Succession Planning and M&A During COVIDby
Given our unprecedented times, it’s logical to predict that M&A activity for CPA firms will brake to a halt until the national quarantine and social distancing guidelines are lifted. For many firms planning their succession strategies, the likelihood of them merging with a firm they have only met via a Zoom or Microsoft Teams call as opposed to an in-person introduction remains highly doubtful.
Considering the current climate and any succession planning therein, it would be a challenge to close on an M&A transaction that began prior to the coronavirus outbreak, and the odds of launching any new deals are miniscule at best.
COVID-19 has wreaked havoc on virtually every aspect of our lives, not the least of which is the economy. The projected downturn in the GDP and the levels of unemployment are expected to exceed the post 9-11 era and the financial meltdown of 2008-2010 and could potentially be as catastrophic as those seen during the Great Depression.
As with post-9-11 and the recession of 2008-2010 there are two schools of thought regarding CPA firm M&A and succession planning. There will be a significant number of firms that have previously been active with acquisitions who will sit back and wait for a more certain economic climate before becoming active again. Some of the larger firms have in fact announced across-the-board layoffs as well as cuts in compensation.
Many firms, particularly those with multiple partners, have recently been more strategic in identifying M&A targets. It can be hard to execute a long-term strategy amidst a landscape filled with uncertainty.
In the past, staff shortages and the void in the talent pipeline discouraged many firms from aggressively pursuing M&A strategies. Now, with more than 50 percent of the American workforce operating remotely and a widening pool of furloughed accounting staff as a result of the downturn, firms are more likely to accept satellite offices and remote workers or reduce the amount of space they currently occupy. In fact, according to a recent AICPA survey, some 60 percent of firms under the $5 million threshold in billings expect that “working from home” will become a permanent part of their operational flow going forward.
For seller firms, many of those owners who are approaching retirement or a period when they want to retreat from full time roles, the pandemic has accelerated the timelines for many. Some practitioners we have consulted with over the past several months have in fact determined that with the annual stress of tax or audit deadlines, the quarantine has only served to heighten their desire to look for an affiliation.
Will it Be a Buyer’s or Seller’s Marketplace?
Pandemic or no, in recent years, the market for mergers has clearly shifted to one that favors buyers. It is a matter of supply and demand. The supply of sellers has gradually overwhelmed the demand from buyers, mostly due to aging demographics.
Some buyers are presented with so many opportunities that they can afford to be more selective by virtue of a greater inventory of available practices. The question that lingers in the minds of both sellers and buyers remains, “What is the multiple?”
The shift to a buyer’s market in recent years has driven down multiples across the country. A multiple above one times revenue was common in the largest metro areas five or more years ago, but that has become rarer in recent times.
Should the Smaller Firms Delay Succession Planning?
Recently, I taught a class on succession planning for one of the major software vendors to the accounting profession. The session like most everything in the era of COVID-19 was held virtually.
As is customary, the webinar provided a Q&A box for attendees who were not hesitant to pose questions, particularly those related to succession planning within smaller firms in the wake of the pandemic. The question that really drew my attention was when one participant wanted to know if they should be doing anything differently regarding succession in the face of the national crisis. Essentially, they wanted to know if they should put it off.
I thought about that for less than a second and I responded with a resounding “NO!” Prior to the outbreak of COVID-19, too many firms were already guilty of what I liked to call “succession procrastination,” regularly tabling an issue that so badly needed to be addressed sooner rather than later.
Now my fear is that the coronavirus would provide the excuse to stage an even greater retreat from what was a critical issue to the near and long-term success of CPA firms. In fact, I told the attendee that if anything, succession planning should even begin earlier than usual.
Traditionally we urge our clients that ideally, succession is something they should be thinking about 5-7 years down the road. That represents an adequate timeline to determine whether their short and long-term solution lies internally or externally. If there is no one on their “bench” capable of assuming the leadership reins, then their solution lies via an upstream merger.
However, far too many owners decide to trim that critical 5-7 years succession planning timeline so necessary for an orderly transition, by half or even a third and then find themselves painted into a corner when valuations begin dropping and the inventory of sellers begins to balloon making it a true buyer’s market. Sadly, they often find themselves struggling to find a suitable successor under unfavorable terms.
When the national quarantine forced staff to work remotely, many of the smaller firms found it difficult to ensure efficiency and continuity by virtue of having antiquated technology by today’s standards. If that was the case regarding their IT capability, coupled with an aging ownership group, I told the attendee that succession planning for them should have literally begun yesterday.
Wearing a protective mask and practicing safe social distancing is not a panacea for succession procrastination. If anything, it should serve as a wake-up call for aging practitioners -- particularly in those smaller firms -- that they just may not want to deal with a similar situation ever again.
Therefore, succession should be addressed as if it were business as usual, or in many cases, sooner than usual. Either that or they can choose to procrastinate to the point where they will ultimately create both client and real estate opportunities for other, more progressive firms.