Weekly Update

Enhancing Firm Attractiveness to Buyers

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Executive Summary

  • Private Equity Acquiring Accounting Firms – Private equity firms are increasingly interested in acquiring accounting firms, which marks a shift from the “previously unwritten rule against investing in sectors whose primary asset goes down the elevator at the end of the day (i.e., people).”
  • Public Accounting Growth Areas – Particularly for smaller CPA firms, there is a positive outlook for growth in the following areas:
    • Client Accounting Services (CAS) and fractional CFO services,
    • Niche development,
    • Financial statement audits,
    • Asset and wealth management,
    • Advisory services,
    • CPA firm back-office services,
    • Client system controls’ review, and
    • Lifetime planning services.
  • M&A for Small- and Mid-Sized Firms – For the 46,000 “Main Street” public accounting firms in the U.S. generating revenue of $5mn or less annually, some ways to enhance their attractiveness to firm buyers include:
    • Demonstrating their niche potential, synergistic value, and ability to create a competitive edge,
    • Filtering out less-profitable 1040 clients with fees <$1k and engagements below $3.5-5k in annual fees,
    • Illustrating and quantifying five areas for significant upside for acquirers of your firm,
    • Making your top 50 clients as attractive as possible,
    • Identifying and addressing your firm’s most significant vulnerabilities,
    • Being willing to work alongside the acquiring firm for a while with skin in the game, such as an earn-out, and
    • Developing a good rapport with potential acquirers.
  • Niching Down – Focusing on niche markets and demonstrating your expertise with webinars can help attract more clients in the niche.
  • Accounting Errors – According to Gartner, “It’s better to have less technology with a workforce that accepts it than to have the cutting edge of technology and resistant employees.”
  • Skills-Based Hiring Remains Elusive – Although job postings requiring a degree fell by nearly 400% between 2014 and 2013, during this time there was only a 3.5% decrease in hiring candidates without a bachelor’s degree.
  • Avoid Constant Competitor Comparisons – While it is crucial to understand your competitors for market positioning, avoid constant comparisons to avoid unnecessary negativity and unproductive spirals.  External appearances can be deceiving, and your competitors’ apparent outward success often masks significant internal challenges.
  • Job Ghosting Remains Significant – A significant trend among Gen Z job candidates includes failing to attend interviews or reporting to work after they accept an offer.  According to Indeed in the UK, 93% of Gen Z flaked on a job interview, and 87% never showed up to work after accepting an offer.
  • AI to Take Your Tedious Tasks, Not Your Job – AI is more likely to automate some of your mundane tasks that you don’t want to perform anyway rather than replace your job.
  • Achieving a 6-Hour Workday – Some strategies to achieve a 6-hour workday and avoid staff burnout include:
    • Setting healthy client boundaries,
    • Requiring upfront payments,
    • Monitoring and managing staff capacity, and
    • Implementing ‘half-day Fridays’.
  • Buying an Accounting Firm – Some important considerations when you buy a CPA firm include:
    • Why the firm is looking to sell,
    • The firm’s performance over the last few years,
    • Significant economic developments in the geographic area around the firm, and
    • The extent of the firm’s cultural match with that of your current firm.
  • Generative AI Use – This week the Wall Street Journal reported that in a survey it recently conducted “of 1,400 executives around the world asking them about generative AI and what they’re doing with it[,] ninety percent of them are just observing and waiting for things to happen,” and only “10% are actually really” using AI as “pioneers.”

Accounting Today –  Private Equity ‘Revolution’ Brings Risks to Wealth and Accounting 

  • Private equity capital is revolutionizing the wealth management and accounting industries by aggressively pursuing add-on acquisitions within these fragmented sectors.
  • Deal volumes in professional services like accounting and wealth management remain strong.
  • This transformative growth for the accounting industry challenges the traditional view against investing in people-heavy businesses.
  • “Private equity has emerged as a powerful catalyst for driving transformation, process improvement and growth acceleration for professional services firms.”
  • “Investments in this sector buck the previously unwritten rule against investing in sectors whose primary asset goes down the elevator at the end of the day (i.e., people).”

Accounting Today –  Voices Art of Accounting: Top Growth Areas for CPAs 

  • There is a positive outlook for the future of public accounting, particularly for smaller practices.
  • Some key growth areas include:
    • Client Accounting Services (CAS) and fractional CFO services,
    • Niche development,
    • Financial statement audits,
    • Asset and wealth management,
    • Advisory services,
    • CPA firm back-office services,
    • Client system controls’ review, and
    • Lifetime planning services.
  • “Many smaller CPA firms are abandoning audit services because of the added costs of keeping up to date.”
  • “Asset management is a continuing, sustainable, and growing source of revenue for CPA practices.”
  • “Every business with more than one owner should have a buy-sell agreement, and solos should have a continuation plan.”

