depend on you in a timely fashion, and we are questioning whether or not you have enough firepower,” those are good complaints. Those are the kind of complaints that tell you you need to go elsewhere.

There are some clients that won't pussyfoot around. They'll come out and say to you, our lender, or our investors, have told us that we need to turn to a larger CPA firm. When you hear that, and hear that more than once, that is loud and clear that you need to find someone to merge into because you don't want to jeopardize losing those wonderful clients. The client really enjoys the relationship. It's not their choice to make the exit, but somebody else is dictating it. So it's the easy fix there, although it's not one, two, three, but the easy fix in terms of continuity would be to merge to a larger firm to satisfy this particular issue.

You talk about clients being loyal and satisfied. Another group that you need to be loyal and satisfied would be your staff. Staffing woes, staffing complaints: what's the tipping point in that area?

[Rosenbloom] Number one, the industry is plagued by staffing problems, either not having enough people interested in working in a CPA firm or not having enough people interested in having a long-term career in a public accounting firm. The turnover factor in many, many good firms where they do all the right things is a function in large part of lifestyle. Of course, now during our COVID conditions, people have different tensions and they need to be able to, in many cases, work less. As a result, there's just not enough personnel available to take care of the client base.

Being progressive with your employees is certainly a big plus, but work that is being done has got to be looked at very, very closely to keep people motivated. What you can say is, when you look at these trends, that you have to say to yourself, number one, historically, we have a turnover rate of whatever it may be and it's accelerating, but how much longer is it now taking for us to replace people? Where in the past, we might have had a 10% turnover, but we could replace somebody within two months taking the seasonality out of it that you're not going to find somebody, especially a good person in the heart of tax season, but taking the seasonality out, it would take you two months. You could have an opening now, sit vacant for six months. Recruiters could tell you, we'd love to help you, but we can't find people who would like to work in your kind of firm. It doesn't mean it's a quality issue. It's a size of firm issue.

Knowing that you can't fill the vacancy for a period of time, knowing that there's an increasing request and interest in having more of a flexible routine and a part-time routine and projecting out your needs, you can tell in advance that you're going to have a shortfall and have to make a decision as to whether you want to right-size your firm. It doesn't mean you need to merge per se. You may want to right-size it. You may want to have less clients and therefore take your treasured community of employees and use them to the point of taking care of a smaller client base.

Or you may say, no, I don't want to right-size. I want to make my right size larger. I now have to find a firm that can do recruiting better or train people better because they have the budgetary capacity to do that. Larger firms typically do, but every firm needs to recognize that whatever the size firm, all firms have challenges with staff. It's just a question of improving your environment, if that's one of the triggers to make you consider a merger, but no one is going to bring you the perfect answer. But the improvement might be really, really significant. It could contour significantly to your own quality of life, let alone your issues with clients being much more on board with you.

Related to issues of staffing, another sign is when your team starts to get that feeling of being overwhelmed. And when we talk about your team here, we're actually including “yourself.” Again, it's been a little bit of a theme, but how do you know when this is signaling you to merge as opposed to a spot where you're just saying, “Hey, guys, we're in a little bit of a busy period here?” What's the difference?

[Rosenbloom] Again, we have gone through two very, very unique and strange busy periods for the profession due to the COVID environment. Two years back, tax season just never ended. It went through July and then there was work right after that. You've had people on a very, very prolonged, intense work situation, because they were helping their clients with PPP and EIDL, etc. Now, in this past year, there still was a little bit of an extension period. Normally, the rule that I have is don't use your busy season as the barometer. You know it's the worst time. You should just get through it. It's if you are unhappy out of the busy season and can't see enough situations where you're having fun and it's out of busy season, that's telling you that it's time to find a solution that would bring you some more resources, which would make for a happier daily routine. That's what it's all about. It's about not the busiest of times. It's about when they're traditionally not the busiest of times.

I also think that if you are, even in the busiest of times, finding that you can't be the resource to your client because either there's not enough time in the day or you just don't know the answers, you're going to know that for yourself, you're going to know your own threshold of pain and disappointment. Of course, during the busy season, you're not going to be able to complete a merger during the busy season, but you will be able to register that. I also say to people, and this goes back before COVID, you'd find people on April 16th calling and saying, “I have to merge. I can't take this anymore.” “My response would be, you know what, call me in May. Let me know if you feel the same way, because they just completed a horror show. Now it's time to take a breath, take a vacation. Let's see if this is the real story.

That's why I say, you have to look at it at the non-difficult times. In these last two years, difficult has been a very, very prolonged portion of the calendar. It's taught a lot of people that they should value more of an opportunity to have downtime. People are now, they eat, live, and breathe out of their own office because they're in a home office and it's made that tension level even greater so that they are looking for different solutions so that when they are home, they're not working all the time, that they can enjoy themselves. It's been a very interesting environment, provoked in large part by the COVID experience. The impact has been to all kinds of health issues, especially mental health and in and around how comfortable people are with their work life.

