Levenfeld Pearlstein is the law firm for accounting firms and the people who run them. Partner Russell Shapiro is a leader in advising on the legal and business aspects of accounting firm partnership agreements and mergers and acquisitions. He has twice been recognized by Accounting Today magazine among the “Top 100 Most Influential People in Accounting.”
To better understand the current landscape of the public accounting field, over the past year, we have conducted a series of interviews with managing partners and industry insiders on a wide range of topics impacting the accounting industry. Over the last six weeks, I interviewed more than a dozen highly respected accounting firm managing partners and several industry insiders. They are all leaders in the industry, and the managing partners interviewed run high-performing firms with revenues ranging from $20 million to $300 million. This is the third in a series of interviews designed to help us all better understand the “state of affairs” within the accounting industry. You can read the previous interview responses from Q2 2020 here and Q3 2020 here.
When interviewing the MPs and industry insiders, I asked for their unvarnished truths and best insights. Ideally, this feedback and insight will help other business leaders who might be facing similar challenges to learn from each other.
This round of interviews revealed some common themes of challenges that are top of mind for the accounting industry, namely (1) how to maintain relationships and company culture within the firm and with clients in our remote work environment; (2) the pervasive impact of succession planning and changing demographics of the industry; and (3) the role that technology is playing in reshaping the direction of the industry. Below are the interview responses in their raw and authentic form, edited slightly for clarity. I also provided summaries and key takeaways as applicable.
The interview responses will be discussed in two parts: (1) takeaways from 2020 and (2) predictions for 2021 and beyond. The first part is below, and the second part is available here.
1. How was your 2020 from a financial perspective? What did you learn from 2020?
From a financial perspective, 2020 was a good year for the accounting industry as a whole. Most firms interviewed did the same or better than the prior year on a profit basis. Many, if not most, had an increase in revenue; all had expense reduction due to reduced travel, client entertainment, and conference attendance. Many firms also got PPP loans, which will ultimately be forgiven.
In addition to the more obvious lessons of 2020 – namely, the importance of adaptability and technology, and the challenges and opportunities of a remote workforce – there were some common themes of “lessons learned” that may lead to further growth for accounting firms. For instance, interviewees noted the value of communication and long-term relationships. Building new relationships – with employees or clients – was more challenging in this environment. Interviewees noted that accounting firms are far more resilient and adaptable than they had previously thought, and it will be interesting to see how accounting firms use that adaptability and resilience to further stretch beyond “business as usual” once we emerge from the pandemic.
“I learned the value of long-term relationships, both externally and internally.”
– Managing partner
- “It was the year of the trusted advisor. Most firms had an increase in revenue. Successful firms will learn how to do business development in new ways.” – industry insider
- “Things changed on a dime and we have to be prepared to act. There was an imperative to make decisions and move forward and if what we did was wrong, we realized we can fix it later. The other thing we learned is that we cannot communicate too much.” – Managing Partner
- “I learned the value of long-term relationships, both externally and internally. We had a very good year, but it came from our existing clients rather than new clients. I also learned that we are more nimble than I thought.” – Managing Partner
- “We learned that there are different ways to do things. We reduced costs in marketing, conference training, office expenses, etc.” – Managing Partner
- “Firms were able to help their clients beyond typical compliance work, including cash flow and PPP. Firms and clients need to be at the same technology level to interact well. Informal collaboration has not yet been figured out.” – industry insider
- “Firms are way more adaptable than gave themselves credit for.” – industry insider
“We are not always sure how far to insert ourselves into the employees’ lives. Our people are not getting a rest.”