Accounting Today –  Voices Harnessing the Hype of GenAI 

  • The use of GenAI in accounting can help address challenges such as complex and changing regulations and staffing shortages.
  • However, despite GenAI’s potential, human insight and judgment remain irreplaceable, highlighting the importance of training professionals to provide insight and judgment to address future challenges.

Accounting Today –  Voices How Main Street CPA Firms Can Attract Buyers in 2024 

  • There are over 46,000 “Main Street” public accounting firms in the U.S. generating $5 million or less annually, which play a crucial role for businesses and individuals.
  • Despite their value, these firms face challenges in the mergers and acquisitions (M&A) market due to selective acquirers and a competitive environment.
  • To improve their M&A prospects, these firms should focus on demonstrating:
    • Their niche potential,
    • Synergistic value, and
    • The ability to create a competitive edge.
  • Typical acquirers of CPA firms include:
    • Private equity firms,
    • Firms seeking specific leadership, and
    • Firms that could be more entrepreneurial.
  • “Acquirers are very selective and can be because so many firms are looking for a deal.”
  • Some other ways to be more attractive to acquirers include:
    • Filter out less-profitable 1040 clients with fees <$1k and engagements below $3.5-5k in annual fees
    • Illustrate and quantify five areas for significant upside for acquirers of your firm
    • Make your top 50 clients as attractive as possible
    • Identify and address your firm’s most significant vulnerabilities
    • Be willing to work alongside the acquiring firm for a while with skin in the game, such as an earn-out
    • Develop a good rapport with potential acquirers

Accounting Today –  Voices Myths and Fears About Niching Down 

  • Deciding on a niche market is an effective strategy for growing your firm.
  • Niching down counters the myth that it limits customer base and profits by focusing on areas with substantial potential clients, like the cannabis industry.
  • This approach involves identifying target customers and tailoring marketing to meet their specific needs, thereby attracting more clients who see the firm as understanding their unique challenges.
  • While passion for a niche is important, it should be balanced with industry research.
  • Becoming a thought leader in your niche, through methods such as webinars, can help attract niche clients.
  • “If you select a niche with a large number of potential clients, your customer base will not be limited.”
  • “Being strategic in your marketing and the services you provide means you will likely attract more clients than if you pursued a wider audience with a more general message.”
  • “Our potential clients reach out to us because we’ve been providing content that has alleviated some of their pain points already, and they are ready to become a client to get more problems solved.”

CFO Dive – More Than Half of Accountants Make Several Errors Each Month: Gartner

  • According to Gartner, accountants are prone to making errors due to excessive workloads and the need for careful review and interpretation of data.
  • “It’s better to have less technology with a workforce that accepts it than to have the cutting edge of technology and resistant employees.”
  • “Companies can reduce financial errors by as much as 75% by making the adoption of technology easy to use, learn and customize, Gartner said.”

CPA Practice Advisor – The Accounting Technology Lab Podcast: Zoho Analyst Day 2024

  • AI can streamline tasks, such as document recognition, data analysis, and anomaly detection.
  • An example of a practical application of AI is expense reporting (e.g., OCR for extracting text from photos and detecting anomalies in expense reports.
  • More than 20 of the accounting profession’s thought leaders gathered in Dallas last Tuesday for the Thought Leader Symposium, hosted by CPA Practice Advisor.
  • The event, now in its 15th year, focuses on significant trends, challenges, and emerging issues in the accounting field, including technology, private equity’s impact, staffing, learning and development, AI, and security concerns.

CPA Practice Advisor – Despite Dropping Degree Requirements on Job Ads, Many Firms Aren’t Changing How They Hire

  • Skills-based hiring has been shown to be more effective at predicting job performance than education.
  • A study by Harvard Business School and The Burning Glass Institute found job postings dropping degree requirements increased by nearly 400% from 2014 to 2023.
  • However, it noted there was only a 3.5% increase in hiring candidates without a bachelor’s degree during this time.

Future Firm – Ignore Your Competitors (Kinda)

  • In this episode of the Future Firm Accounting Podcast, Ryan Lazanis discusses the importance of not overly focusing on competitors in the accounting industry.
  • He emphasizes that while understanding competitors is crucial for market positioning, constant comparison can lead to negativity and unproductive spirals.
  • Lazanis advises firm owners to concentrate on their own firm’s progress and goals, rather than comparing themselves to others.
  • He also highlights the deceptive nature of external appearances, reminding listeners that outward success often masks internal challenges.
  • “The only important thing is how you are doing.”
  • “Comparing yourself to yourself is the best comparison you can make.”

