Strength Numbers.

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.

"Firms are trying to become more multidisciplinary," Shamis says. "The $2- to $3-million firms can't compete with the $50-million firms. They don't have the capital. And the best way to do it may be to merge with a larger firm."

Gale Case, CPA, CFE, a principal with Rothstein, Kass & Co., P.C. in Beverly Hills, agrees. Case's firm Ozur Andersen & Radder merged with Rothstein in January 2000.

"It allows the firm to leverage itself more," says Case. "It gives us a capacity to do a greater volume of work. And this is the age of clients wanting one-stop shopping. As a larger firm, it allows us to provide a wider variety of services ranging from financial and investment planning to business consulting, risk management and many aspects of insurance."

While the merger presented Case and his fellow partners a few challenges, including adapting to new management styles and workloads, it brought a few perks. The merged firm now has a presence on both coasts and Case's office can seek work they never would have considered prior to the merger. It boosted the firm's financial services area and provided a more secure environment for retirement, Case says.

Despite all that diversification, CPAs within the firm were able to focus on their specialties while still reaching a broader client base--a feat that's becoming more and more difficult for a sole practitioner in a complex industry.

"What local firms are doing across the nation and across the world are associating with each other. Firms that specialize in estate planning are teaming up with firms that specialize in financial planning ... . So the client gets the full range of services that the client is demanding," Telberg says.

Even a heavy-hitter, like McGladrey & Pullen, LLP saw the benefits of teaming up through its merger with H&R Block. "We're all in the business to form alliances to drive profitability," says Larry Koenig, managing director with RSM McGladrey, Inc. in Riverside. He adds that after the merger, "We were able to go out into markets we hadn't reached before and make our presence known."

And RSM McGladrey gave H&R Block a boost in growing its empire. "RSM McGladrey will be a strong, well-capitalized competitor, and with this solid foundation in place, we will continue to expand our national practice," said Prank L. Salizzoni, then-president and chief executive officer of H&R Block in a June 1999 press release about the merger.

The key to the success of the largest merger to date, was a shared vision, adds Koenig. "Both sides were well-informed. We all knew what the expectations were." Both were aiming to grow their businesses and become industry leaders in accounting, tax and consulting for mid-sized companies.

NEW CHALLENGES, NEW CHOICES

With a merger or consolidation there are challenges, like adapting to new operating models, taking on new responsibilities, adjusting from a partner environment to a corporate environment and maybe a change in focus. When the visions are different, that's when some people may decide to go it alone.

"In any merger, there's going to be a few folks who will opt out," says Gale Case. "Sometimes it's because of the larger size, or others may choose to start something they've been planning for a long time."

But there hasn't been a mass of defections, says Telberg. "We haven't seen it from American Express or Century Business Services. Once these marriages are made, they do last."

What a merger could do is act as a turning point for some CPAs to carve new paths.

"It was definitely a turning point for me," says Paula Voorhees, a former partner with Case at Ozur, Andersen & Radder in Los Angeles. She opted out of the merger after a year to form a sole proprietorship in Marina Del Rey. "I had thought about forming my own practice, but never really thought about it seriously. It was just the right time for me."

Voorhees' says it was difficult to maintain her specialties--small businesses and estates and trusts--under the new company. "There was more pressure to be a big business person, to go get bigger clients. It's not bad; it's just different," she says.

Under the new culture, Voorhees felt that the personal side of her practice was getting lost and she felt that her clients would get lost in the shuffle. "Should something happen to me, who would care for my clients? They were not the kind of clients on which the new firm focused," she says.

That personal service and close ties to the community is what sets the small, local firms apart from the larger regional firms, says Julian Cangelosi, CPA and founding shareholder in Cangelosi & Holmes, Inc. in Tustin. "Personal service and the niche market," he says, "that's why the local firm will always be around."

That's not just for CPA firms, Cangelosi adds. "When a large company buys a smaller unit, it tends to be entrepreneurial. And it may find that it's not capable of delivering the service that a local firm provides. What the local firm offers is a closer representation of the market and close ties to the community."

Voorhees says that making the break gave her the freedom to focus on what she wants. "The only boss is my clients and the only pressure is what I put on myself. I worked more hours during tax season, but I was in a much better mood. The bottom line is my clients are paying less, I'm making more money and having more fun."

And the value of alliances isn't lost on Voorhees who has formed affiliations with other solo CPAs who share office space with her. "It's important to have people to share my ideas with," she says.

It's the sign of the future, says Telberg. CPAs are aligning with other CPAs and they are joint-venturing in unprecedented numbers. "CPAs have reinvested in their profession as never before," he says.

The consolidation trend has drawn attention to the long-term value of CPA firms, Telberg adds. "Before, CPAs looked at their occupation as a job. With consolidation, CPAs looked at their firms as assets. Now they look at how they can maximize the value of their assets like any shareholder."

Sharon Ross is an associate editor for California CPA.