Mark Goldfarb cannot recall the number of times he and his partners have heard the offer: the promise of easy cash and a name loaded with brand recognition. It is, without question, a tempting lure.
But Akron’s SS&G Financial Services has managed to hold its own in an industry rife with mergers and buyouts.
“We’ve been approached by all the major consolidators,” explains Goldfarb, who is a bit reluctant to share many of the details about the suitors who have beaten a path to his doorstep over the last few years. “We really didn’t think a lot of their business models made sense. And, at the end of the day, you can have all kinds of services under one roof, but you’ve still got to take care of your clients.”
That is the long and short of the accounting industry. While companies such as American Express and Century Business Services motor through the accounting profession snatching up independent CPA firms, SS&G has managed to keep its name off of the ever-growing laundry list of industry acquisitions.
Instead, Goldfarb and his partners have pursued their own acquisitions. They’ve spent the better part of the past 18 months transforming the accounting firm formerly known as Saltz, Shamis & Goldfarb into SS&G Financial Services.
First, in March 1999, SS&G acquired Akron’s McWhorter & Co. to form the base of its health care practice. Then, it added Chagrin Falls-based employee benefit consulting firm R.C. Morris Inc. and Westlake-based technology consultants F1. Finally, and most recently, SS&G acquired the Columbus CPA firm of Green and Wallace Co.
The deals boost SS&G’s annual billings about $5 million and increase its work force to 280, making SS&G the largest independent accounting firm in Ohio and one of the 50 biggest in the country.
“The bean counter is no longer a bean counter anymore,” Goldfarb says of the influx of new client services to SS&G. “Or, at least now, there’s a different way of counting beans.”
These are strange days to be a CPA. The profession was in the process of evolving from bookkeeper to business consultant when the rules changed again. A dwindling pool of qualified professionals, a booming economy and the need for a quick and easy business succession plan have mixed together to fuel an age of rampant consolidation in which you can hunt, be hunted or try to stay out of the way.
How this trend will ultimately affect the more than 44,000 small, independent accounting firms in the United States depends upon whom you ask. Answers vary from “not much” to predictions that many of these small players could end up gasping for air if and when the U.S. economy takes a nosedive.
“There is a strong entrepreneurial spirit alive in the hearts of many of the smaller practitioners. I don’t really think they see it as change or die,” says Tim Fogarty, a professor and chair of the accounting department at Case Western Reserve University’s Weatherhead School of Management. “It’s a difficult sell because the phones keep ringing and there are more tax returns to be done.”
It’s not only the small players that industry observers are worried about. Independence-based Century Business Services’ lackluster stock performance of late is an indicator to some that perhaps bigger is not always better. The bottom line is this: It doesn’t matter what level of the highly fragmented industry food chain an accounting firm falls into, those in the top office are looking over their shoulders to figure out how to emerge from the changes as survivors.
Keeping up with the competition
Of the 45,000 CPA firms in the United States, few are considered “national.” Carve the 100 largest firms from that list and you are left with roughly 44,900 businesses that each have fewer than 50 CPAs.
It’s obvious from those numbers that the small accounting firm will not become extinct any time soon, but some wonder why so many were bought by just a handful of big-name players. Industry watchers point to the booming economy, a dwindling work force, business succession planning and client demand as the reasons.
“Part of it is trying to keep up with what’s going on with the larger firms — the Big Five firms,” says Fogarty. “They have certainly gotten aggressive in terms of trying to offer their clients one-stop shopping for a diversified portfolio of services and these small firms have not been able to keep pace.”
Likewise, Alan Anderson, Senior Vice President of Technical Services for the American Institute of Certified Public Accountants (AICPA), sees the needs of the customer driving the consolidation trend.
“Clients are demanding more,” he says. “They like to go to one place to take care of everything.”
But while the Big Five — Arthur Andersen, Ernst & Young LLP, KPMG Peat Marwick, PricewaterhouseCooopers and Deloitte & Touche — and other players in the profession roll new services into their portfolio of client offerings, many smaller firms can only sit on the bench and watch. Stir in the hefty price of integrating new technology and it soon becomes apparent why some CPA firms look at a merger offer as a life preserver.