Going Concern – The Job Ghosting Is Getting Out of Hand

  • A significant and relatively new trend among job candidates, particularly those from the Gen Z demographic, involves ghosting prospective employers.
  • This is a phenomenon where the candidate fails to show up for scheduled interviews, as well as not showing up to work after accepting a job offer.
  • According to a survey conducted by Indeed in the UK, “A whopping 93% of Gen Zers told the global recruitment platform that they’ve flaked out of an interview.”
  • “Worse still, a staggering 87% managed to charm their way through interviews, secure the job, and sign the contract, only to leave their new boss stranded on the very first day.”
  • This behavior is not only prevalent among job seekers but is also increasingly being reciprocated by some employers, leading to a culture where ghosting has become entrenched in the hiring landscape.
  • The impersonal nature of modern recruiting processes could be a contributing factor to this trend.

Going Concern – Only the Dumb Firms Monitor Badge Swipes

  • In response to EY UK partners allegedly “tying performance ratings to non-anonymized badge swipes,” a former EY leader stated that as a result “these large firms, like EY, risk losing staff for good.”
  • The former EY leader stated that it is the responsibility of C-suite leaders “to create an organisation their employees want to be a part of…but atmospheres dominated by control – don’t quite fit that – they push staff into survival mode.”

Going Concern – QOTD: “The Robots Are Not Coming For Your Jobs, They’re Coming For Your Tasks”

  • EY’s Global Talent Acquisition Leader emphasized that AI is aimed at automating tasks rather than replacing jobs.
  • Automation focuses more on mundane and routine tasks that employees typically do not want to engage in.
  • Research by the IMF indicates that 60% of jobs in advanced economies will be impacted by AI, and it will typically affect parts of jobs rather than entire functions.
  • “The robots are not coming for your jobs, they’re coming for your tasks.”
  • “And in most cases, they’re coming for tasks that you don’t want to do anyway.”

Ignition – Inside the 6-hour workday: Video highlights from Dawn Brolin and Marcus Dillon

Some tips to achieve a 6-hour workday and reduce staff burnout include:

  • Set healthy boundaries with clients, especially when client processes could negatively impact your firm.
  • Require clients to pay you upfront, which avoids cash flow problems and time wasted chasing payments.
  • Closely monitor the capacity of your staff, and help your stuff recharge (e.g., with ‘half-day Fridays’).

Insurance Journal – Why Insurance Professionals Will Change Jobs in 2024

  • There is value in focusing more on staff retention rather than merely recruiting new talent.
  • The demand for remote work options is a significant factor for professionals considering a job change, with a strong preference for 100% remote roles.
  • Firms that fail to offer flexible, remote work arrangements risk losing candidates to competitors who meet these demands.
  • Compensation is becoming a critical differentiator in attracting talent, as benefits and perks become more standardized across the industry.
  • Staffing issues and the resultant burnout from unaddressed workload demands are pushing insurance professionals to seek new employment.
  • Open-mindedness in hiring, including considering remote candidates and offering competitive salaries, is essential to alleviate pressure on existing staff and improve retention.
  • “No Remote Policy = No Candidates.”
  • “Remote jobs fill faster than office-based positions.”
  • “Compensation May Be the Only Differentiator.”
  • “Your Staffing Issues Lead to Their Burn Out.”
  • “The best advice I can give is to be as open-minded to all possibilities as early in the process as possible.”

Journal of Accountancy – JofA roundtable: Why 2024 is shaping up as a big year for ‘people tech’

  • PeopleTech involves using technology to address staffing-related issues, and its applications include:
    • Performance reviews,
    • Feedback, and
    • Staff appreciation.
  • The integration of AI tools in platforms like Zoom and Microsoft Teams can assist with meeting summarization and task automation.

Journal of Accountancy – Tech roundtable: AI and Automation Go Way Beyond ChatGPT

The key recommendations from the panelists on this episode of the Journal of Accountancy podcast include:

  • Embrace Generative AI – Utilize generative AI tools like ChatGPT for various tasks within your firm, recognizing their current capabilities and limitations.
  • Focus on Data Hygiene – Ensure accurate and clean data to train AI systems effectively, as poor data can lead to unreliable outcomes.
  • Integrate AI in Existing Apps – Look for opportunities to embed AI within your existing applications to enhance their functionality.
  • Be Cautious with AI Development – Understand that developing AI tools from scratch can be complex and risky; consider leveraging existing AI solutions.
  • Collaborate with Technologists – Partner with IT and technology experts, especially for advanced AI and automation implementations.
  • Implement Data Governance – Develop strong data governance policies to manage the risks associated with AI and automation.
  • Explore AI for Automation – Utilize AI for automating routine tasks, thereby increasing efficiency and freeing up time for more complex work.
  • Evaluate AI Outputs Critically – Regularly assess and verify the output of AI systems to ensure accuracy and reliability.
  • Prioritize Technology Integration – Ensure your technology systems are well-integrated to avoid duplication of work and maintain data consistency.
  • Keep Up with Technological Advances – Stay informed about the latest developments in AI and automation to continually enhance your firm’s operations.

