Why Do Larger CPA Firms Purchase Smaller Firms?

A large business merger or acquisition usually dominates the headlines, particularly if it is a large transaction. However, small-business transactions such as a larger CPA firm purchasing a smaller one, are a more common occurrence. Reasons why a larger CPA firm may want to purchase a smaller accounting company vary from wanting to increase its client base to helping it become more competitive.

Expanding Client Base

One of the main reasons why a larger CPA firm may want to purchase a smaller-sized accounting operation is to add to its existing client base. This is particularly true if the small firm has a reputable and solid list of clients or has experience in a particular industry. In this case, practice development through acquisition is better than building the practice one client at a time.

Expanding Into A New Market

Rather than setting up a new office in a new market, a larger CPA firm may decide to buy an existing firm in the local area. In making this decision, a CPA firm must weigh the costs and benefits of spending money on a new office, equipment and staff against the costs of acquiring an existing operation.

Hiring Talent

A CPA firm in need of talent may decide to make an acquisition of a smaller rival. In such a case, the CPA firm bases its purchase decision on the quality of the staff of the acquired company. This is especially true if the accountants at the smaller firm have key client relationships or are already at or near partnership level. It is not uncommon for a client to show loyalty to a particular accountant who is responsible for nurturing the client relationship.

Competition

As it is in the case of the business acquisitions, a larger CPA firm deciding to get rid of its competition through an acquisition is not out of the realm of possibilities. On the flip side, a small firm seeking to avoid losing business may welcome joining forces with a larger CPA firm.

Types of Transactions

There are several types of transactions in a CPA firm acquisition. In an outright sale, the partners or owners of the smaller firm sell the entire practice. A merger exchanges the equity interest of one firm for the equity of the acquiring firm to form a combined entity. A two-stage deal combines a buyout with a merger to address the needs of both parties to the transaction. In a cull-out sale, the sellers segment a portion of their accounting practice and sell it off.

References

• TransitionAdvisors; Understanding the Market for Accounting Firm Mergers and Acquisitions; Joel Sinkin and Terrence Putney CPA; January 2007
• The Student CPA; Mergers and Acquisitions Fever Takes Hold of Regional Accounting Firms; Narcisse Dansou; February 2011
• "Baltimore Business Journal"; Greater Baltimore's CPA Firms in Hunt to Buy Rivals; Gary Haber; March 2011
• ThinkVisionary: Visionary Marketing