Consolidation and the Mid-Sized Firm, presented by August Aquila

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Consolidation and the Mid-Sized Firm

presented by August Aquila, Vice President, Mergers & Aquisitions, American Express Tax and Business Services

Session Moderator: Good afternoon everyone! I want to thank August Aquila for being our workshop leader today.

August Aquila: Welcome to AccountingWEB’s Workshop on Consolidation and the Medium Size firm.

Session Moderator: August brings a wealth of experience from his background at American Express Tax and Business Services.

The floor is yours, August! Thanks!

August Aquila: I would like to start out by asking everyone to post their questions. I want to make sure that they all get answered

Kenneth DeWitt: Good afternoon, Mr. Aquila. What is your definition of a "medium" sized firm? What should such firms be doing now to be best positioned well to compete in the future consolidated world?

August Aquila: Ken, a medium firm is about $2million in gross fees and would go up to $5 or $7 million. I don't think there is a formal definition of a medium size firm. Most firms over $10 million would not be considered as medium.

Bruce Winters: Hi, I’m trying to understand why is Amex in the business of being a Public Accounting Consolidator

August Aquila: Bruce, that is another topic for another day. This workshop is meant to share ideas with medium size firms and give them things to think about as they ponder the future

Gail Perry: This question was submitted earlier today by Fabian Schmilovich:
Is American Express Tax and Business Service considering expanding its idea of consolidation and strategic alliances of CPA firms to Latin America CPA firms as well?

August Aquila: Gail, at the present time we have no plans to expand beyond the US.

Gail Perry: And this question was submitted by Ken DeWitt, who is with us today: In looking for firms as possible merger / acquisition candidates, what compensation plans for partners / managers / staff seem to fit best or work best in the eyes of the consolidators? More specifically, what incentive plans, if they were already in place, would fit with the business model of the consolidators? Do these motivate (a) billings (b) internal referrals, (c) new business generated, etc. or some combination of these?

August Aquila: Ken, can you tell me who you are with, so I can best answer your questions.

Kenneth DeWitt: I am one of the owners of DeWitt & Dyer LLC in Tuscaloosa, AL. We have 14 team members, have a diversified practice in tax, accounting, consulting, and financial planning. We want to structure ourselves to be competitive and part of that involves how we reward our own.

George Castanza: Mr. Aquila- is your entry into the accounting profession based upon the fact that accountants enjoy a unique relationship with their clients, and rather than "network" with accountants, you would rather become the accountant? This would put you in the position of cross-selling all of your financial services directly to the consumer.

Steven Meyerson: I'm an income partner with Sattell, Johnson, Appel & Co with 2 offices in metro Milwaukee, WI. We have a total of 42 team members.

Kenneth DeWitt: Steve - has your firm grown to its present size through internal growth, or through acquisition?

Steven Meyerson: Actually, both. Our clients have grown and name recognition has provided some. We acquired a practice on the west side of Milwaukee last Nov and another sole practitioner a year & a half earlier.

August Aquila: I wanted to share with you a survival checklist. It gives some idea of the things you need to think about.

Survival Checklist

  • Has your partner group met to discuss future options for the firm? Younger partners will have a different view than older ones. Depending on the partner dynamics this can be a very sensitive issue to discuss.
  • Have you determined what we want to be as a firm? Many partner groups are afraid to discuss change. They are afraid to upset the cart. Don’t be afraid to face your fears.
  • Did you discuss all the reasons why your firm would want to be part of a consolidator? Don’t put money at the top of your list. There are much better reasons.
  • Why would a consolidator want your firm? Do you have a niche practice? Would you be considered to be the lead firm in the area? Does your firm have great leaders? If you have something that is truly unique how can you take advantage of it?
  • Will our two cultures mix? Most acquisitions fail because a new culture never develops. It’s important for you to understand your firm’s culture, the way you do things, and how the new entity will work.
  • Can you live without having ultimate control? No matter whom you join forces with, there is no such thing as a merger. Some one always acquires some one else. If independence is critical to you, then unless you are the purchaser and surviving firm, selling your practice may not be right for you.
  • Do we know all there is to know about the consolidator and what it intends to do with our practice? You don’t sell your practice everyday, so you want to make sure that you take your time and gain a full understanding of the firm that is acquiring you. May sure you do your due diligence.? Do we have problems in the firm that need to be resolved? All firms have problems that they just don’t want to address. Perhaps it is an unproductive partner? Perhaps the managing partner is a dictator and the other partners are afraid of him or her. These problems are not going to go away just because you are acquired. The acquisition, however, can help you resolve issues that you were afraid to address before. New owners, new decision makers.
  • That 's it.