Public Accountant (Australia) – Changing the Cost of Some Uni Degrees Didn’t Change Students’ Minds

  • One way to help address the staffing shortage would be to get more students to major in accounting.
  • Australia attempted to redirect university students from majoring in “low demand” fields, such as history or journalism, to “high demand” fields, such as accounting and engineering.”
  • This involved increasing tuition and fees for “low demand” fields by up to 117% while reducing tuition and fees for “high demand” fields by up to 59%.
  • However, this only resulted in approximately 1.5% of students changing their major in response to the tuition and fee changes.

Public Accountant (Australia) – How to buy a business

Some important considerations when you buy an accounting firm include the following:

  • Why is the firm looking to sell?
    • It would not be concerning if the firm’s owner is simply retiring or moving to a faraway location.
    • However, you want to make sure the firm owner is not “going to go and open another practice not far from you, soon after you buy their business.”
  • Perform robust due diligence to obtain an excellent understanding of “what has gone on in the business over the past three to four years.”
  • Research what is going on in the region (e.g., is the universe of potential firm clients increasing or decreasing).
  • Seek a cultural match for your firm regarding:
    • Client type,
    • Service levels,
    • Staff expectations, and
    • Tools used to run the firm.
  • After you purchase the firm, have the previous firm owner let clients know why they exited the business and have them introduce you during your new firm’s next face-to-face meeting with them.

Rosenberg & Associates – Highlights of Managing Partner Panel – Part One

  • Marc Rosenberg and Art Kuesel recently led a discussion of The Virtual Roundtable Group (VRT) “to exchange ideas about CPA firm best practices”
  • Rosenberg and Kuesel founded the VRT, which is a group for managing partners whose firms have total revenue between $10mn and $30mn.
  • Key topics included:
    • The importance of reinvesting profits into staff and technology,
    • Managing partner buyouts with “circuit breakers” to protect cash flow,
    • The necessity of informing the firm about partners’ serious medical issues,
    • The benefits of educating staff about firm operations, and
    • Strategies to motivate staff to aspire to partnership including:
      • Reducing workloads,
      • Easing high-stress cultures,
      • Establishing clear advancement thresholds, and
      • Highlighting the benefits of partnership.

Rosenberg & Associates – Highlights of Managing Partner Panel – Part Two

  • Key topics covered in a session of Art Kuesel and Marc Rosenberg’s Virtual Roundtable Group (VRT) for managing partners at firms with revenue of $10-$30mn included the following:
    • Partner evaluations,
    • Compensation,
    • Leadership development,
    • Addressing staff shortages, and
    • The importance of a compensation committee.
  • It emphasized the necessity for regular partner evaluations and performance feedback, innovative approaches to compensation and leadership development, and strategic solutions to staff shortages.
  • The discussion also highlighted the effectiveness of a compensation committee (CC) in managing partner compensation and the potential challenges it faces.
  • “The absolute key to a successful comp committee is that all CC members need to be highly credible in the eyes of the partners.”
  • “At many firms, staff work their way up to partner, receiving regular performance appraisals. But when someone becomes partner, partners stop having performance evaluations.”
  • “This makes little sense if your firm is truly committed to a performance-based partner comp system.”
  • “A few firms are hiring non-accounting majors (English, finance, economics, etc.) and training them in basic accounting skills.”
  • “The partners must trust the CC to exercise good judgment in making the income allocation and to be fair and unbiased.”

Wall Street Journal – How Companies are Starting to Use Generative AI to Improve Their Businesses

  • Companies are increasingly adopting generative AI for various purposes, such as:
    • Enhancing help desk efficiency,
    • Boosting employee productivity, and
    • Improving customer service.
  • Significant productivity gains of 10-50% have been reported as a result of implementing AI.
  • “For the most part, some of the big use cases for us are making the help desk more efficient, making employees generally more productive, [and] using generative AI to follow up with potential candidates for employment.”
  • “Deploying existing software tools that have generative-AI features in them [can result in] a 10% to 20% productivity improvement.”
  • “We did a survey late last year, early this year of 1,400 executives around the world asking them about generative AI and what they’re doing with it.  Ninety percent of them are just observing and waiting for things to happen.  We are seeing the 10% actually are really getting out.  They’re being pioneers.”

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