Referrals are of great importance to many CPA firms, so we come to the issue that you call the “referral exodus”: How does this point to it maybe being time to make an exit?

[Rosenbloom] I think this goes back to the conversation in and around new business. Number one, the better CPA firms monitor where their business comes from. Some of them get a majority of their business from existing clients and some of them get a majority of their business from centers of influence – from attorneys, investment people and bankers. There is a limit on how much an existing client can refer your way. They're not in that business. They can certainly be a great advocate and the credibility of their reference is strong, but the attorneys, the bankers, etc., they touch many more people.

If you're looking at your opportunities and seeing that, you know what, you're just not getting referrals from these particular providers anymore, or the number of opportunities are dropping and/or the nature of those opportunities where they used to be sending you $10,000 and $20,000 opportunities and now you're getting the $2,500 opportunities, you're seeing that somebody is saying something to you about their confidence or their observations. If you're seeing statistically the opportunities dropping, that is the kind of exodus that we're talking about. And, are you also seeing that you're sending more out to a particular person than they're sending to you?

That I would measure more so in dollar situation than necessarily in numbers, because you may send a great client to somebody that they may bill $50,000 a year to, and you only sent them one referral versus sending them $3,000 and $5,000 accounts. They were happy to get one referral because it was $50,000 and they didn't turn away the $15,000, but don't do it necessarily by the number, but by the dollar significance. If you're seeing, and that's why I come back to what's coming into you, are you seeing smaller profile opportunities versus what you had in the past? That's telling you that you've got to tinker with your engine. You have to see whether or not this engine has to be hitched to a different type of vehicle.

Let's say a firm's sees a number of these signs, and they decide to begin looking for that merger, what's the first step they should take to make sure the merger inquiries and the discussions are conducted diligently, thoroughly, and appropriately? Where should they get started?

[Rosenbloom] Well, the first thing that I would say is you need to have consensus amongst the partner group. If it's a sole proprietor who's seeing this, then he or she looks in the mirror and makes a decision. But generally speaking, in terms of practices that have partners, depending on the number of partners, you have to be sure you have consensus. Is everybody seeing the same signs and is everybody troubled by the same signs? Are they troubled to the same extent? You have to be sure you have consensus. Once you have consensus that it's time to explore versus “Hey, we'll talk to anybody, we'll hear what they have to say,” that's an interesting conversation, because, yes, you can hear what they have to say, but in large part, you're experiencing the need to have the conversation because you don't have enough time.

So, why are you taking time where you're so busy just to have this potentially valuable conversation? That's not a good use of your time. You need to be sure you have consensus that we should be exploring. Then you need to build the consensus around what is the right type of bride for us? What should we be looking for? If we're going to go down this path, we would expect that any larger firm can do a better job with recruiting and training than we would. But there's a lot of larger firms, so how are we going to further filter that? Are we looking for them to have niche expertise? Are we looking for them to have a comparable billing rate structure? Are we looking for them to have a certain demographic? Are we looking for them to have a particular approach to partner comp?

You've got to dissect what it is you'd be looking for and you've got to prioritize the things that you would be looking for. You really need to work with a facilitator who is coming in to bring to the attention of your partners and yourself the things that you should be considering and the viability of finding the things you're looking for because depending upon your own profile of a firm, you may have more options or less options. The fact that you would want to have a firm that looks like this, but you look like that, it may not be a good connect for you to get what you're looking for, but some other firm may have two items less and you may say, “Well, that will work too.” You've got to work with somebody who knows what the market looks like, that knows what are the elements that people should be focused on, and can guide them through the prioritization with empathy, for what's on people's worry scale.

If people don't worry about this type of transaction, they're not normal. There's worries on both sides of the table, whether you're the acquirer or the firm that's looking to be acquired. This is not something that somebody says, this is a simple slam dunk. It's something that people take seriously and they see the potential for, but they know there's downsides. I mean, clearly accountants historically are very good about finding the negatives. You're not the only one at the table who's a well-versed negative specialist. There's going to be the person on the other side too. That's also important that when you have the early meetings, it's really powerful for both sides to share what their anxieties would be. What would worry you about this kind of transaction? If somebody says, we have no worries at all or no concerns at all, I'm not sure I would take the next meeting, but it doesn't mean that the concerns are not capable of being resolved.

But nothing is perfect, and I think that, then again, it's all part of being coached through the process and getting your ideas in sync and putting your time to good use because, as I say, so much of the provoking here is about not having enough time and not using our time properly. If you're going down the path of M&A, you got to be sure you're putting your time to a good use and you need someone to help you to do that.