– Managing Partner
- “People are resilient, and if led, they can figure out how to contribute. It has been emotionally tough on a lot of people. We are not always sure how far to insert ourselves into the employees’ lives. Our people are not getting a rest. Social unrest has exacerbated the situation. We also found that we are capable of more change than we ever thought possible. There is a need to communicate a lot. We have a cadence of involving people so that they know what is going on.” – Managing Partner
- “The lack of ability to collaborate on a one-on-one basis will affect training and development. Younger people will want to come to the office for training and collaboration. The problem is in the 10-15-year managers and younger partners who have families and will not want to come to the office.” – Managing Partner
- “Firms with stronger cultures did better and firms that invested in technology did better. People who thrived in the old environment didn’t necessarily thrive in the new environment. Will people get on a plane for a two-hour dinner anymore? The firms that figure out how to work in a hybrid environment will be successful. Space needs will be less. People will work in different location and be happy – it will be less about putting in your time.” – industry insider
“The industry will continue to consolidate.”
– industry insider
2. What is your current view on M&A and how does it differ from the past?
Nearly all interviewees agreed that M&A activity will likely stay robust, with several people commenting that succession planning is a big factor in the M&A trend.
- “It is a seller’s market if you are a great firm. The deal structures are changing with cash upfront as goodwill payments for the bigger (over $20 million) and better firms.” – industry insider
- “Seems to be exploding now due to succession issues and the need to be at critical mass in order to make necessary investments. Also, the need to recruit effectively. There is pent-up demand from last year.” – Managing Partner
- “For good firms, it is a seller’s market. For others with retirement and age issues, it is a buyer’s market. Buyer’s don’t want an older staff. Generally, for $5 to $10 million firms it is a buyer’s market.” – Managing Partner
- “The industry will continue to consolidate. For small CPA firms, it is a buyer’s market, especially in secondary markets because it is hard to attract the talent who will take the work. Good local firms will look to become or be part of regional firms so that they can specialize and compete better. In the top 100, a lot want to expand geographically, and some want to add-on with industry niches.” – industry insider
“It is a buyer’s market because we don’t need the revenue – we need the staff.”
– Managing Partner
- “M&A will continue. There will be consolidation in the top 50. Clients need technology services – they want business solutions. The aging partner demographic will also continue to drive merger activity. Also, firms need to grow to create more challenges for employees. Many firms are not willing to invest enough to stay independent.” – Managing Partner
- “More firms are looking at alternatives. Smaller firms are not as equipped for the logistics of communications, etc. It has been a wake-up call. There may still be fee reductions due to clients who go out of business from the recession.” – industry insider
- “Firms and partners will not be able to trade on long-term relationships like in the past. There will be more options for mid-level talent. Those that don’t invest in technology and new services will be in trouble. Younger partners may not want to be saddled with retirement and real estate costs. All of this will drive mergers of those that can’t meet the challenges.” – industry insider
- “We are continuing to acquire cyber and other tech consulting ability. Big are getting bigger and the small are getting smaller. It will be hard in the middle due to overhead and technology costs.” – Managing Partner
“Pricing is coming down a little bit, but not much.”
– Managing Partner
- “A lot of smaller firms will disappear because they won’t be able to keep up with the times and invest in their staff. Non-CPAs will be more a part of staff going forward.” – Managing Partner
- “There were two big deals last year. The trend will continue because the top 25 have growth aspirations. The deals have to be big for those firms in order to have an impact. There is pent up demand for smaller deals also.” – industry insider
- “There has been less activity. There are fewer buyers of smaller firms because so many mid-size firms in local markets have been acquired. Buyers are more selective.” – industry insider
- “The second half of 2020 was slow and now things are starting to pick up. We have learned how to do a virtual integration. Going forward it will be a hybrid integration. Pricing for non-CPA businesses is lofty. It is a buyer’s market for marginal candidates – those with succession issues or that have not invested. Those firms are going for 60-70% of revenue. In addition to looking at the firm age demographics, we are also looking at the client age demographics. Firms that are more desirable are going for higher prices. We are seeing more cash up-front in deals. We are more aggressive with firms that are more industry focused than those that are general practices. PE may be coming into the market.” – industry insider
For Part 2 of the survey – including responses regarding challenges, opportunities, and changes for 2021—click here. We will provide updates and additional information, as available.