Merger and Acquisition Opportunities and Strategies During Challenging Times

Overview

As the economic recession and health concerns in our nation are at a pivotal point and closely linked in a "Perfect Storm," strategic-oriented CPA firm leaders will take more of a holistic approach to manage and lead their firms. As CPA firm partners come to terms with the recession and health risks, leaders must not only focus on the current and immediate issues affecting their firms, but now they must also plan for the near and long-term future "New Model." It is essential that strategic planning takes place now and does not ‘take a back seat’ to other pressing issues. If that happens, it may be too late to develop a plan later in the year or in 2021 as this "Perfect Storm" will quickly move in unknown directions and uncharted territory. 

As a famous baseball player once said, "The future isn’t what it used to be" and "You've got to be very careful if you don't know where you are going, because you might not get there."

M&A Buyers

As leaders move away from crisis management to determine the best approach for the future, mergers and acquisitions (M&A) will most certainly be part of a holistic approach in dealing with the “Perfect Storm.” In the first and second quarters of 2020, the market for M&A contracted, but is now accelerating as firm leaders assess the state of their firms currently, for the remainder of the year, and into 2021. These times are unprecedented and there is no playbook on how to ‘win the game.’ However, CPA firms that used M&A as a strategy during the past economic downturns have often fared better in the long term than those that didn't use this strategy.

Managing Buyer’s Risk

Deal flow has been increasing, multiples have remained mostly flat, and we are not seeing many ‘bargain basements’ deals. However, buyers have become more cautious and more concerned with managing the risk of future collection problems and/or client losses due to sales or bankruptcies. To uncover potential future collection problems, many CPA firm buyers are conducting due diligence earlier in the deal process than in the past. After conducting due diligence and incorporating appropriate representations, warranties, and covenants in the transaction documents, uncertainty remains regarding the COVID-19 related risks associated with the transaction. As a result, a buyer may require adjustments to the purchase price. COVID-19 risk clauses will be added to deal agreements for the foreseeable future and may also extend to future buyouts of partners in seller firms.

Good News

The good news is that buyers have opportunities to acquire above average firms seeking a sale or upward merger that are affected adversely by client losses due to no fault of their own. This can be a unique chance to add significant value as quality firms would not be on the market other than due to the negative impact of a deep downturn in the economy and managing risk with their staff.

Some good firms that have had average performance in the past have now been exposed to internal weaknesses that may be best resolved by combining with a firm that is better equipped and capitalized to deal with this “Perfect Storm.” In addition, some "Baby Boomer" partners who were contemplating retirement in a few years are accelerating their exit strategies by selling now as the crisis has put them over the edge.

Conclusion

Most likely, there will be a relatively short M&A window, perhaps a year or so, until the COVID-19 crisis ends, hopefully sometime in 2021. During this time, quality CPA firms will be available for merger or purchase by buyers who move quickly to take advantage of this opportunity.

It is important to remember that we are ‘living history’ and this time will pass. More CPA firm buyers will see the pandemic as an opportunity, not a problem. As more partners will place a greater emphasis on the future of their firms and on their exit strategies, we expect to see a surge in M&A activity, for both challenged as well as solid firms.

Accountants Advisory Group has significant M&A experience and is well-prepared to assist our clients and buyers/sellers as they navigate through these challenging times. We welcome an opportunity to assist you in evaluating the right course for your firm, whether it is remaining an independent firm, or a merger into a larger firm. If we can assist in any way, please feel free to contact us and schedule a complimentary M&A consultation and evaluation.

Joe Tarasco, CEO and Senior Consultant, Accountants Advisory Group, LLC, assists the leaders of public accounting firms by consulting in all areas of firm practice management, including succession and strategic planning, firm governance, mergers and acquisitions, partner compensation structure, practice development, facilitating partner retreats, and leadership consulting. Click to request a consultation or call (845) 265-9046.