    Selling your practice is a major step in the life of the firm and it has an impact on staff, younger partners, older partners and clients. You want to make sure you are doing it for the right reasons.

    Steven Meyerson: To the best of my knowledge, we have no intent to be consolidated, we only want to effectively compete.

    August Aquila: That's fine, but you will compete with firms that will be stronger, don't forget, consolidators are not only the H&R Blocks, Centerprise, American Express, they are local and regional firms that are joining forces to become better, more powerful firms.

    Steven Meyerson: We are members of ACPA and RAS.

    August Aquila: Being a member of an association is not the same thing. It helps, but I believe you need to look at the marketplace at the local level. How will you compete effectively? What does the association bring to your firm to help it compete locally? How are you a stronger and better competitor?

    I'm all for associations, but the landscape is changing and firms need to determine what they want to do? I don't have the answer for them. Each firm needs to determine their own future

    Here are 8 basic options that all firms have.

    1. Sell your practice. This permits your to monetize the value of your practice, continue to practice, gain scale which will make it easier for you to compete against larger firms, have access to greater amounts of capital, offer better benefits which helps retain and recruit staff, and provide more mobility and career opportunities. You do lose ultimate control of your practice.

    2. Merge up stream. There are limited options for the medium and large local firms today since there are only a few regional firms with whom they could merge. These transactions normally do not let you monetize the value of your practice and you still lose most control over your practice.

    3. Merge with equal. Many firms today are joining with firms of similar size. This can make sense provided that the merger brings about some synergies. Just make sure that 1+1 = 3. Bringing to weak firms together does not make a strong one.

    4. Stand-alone. You feel that you have the talent and resources to remain as you are. Just make sure you develop a realistic strategy for independence and success.4. Stand-alone. You feel that you have the talent and resources to remain as you are. Just make sure you develop a realistic strategy for independence and success.

    5. Multi Disciplinary Practices. These are new entities that are beginning to appear. Ernst & Young financed McKee, Nelson, Ernst & Young, a DC law firm. Some states and the District of Columbia now allow law and accounting firms to share revenues. This added with financial services would truly create a one-stop shopping entity.

    6. Become a consolidator locally. Since many smaller firms look to larger firms to provide them with more services, better service quality, etc., you could become a consolidator of sorts on a local basis. Small firm owners are looking for secured retirement payments. In exchange you get additional clients, staff and if you know how to expand services, etc. you add dollars to your bottom line.6. Become a consolidator locally. Since many smaller firms look to larger firms to provide them with more services, better service quality, etc., you could become a consolidator of sorts on a local basis. Small firm owners are looking for secured retirement payments. In exchange you get additional clients, staff and if you know how to expand services, etc. you add dollars to your bottom line.6. Become a consolidator locally. Since many smaller firms look to larger firms to provide them with more services, better service quality, etc., you could become a consolidator of sorts on a local basis.

    7. strategic alliances through networks/associations

    8. do nothing. it you decide to do nothing you have given up and will eventually go out of business. This is not a viable option for any firm.

    Are there any questions? I know this is a lot of information to digest in this format.

    I want to discuss some reasons why firms consolidate. Each firm probably has a unique reason, but the following five seem to be key ones.

    1. Transaction must create additional value for clients.
    - provide additional range of services
    - improve client service
    - creates efficiencies
    - develops the skills of staff
    - improve resource allocation

    In short it must be good for your clients, your staff and your partners.

    2. Transaction must provide some economies of scale or make you a stronger/bigger player in the market place. Being bigger just for the sake of size is not necessarily better. Size should get you - efficiencies, marketing power and credibility, branding, not headaches.

    3. You want to create/be part of a national industry practice. A merger should give you credentials to compete against bigger firms.

