Why CPA Firms Often Prefer to Sell to Other CPA Firms Instead of Non-CPA Firms

Avatar photoMarc Rosenberg, CPA / May 31, 2023

For about ten years now, there has been a merger frenzy in the CPA profession, fueled by three interrelated factors: (a) baby boomers are rapidly approaching or reaching retiring age; (b) succession planning is not a strong suitProfessionals shaking hands of CPA firms so, they often find themselves with no bench to take over the firm and pay buyouts to retiring partners; and (c) larger firms’ voracious appetite for growth by acquisition, the biggest 50 of which decided a decade ago to become national firms instead of staying in their own backyard.

In recent years, there has been an uptick in non-CPA firms acquiring, or at least trying to buy, CPA firms. These buyers include wealth management firms, venture capital firms, financial companies, and the new kid on the block – private equity. Sellers now have more potential buyers.

Please note: The perspective of this blog is that sellers want to work for 5 years, often 10 years or more, before retiring. So this blog mostly excludes sellers who want to retire in a short period of time.

The outcomes a seller is looking for by merging:

  1. The obvious: attractive deal terms (price, payout term, downpayment, etc.)
  2. Greater certainty that the partners’ buyouts will be paid.
  3. Reasonable compensation, close to what they were earning on their own.
  4. A landing space, continuity and care for their clients and staff.
  5. Sound management that can not only take over their firm but improve it.
  6. Improved access to more and better staff. (Smaller firms suffer more significantly from the shortage of staff than larger firms, though all firms struggle with this.)
  7. In firms whose partner group is relatively young, their owners want to feel good about the loss of control that will likely occur. Partners need to ask themselves if they can survive an “egoectomy.”
  8. Growth opportunities that sellers can’t get on their own, including diversifying the portfolio of services that the seller has to offer their clients.

CPA Firm Mergers: Your Complete Guide, was written because every year thousands of mergers are taking place but relatively few buyers and sellers have much merger experience in one of the largest transactions their firms will ever be a part of. We address: ►the keys to successful mergers the 22 steps in the merger process how to assess cultural fit, benefits of merging upward why buying a firm for one times fees is a steal what larger firms should expect to see from smaller firms & vice versa how to negotiate a merger – from both buyer and seller view 14 things the letter of intent should address data that should be reviewed due diligence and other issues.

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Should CPA firms sell to other CPA firms instead of non-CPA firms?

Generally, yes. Caveat: Each option needs to be analyzed on a case-by-case basis. This is not an all-or-nothing scenario

Why do CPA firms prefer buyers to also be CPA firms? Compared to non-CPA firms, CPA firm buyers offer the following advantages:

  1. In both scenarios, the seller’s partners usually have to take a pay cut to enable the buyer to net an acceptable ROI. In mergers with non-CPA firms, the pay cut is often much larger than with a CPA firm merger.
  2. CPA firm buyers are experienced and skilled at managing a CPA firm. They understand the business, its intricacies and nuances. Non-CPA firms have little of this knowledge.
  3. Sellers are much more comfortable ceding management control to another CPA firm that understands the business, rather than a non-CPA firm buyer with no experience managing a CPA firm. The notable exception is when the buyer is much larger than the seller. For example, if a $100M firm acquires a $5M firm, the sellers don’t expect to have a say in management. But if a $10M firm acquires a $5M firm, the seller often remains involved with management.
  4. If the seller is looking for access to capital to expand, they can always get a bank loan instead of relying on a non-CPA firm’s cash.
  5. When buyers are non-CPA firms, especially with private equity deals, the buyer is looking to flip the business in 5 years or so to another firm. This can be disturbing to sellers because they won’t have a say in who their future owner will be.
  6. The universe of CPA firm buyers is much larger than that of non-CPA firm buyers. This has changed dramatically in the past 5 years, as the Top 50 firms are now actively buying firms from coast to coast instead of staying in their region.

Of course, all these reasons for preferring a CPA firm buyer may be irrelevant if the deal terms of the non-CPA firm buyer are in the “offer they can’t refuse” category.

In short, if a seller can get a deal with a CPA firm buyer whose offer is close to or the same as a non-CPA firm (and I’m not just talking deal terms), the buyer will usually prefer the CPA firm offer.

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