Like all businesses, accounting firms are confronting the pressures of inflation. Some of the inflationary cost increases can be passed through completely, some can be passed partially, and other costs cannot be passed on at all.
In addition to the regular culprits of inflation, accounting firms have a significant cost spike coming from the intense escalation in salaries that is currently impacting the industry. Every recent practice management survey reveals record-setting increases and salary levels.
Salary inflation has nothing to do with the price of eggs or office supplies, but it is a supply chain issue, of sorts. With accountants leaving firms for higher salaries or less stressful positions, staff shortages are creating a gap in firm expertise.
Firms must look for ways to enhance profitability to guard against all these inflationary pressures. And client fee increases can only get a practice so far.
One way practices can battle rising costs is through mergers and acquisitions.
Of course, merging in or acquiring a firm has its own up-front costs. However, M&A can generate significant profits if done strategically. Here are five ways to achieve M&A profitability.
1. Introducing services: Spreading a firm’s most profitable services to a whole new group of clients has a quick and calculable impact. Similarly, if firms have different yet complementary skill sets, the entire combined client base can benefit — and the firm can profit. These are the best kinds of mergers.
2. Creating efficiencies: Increasing the frequency of services performed optimizes efficiencies. Team members get better or faster at performing them, processes get streamlined, technology is utilized better, and there is broader adoption of and enthusiasm for value-added billing. For example, if a firm performs audits in a particular industry, even adding 10 more audit clients in that industry makes the entire team better and more efficient at doing audits. Team members become more capable and are seen as true experts, which can equate to increased profitability.
3. Adding talent: If firms know they can become more profitable with value-added services, and the bench of talent is light in the areas they want to build out, a larger, combined firm can justify adding new experts to the team — along with their market-competitive salary requirements. This can also create more opportunities for emerging partners. It’s hard to rationalize a partner path when firm profitability is low or flat.
4. Supporting investments: The integrated firm can rationalize investments in technology and other infrastructure that can produce greater practice efficiencies while creating less dependency on human capital. As technology becomes more intelligent and intentional, it can work harder and smarter for existing staff. A better ROI will come from spreading costs across more bodies in the combined firm.
5. Attracting bigger clients (and fees): The combined, midsized firm may offer a certain amount of prestige to larger clients looking for more attention and more ideas to make their businesses better. The industry-wide CPA firm M&A trend has created another opportunity for the mid-sized firm looking for bigger clients, as well. Many clients—who are used to paying bigger fees—become dissatisfied with their current mega-firms that have already merged and are looking to jump ship. Whether they feel that they are not getting the best service and attention from the mega-firm, or they are unhappy with its growth strategy (for example, private equity investors are encouraging the firm to pursue even bigger clients), many clients are starting to look around for a competent accounting firm to provide the service and attention they require.
In the current market, it has become increasingly difficult for successors to filter opportunities that are retirement-driven. What sets the attractive firm apart from the pack is being entrepreneurial and able to bolster profits for the acquirer.
Looking to heighten profitability should be a significant goal — and outcome — of M&A. Considering practice combination as a way to combat inflation is even more exciting. It’s a means to determine what firms make sense, and whether an acquisition or a merger would be a preferable solution.
In light of the current economy, getting an edge is going to be advantageous: Certain M&A opportunities may be the advantage for now and the future.
