Mergers and Acquisitions: A Growth Engine For Public Accounting Firms

The public accounting sector is highly competitive and fragmented, with the Big Four firms dominating the market share, followed by several mid-tier and regional firms. Regardless of size, however, mergers and acquisitions (M&A) are common strategies for public accounting firms to expand their geographic reach, client base, service offerings, and talent pool.

As such an important part of shaping the sector, we take a look at the key trends, drivers, and challenges of M&A activity

The outlook for the industry in 2024

M&A activity in the public accounting space has been growing in recent years, and there’s little reason to suspect this won’t continue in 2024 and beyond – with data suggesting record deal levels could be on the horizon this year.

And firms of all sizes are likely to be involved in this activity too. For the Big Four it’s about diversification and the addition of specialized services. With a real need to enhance their digital capabilities and diversify revenue streams, strategic acquisitions could be pursued in the areas of cybersecurity, data analytics and sustainability – and those providing access to emerging markets around the world.

For mid-tier and regional firms, it’s likely that activity will focus on scaling up. Consolidation to gain scale and compete with the Big Four will help address the talent shortage, while merging with or acquiring complementary firms with industry expertise or geographic presence are likely to be key – which could also mean firms joining global practice networks.

Meanwhile, smaller firms will face increasing consolidation pressure on top of regulatory changes and technological disruption. They will either exit the market by selling to larger firms or join forces with other similar-sized firms to survive and thrive. They will also more likely focus on their niche markets, such as family-owned businesses, nonprofits, or startups, and differentiate themselves by offering personalized and value-added services.

The key drivers behind this activity

The recovery of the economy and the demand for public accounting services after the COVID-19 pandemic has created new challenges and opportunities, such as helping clients navigate stimulus programs, tax reforms, business continuity, risk management, and digital transformation. Firms that can adapt to the changing environment and provide innovative and holistic solutions will have a competitive edge and attract more M&A interest.

Regulation is also key, with the public accounting sector subject to various rules and regulations from the authorities, such as the SEC, the PCAOB, the IRS, and the AICPA. These demands are constantly changing and becoming more complex and stringent, especially in the areas of audit quality, independence, ethics, and reporting. Firms that can comply with the regulatory and professional standards and demonstrate their credibility and reputation will be the winners here.

Technology and innovation are transforming the public accounting sector, enabling firms to automate and optimize their processes, enhance their data and analytics capabilities, and offer new and value-added services. M&A interest will therefore follow firms that can leverage technology and innovation and invest in their digital infrastructure and capabilities.

Challenges to M&A activity

It’s not all opportunity, however, as challenges remain both at firm and sector level that will impact the success and availability of M&A potential for US public accounting firms.

Market conditions continue to influence valuations and pricing, as well as the expectations and negotiations between parties. Justifying valuations and showcasing the key aspects of the firm – such as size, growth, profitability, client mix, service mix, talent pool, culture, and reputation – will help M&A activity progress through different market conditions, where interests and goals between partners are aligned.

Successful integration and retention after completion is critical for the success of M&A deals, as this inevitably impacts things like operational efficiency, client satisfaction, employee engagement, and financial performance. Challenges exist, such as cultural differences, leadership conflicts, client conflicts, staff turnover, and regulatory issues, so firms that can plan and execute good strategies here will see the benefit.

Competition and market disruption is also growing, with new entrants such as technology companies, consulting firms, and alternative service providers offering similar or superior services at lower costs or higher quality. This can erode things like market share, revenue and profitability for more traditional public accounting firms, which can then reduce their attractiveness and viability for M&A deals if they can’t demonstrate their value.

The role of Taylor Hawkes

Our position as a respected adviser in the accountancy and finance sector allows us to provide consulting services to practices, particularly focusing on company transactions and valuations. Whether it’s owners looking to sell their practice, merge with another firm, or wanting to buy as part of expansion plans, our expert valuations team have the experience and industry contacts to support the strategy.

Our in-depth market knowledge and data analysis approach enables us to provide valuable advice, helping owners understand and accurately value their business, as well as identifying their aims for the transaction. We then provide a full management service that guides firms along each step of the process, from enquiry and offer, to negotiations and the final legalities.

The key to a successful deal is having more than just a basic understanding of the sector, but being truly part of it. Some external investors may not represent good long-term partners, due to a lack of industry knowledge for what makes a particular firm tick in the changing accounting landscape. As advisors focused on this sector day-to-day, and working strategically alongside firms of all shapes and size, we are uniquely positioned to help match a selling firm with a buyer where their ambitions, culture, systems, skills and expertise are in sync.

Our foundation in recruitment is also a benefit to the staff restructuring process that these deals can require. From helping identify and recruit senior leadership experts to fill the management gaps created by merging or selling a business, to change management specialists to run transitions, and handling the placement of staff impacted by duplicate or obsolete roles, our recruitment advisors support our transaction experts in covering all bases as the business transaction takes shape.

Click to download: A Holistic Approach To M&A and The A-Z Of Buying And Selling An Accountancy Practice