The 2020 Rosenberg Survey: Takeaways

The 22^nd annual Rosenberg MAP Survey, as always, contains numerous morsels of valuable advice for CPA firms. In this year’s survey, 338 firms participated, 80% with revenues in the $2-20M range. The survey and our companion book, What Really Makes CPA Firms Profitable, is committed to encouraging the practice of benchmarking as a powerful way to optimize CPA firm operations and profitability. The power is not limited to the data reported on, but the messages to firms that are gleaned from the data. Implementation of these messages will move your firm from good to great. This blog focuses on these takeaways.

Revenue and Profits

Revenues in 2019 increased 6.4%, down from 7.7% the prior year. Most of the decline was attributable to a sharp decline in mergers. In 2019, mergers accounted for a still robust 16% of revenue growth but was 23% of growth in 2018 and an extraordinary 39% in 2017. So, factoring out mergers, organic growth in 2019 was 5.4% compared to 5.8% in the prior year, making the decline in revenue growth unremarkable. Remember, we are reporting on 2019, before the “Year of Covid.” Back then, revenue growth was obtainable but challenging for most firms. Firms continued to struggle finding staff to fuel their growth, so their business development efforts were not operating full throttle because they were working close to capacity. Also, firms’ leadership was been stretched thin, with them at times too busy to lead.

Profits increased nicely. Income per (equity) partner (IPP), CPA firms’ flawed but best available measure of profitability, rose 6.9% to $497,000 for multi-partner firms with revenue over $2M. It’s amazing that this figure is just a hair below the $500K mark. Few partners ever thought they would earn this kind of money when they started their careers. The increase is attributable to (a) increased revenue, (b) fee increases, (c) a continuing trend of staff-partner ratios increasing, (d) an increase in consulting which is generally more profitable than traditional CPA services and (e) profitability from mergers. Part of the staff-partner ratio increase results from a continuing trend of holding the equity partner headcount steady despite revenue increases and the retirement of partners.

Order your copy of The Rosenberg Survey – 2020 Edition here. 

Decline in Mergers

Don’t get us wrong. The merger market is still quite active, but it appears to have reached its peak in 2017 when mergers accounted for 39% of CPA firms’ revenue growth. This figure declined to 23% in 2018 and 16% in 2019, still quite significant. The decline is attributable to (a) buyers are increasingly looking to merge in consulting firms instead of traditional accounting practices, (b) somewhat related, firms’ appetite for traditional accounting and tax practices has diminished, even for firms who aren’t pursuing consulting mergers, (c) the larger firms who have done the bulk of merging in multi-partner firms, have tapped out the markets in the country’s 50 largest cities. All of these factors have resulted in a palpable increase in the “pickiness” of buyers in selecting sellers. Until Covid hit in 2020, we weren’t expecting any further declines in merger activity but the virus has softened the merger market for the near term.

A Disturbing Metric

For the first time in the 22-year history of the survey, the percentage of female partners to total of 23% failed to increase from the prior year. This despite women comprising 58% of firms’ professional staff. We have no explanation for this leveling off but we hope it does not signify a diminished effort by firms in their retention and leadership development initiatives for women. Anecdotally, we have been very pleased to see an upward surge in the number of new female managing partners at our clients.

Slight Decline in Goodwill Valuation

When I started my career in CPA firm management as the COO of the 23^rd largest CPA firm in the country in the mid-1980s, the industry norm for internal goodwill valuations was one times fees (remember, this is for internal buyout purposes not external sales). By the time we created the first Rosenberg MAP Survey in 1999, this figure had plummeted to 81%.  In 2016, it was 80%, dropping to 78% in 2017 and reaching 77% this year and last. There are many factors at play: (a) Continuing conservatism (b) the frenetic pace of Baby Boomer partner retirements, causing younger partners to have concerns about the affordability of the buyouts and their ability to keep the firm together without the founders and (c) uncertainty of the future given technology changes, which threatens the traditional backbone of a CPA firm’s viability – profitable annuity clients in traditional service areas.

The Importance (or Lack Thereof) of Partner Income as a Percentage of Revenue

As alluded to earlier, it’s a befuddling, almost comical situation that CPA firms, the masters of financial reporting and analysis, do not have a strong measure of firm profitability. The best and most often used is income per equity partner (IPP) but it is deeply flawed because its computation is highly dependent on the number of partners in a firm.

Alas, IPP is the best measure we have. But beware of a competing metric for measuring firm profitability – partner income as a percentage of revenue. CPA firms and the media alike love to observe that a firm with a profit percentage of 35% is more profitable than a firm at 30%. But this conclusion is often misguided. One needs to look at the staff-partner ratio of these two firms before making any conclusions about comparative profitability.  Firms with high staff-partner ratios will generally have lower partner profit percentages because a higher amount of the firm’s overall labor costs shows up in the expense section of their income statement and a lower amount in the partner profit section (using partnership accounting). The lower partner profit percentage does not mean that the firm is less profitable.

For what it’s worth, the multi-partner firms in our survey with revenue of $2M or more posted a partner profit percentage of 30.3%, exactly the same as the prior year. Perhaps this indicates that profitability really didn’t increase organically in 2019 but rose overall simply because of the flattening in firms’ equity partner ranks.

Message: When analyzing your profitability, be careful about focusing on the importance of partner profits as a percentage of revenue.  It may give misleading results.

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Two Metrics That Seem to Have Leveled Off

1. Percentage of firms using the non-equity partner position. In 2007, this figure was 33%. After steadily rising for a period of years, this percentage has leveled off in the 55% range for the past five years.
2. Percentage of firms having mandatory retirement. Each size range of firms has been level for at least three years: Firms over $20M are in the mid-90% range. Firms $10-20M are around 80%. Firms $2-10M are about 60%.

The explanations for both scenarios are similar – there are a certain number of firms that simply don’t want to change, so that levels off the metric. For using the non-equity partner position, there are many firms that feel a staff person should be promoted directly to an equity partner and see no purpose in the intermediate step of a non-equity partner. For mandatory retirement, there are a certain number of firms whose partners feel that it’s their right to decide when to retire and don’t want to be “told” when to retire.

Benchmarking Your Firm

Whether you participated in the survey or not, we recommend you compare your firm’s key metrics to MAP data on a regular basis. This allows you to have an idea of where you stand compared to your peers and identify opportunities to improve your own operations and profitability.