    4. You want to be part of a Multi-Disciplinary Practice (MDP). Perhaps the greatest threat for the medium firm will come from the MDP, But only if, ?by brining the various services in-house will the firm be able to coordinate and integrate a variety of diverse specialists? (per David Maister). Clients will want one professional who oversee complex transactions and take responsibility for all the issues involved (managerial, accounting, legal, financial, consulting, strategy, etc.

    5. YOU HAVE TO DO IT. You are going into the merger from a position of weakness rather than strength. There may be times when a merger is the only way to rid of some partners. You need to totally disrupt the organization through a merger to change it.

    Obviously the last reason is not a good one.

    Stuart Samet: Does the client really want one professional to do it all- or does she want one firm that has the capacity to do it all???

    August Aquila: Some one asked earlier how to compete with consolidators. I think the question should really be how to compete with anyone?

    Steven Meyerson: Agreed.

    August Aquila: I believe the client wants to work with someone who can bring the resources to the table. It is not necessary for one person to be able to do it all. I doubt that there is any one of us who can do everything for our clients.

    Stuart Samet: That sounds more comfortable to me.

    August Aquila: Stuart, there is a lot of misunderstanding about consolidators. I don't believe that any of them want or ever wanted to do anything that would harm clients, the value of the CPA brand. In fact, American Express entered this arena because it saw the value of the CPA Brand and wanted to leverage that value with the Brand equity that AEXP already had.

    Here are some ways to compete (with consolidators, with anyone)

  • It may seem to be a simple answer, but you need to understand your clients and what they want. The more you know what your clients are trying to accomplish the more services you will provide them and the more value they will get. This translates into more revenue and profits for your firm.
  • The best way to keep your clients and grow your firm is to spoil your clients with service and attention. The more time you spend with them the more your learn. The more you learn the more you can do form them.
  • Don’t be afraid to offer your clients service guarantees. Most organizations that want to keep clients for life realize that they need to provide the client with a certain degree of comfort about the service they are to receive.
  • Client services skills (listening to clients, learning how to identify opportunities, etc.) will make you a strong competitor in your market. Invest in this area and you will not be disappointed.
  • If you want to keep staff in this tight market, share the wealth /profits with them. They will be more motivate, stay with you longer and produce even more profits for the firm.
  • Don’t accept mediocrity, it will kill you. Demand the most of yourself and your people. Aim for the highest and best you can be as an accountant and a person.
  • Have a vision and live it. If you don’t have a vision of where you are going, you will surely get there. People follow others who paint a bright future for them. Get your paintbrush out today.
  • Have fun life is too short. Keep things in perspective. Don’t take things too seriously. Create an environment where people are motivated to work and come in each day with renewed passion.
  • As you can see these are basic concepts. But just think of spring practice and what do the pros do, they always perfect the basics.

    Kenneth DeWitt: One of your points was "share the wealth and profits" - I'm looking for good models that do that. Do you have any suggestions for where to look?

    August Aquila: I know of firms that share profits with staff. They take some percentage of incremental profits over the last year and distribute them. They also share the financials with the staff. I'd be happy to discuss more off line.

    August Aquila: I know we are running out of time. I wanted to give you just a little more information if you decide that you want to join a consolidator. Here are some things to think about.

    No matter what you do, make sure you have answers to the following before your merge or sell your practice.

  • Do the two firms have similar values systems? Do you value a balance between work and life? How important is client service to the entity? Etc.
  • Do the two organizations have similar ideas about running the business? Does one want to grow while the other is content with staying still?
  • How are employees treated? Are employees given the opportunity to do upward evaluations? Do employees have performance management objectives?
  • Is the quality of the work products similar? Make sure you do your own due diligence. Check out the most recent peer review reports.
  • What are the risk factors in this transaction? You not only want to check out pending litigation, etc., but other areas that could impact your practice (i.e., poor reputation in the marketplace, high turn over of staff and accounts, etc.)
  • How does the partner group work as a group? Do they even work as a group? Or do they have an eat what you kill mentality? Do they collaborate? In today’s environment, if you don’t collaborate you die.
  • If any one wants to contact me, my e-mail is [email protected].

    Kenneth DeWitt: Thank you, August. I will contact you about the things we discussed online.

    August Aquila: If there are no more questions, I want to thank you for participating in AccountingWEB's Workshop.

    Session Moderator: Thanks August!

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