Strength Numbers - accounting firms

California CPA, Oct, 2001 by Sharon Ross

With the Threat of Consolidation Gone, CPA Firms Grab Hold of Their Destinies

Adapt or die! Remember the consolidation storm of the A mid-90s? If you owned a small CPA firm that offered A tax and accounting services, the doomsayers cried that you either had to join the consolidator such fierce competition that you'd need to change your practice's focus. The storm has faded, but the forces of change are still here, and CPAs are finding strength in numbers.

A HISTORY LESSON

In the late 1990s, consolidators were courting small to medium-sized CPA firms to build national networks of accounting, tax and consulting practices. American Express Tax & Business Services was aiming to be in 25 of the largest metropolitan areas, H&R Block set its sights on becoming the industry leader and Century Business Services was acquiring firms at a record rate.

The largest accounting firm acquisition occurred in 1999, when H&R Block acquired the non-attest assets of McGladrey & Pullen, LLP, then the nation's seventh largest accounting and consulting firm, to form an arm of H&R Block, RSM McGladrey, Inc.

In the November 1998 issue of The Practicing CPA, Jay N. Nisberg, a management consultant to the profession from Ridgefield, CT, predicted that the number of midsize firms consolidating would grow from 20 percent to 60 percent by 2003.

It was a trend that appeared only to gain speed, says Gary Shamis, managing partner with SS&G Financial Services in Solon, Ohio and past chair of the AICPA's Management of an Accounting Practice Committee. He says many firms viewed it as a way to swell profits and fund retirement.

Though many CPAs were against consolidators at the outset, when the trend peaked, firms were scrambling to get on board, says Rick Telberg, director of online content at CPA2Biz and former editor and publisher of Accounting Today. "People were crowding into rooms to listen to the pitches of the consolidators."

But, just as things reached a peak in 1999, the trend started to lose steam, Shamis says. The wave of consolidations shrunk from 150 over the course of a year to about five in the last 18 months. "There hasn't been a lot of activity in the top 100 firms," he adds.

A SCREECHING HALT

In the wake of the Internet bust and the overall slowdown in the economy, "the phenomenon of roll ups by Wall Street-funded outfits has come to a screeching halt," Telberg says. In part because capital has dried up, but also because the return on investment was "just not there for Wall Street's taste."

Century Business Services, the most aggressive of the consolidators, has had a difficult time increasing revenue and reducing costs with the CPA-firm business model, Telberg adds. In fact, they've had to sell off other businesses. American Express has slowed its acquisitions of CPA firms, Shamis says, and though there are rumors that H&R Block is poised to acquire more, activity has stabilized.

American Express Tax & Business Services launched the trend back in the early 1990s, about the time when its predecessor, IDS Tax & Business Services, acquired Greg Verdon's Sacramento firm.

"If it had worked out, I would have been in hog heaven," reflects Verdon.

The promise of more resources was alluring to Verdon, who said his small firm of six, which included one other CPA, was poised to benefit from more marketing dollars, a wider client base and better employee benefits.

"I wouldn't have walked into it if it didn't have success written all over it." But just in case, Verdon included a 3-year no-fault roll-out clause that would allow him to unravel the agreement if consolidation didn't fare well for his practice.

Initially, the deal was working. He retained management of his office and reaped the benefits of being part of a larger corporation.

"So many things went wrong in hindsight," Verdon says. "Our business practice philosophies were different from the other CPA firm." American Express blended Verdon's practice with another Sacramento-based firm and moved the two firms to one central location, uprooting both from their client base. "We were getting different signals from the home office, since my contact person in the purchase was different. And, I didn't expect the change of geography to make such an impact."

The location of a small CPA firm is crucial to its clients, Verdon says. Convenience is everything. "It disrupted the geography of our client base, as well as the image base." Suddenly, his clients felt like little fish, he says.

So in 1995, Verdon pulled out of the consolidation under his no-fault clause. "Now I'm back to running my own firm and enjoying it."

American Express had to stay out of Verdon's market for five years under a non-competitive clause, but they haven't returned and Verdon believes they're going after bigger fish.

TURNING TO ALLIANCES

With consolidators moving at a slower pace, CPA firms have shifted their focus to forming alliances with other CPA firms, Telberg says. "Activity has shifted from outsiders to insiders." Since the market forces that spawned consolidation are still there--diversification and specialization--firms are seeing the value of strategic alliances or mergers.