Apr 16, 2021

Business Succession and M&A in a COVID World

Bill CarlinoBy Bill Carlino

The COVID-19 pandemic has and continues to impact every aspect of our daily lives, notably on the economy in general and on small businesses. As a result of quarantine and social distancing guidelines, merger and acquisition (M&A) activity within the CPA community has, not surprisingly, lagged in comparison to prior years when mergers were being announced seemingly on a daily basis. In fact, just a few short years ago, nearly 60% of the Top 100 firms in the country had facilitated at least one merger.

For many firms across the country, the coronavirus lockdown put the brakes on their respective succession planning strategies in addition to mergers. The odds of two firms agreeing to an affiliation after having met only via Zoom or Microsoft Teams are long indeed.

Buyers and Sellers

As with past economic downturns, several schools of thought have emerged regarding M&A and succession planning within the accounting landscape. One is that firms that have been active in past years pursuing merger candidates will take a respite prior to resuming activity once they’re convinced of a more stable economic climate. In fact, some larger firms have, unfortunately, not only braked their M&A strategies, but also announced mass layoffs, compensation cuts, and downsizing the amount of office space they occupy. A second view is firms have become more strategic in identifying potential M&A candidates. Currently, more than 50% of the country’s workforce is working remotely, and CPA firms are now more open to considering satellite offices and employing more remote workers. According to a recent poll by the AICPA, some 60% of firms under the $5 million threshold in billings expect remote workers to become a permanent fixture in their daily operational workflow.

Handshake after merger agreementFor owners seeking an upstream merger as a means to facilitate an approaching retirement or a desire to slow down from full-time, the COVID-19 pandemic upended their timelines. Some practitioners we have consulted with over the past year have revealed that the combination of the quarantine and the added stress of their annual tax or audit deadlines is accelerating their desire to look for a merger partner.

Is the Current Market Buyer or Seller Friendly?

The COVID-19 pandemic notwithstanding, the market for mergers has shifted to the buyer side. The increasing supply of seller firms because of aging baby boomers has gradually overtaken the demand from buyers, who now are presented with multiple options – a luxury that affords more selectivity due to a greater inventory.

A common question that lingers in the minds of both sellers and buyers remains: “What is the multiple?” The shift to a buyer’s market over the past several years has succeeded in driving down multiples across the country. Whereas a multiple above one times revenue was common in the largest metro areas five or more years ago, it is far less common today.

Should Succession Planning Be Delayed?

I recently taught a CPE session on the topic of succession planning, and like most everything conference-related in the era of COVID-19, it was presented virtually. As is customary, the webinar provided a Q&A box for attendees who were not hesitant to pose questions – particularly about succession planning among smaller firms. One question really drew my attention: a participant wanted to know if they should be doing anything differently regarding succession in the face of the national crisis. Essentially, they wanted to know should put it off.

I responded with a resounding “No!”

Even prior to the crisis, far too many firms were guilty of what I like to call “succession procrastination,” putting aside a critical issue that needs to be addressed far sooner than it is. My fear is that the coronavirus would provide the perfect excuse to stage an even greater retreat from what was a critical issue to the near and long-term success of CPA firms.

We usually tell clients that, in a perfect world, succession is something they should be thinking about five to seven years down the road. That represents an adequate timeline to determine whether their short and long-term solution resides internally or externally. If there is no one on their “bench” capable of assuming the leadership reins, then the solution lies via an upstream merger.

Wearing a protective mask and practicing safe social distancing is not a panacea for succession procrastination – if anything it should serve as a wake-up call for aging practitioners – particularly among smaller firms who do not want to struggle through a similar situation ever again. Therefore, succession should be addressed as if it were business as usual ... No, scratch that. Make it sooner than usual.

Continued procrastination will ultimately create growth opportunities for other, more progressive and forward-thinking firms.

Bill Carlino is managing director of national consulting services at Transition Advisors LLC, a full-service consulting firm dedicated to ownership transition and succession strategies for CPA firms. He can be reached at wcarlino@transitionadvisors.com.

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Statements of fact and opinion are the authors’ responsibility alone and do not imply an opinion on the part of PICPA officers or members. The information contained in herein does not constitute accounting, legal, or professional advice. For professional advice, please engage or consult a qualified professional.