“If you’re a CPA who has eight or 10 people working for you and you’re 55 or 60 years old, what are your options?” says Goldfarb. “Somebody who offers you some cash, stock and an opportunity to continue to run your division of a business is a better option than figuring out whether people in your office have the financial capability to buy you out and the expertise to keep clients.”
So what are the owners of small CPA firms doing to help their businesses reach their full potential in this age of consolidation? As it turns out, not much. The booming economy has brought most firms more business than they’d ever seen before, making it difficult for owners to focus on much more than simply keeping up with client demand.
“There really is no panic,” Fogarty says. “There is no incentive to change. There is no time to look around and see what’s going on. As long as people are happy making as much money as they had in the past, or even a little more, they will certainly stay where they are.
“It’s only when they start, as I say, to dream the dream of fabulous wealth, that they start to listen to these consolidators and see the advantage of being part of a larger enterprise.”
Strategic movement in the middle
“If I thought there were disadvantages, we clearly wouldn’t have done it,” explains David Sibits, who has fit in this interview via cellular phone while on the road to visit a client.
Sibits is the managing partner of Hausser &Taylor LLP, a Cleveland accounting firm that made headlines in February when it sold all of its nonaudit business to industry powerhouse American Express.
“Their vision is to be the top service provider to the middle market for tax advisory services. To us, it was a very, very desirable thing to be part of.”
Nevertheless, when the 65-year-old, 270-employee independent accounting firm — one of Northeast Ohio’s largest at the time — signed on the dotted line with American Express, it stood to some observers as an undeniable sign of the changing times. Yet, Sibits does not like the portrayal of American Express as an organization on a ruthless acquisition campaign merely for the sake of building an empire.
He says the decision to sell Hausser & Taylor’s nonaudit accounts to American Express was simply a way to combat industry pressures including a thin work force and the rising cost of technology, while retaining the entrepreneurial attitude that has been part of the firm since its inception. It was that combination of benefits that Sibits says other players who courted his firm in the past simply could not offer.
“We’re a pretty desirable date to the take to the dance,” he says. “This allows us to be the entrepreneurs that we were and still have the benefit of big company involvement. A consolidation into PricewaterhouseCoopers or Ernst and Young or whoever would have changed the entire make-up of the organization. This didn’t. It allowed us to be who we are.”
A few miles south along I-77 lies the headquarters of a public company that has shared the spotlight with American Express as a major industry consolidator that has aggressively snatched up smaller accounting, employee-benefits and business consulting firms during the past few years. But, after an all-time high stock price of a little more than $25 two years ago, Century Business Services, or CBIZ as it’s more commonly known, has hit rough times.
In the past year, there have been accusations of overstated revenue, job cuts and a disastrous quarter that sent CBIZ stock nose-diving to an all-time low of just a few dollars a share.
Recently, the company publicly stated its intent to regain the trust of Wall Street investors through a major internal overhaul; however, calls placed by SBN to the company’s headquarters seeking someone to share their side of the story went unanswered. Regardless, CBIZ is the name that rolls off the tongue of many analysts when they point to an example of the very real risks that accompany consolidation.
“It’s a bit uncertain if these consolidations are successful,” says Fogarty. “I know the CBIZ stock price has plummeted. What the market is saying is that they aren’t sure if the efficiency and the gains are real. A lot will depend on how the other pioneers, like American Express, do in this business.
“If they are successful, then a lot of other people will jump in.”
Anderson, of the AICPA, agrees. He says it is much too early to declare the consolidation trend either a big winner or a big loser because of mixed results from the industry heavyweights who have already tried it.
“It’s hard to see what sort of impact there’s been,” he says. “Obviously, the first group that really broke the norm and started acquiring CPA firms was American Express. Then you started seeing nontraditional players like Century Business Services and H&R Block doing the same thing.
“The jury is still out on how successful those acquisitions have been for those particular firms.”
Bolstering the Big Five
One might expect the Big Five firms to be sitting on top of the accounting profession like kings, simply because of their deep pockets and sheer size. However, the road is seldom that smooth.
It is within the ranks of the Big Five that competition seems the fiercest and pressure to innovate is at its peak. In fact, much of the responsibility of the Big Five firms lies with reinventing the CPA profession in the face of the enormous economic changes spurred by the advent of the Internet.
“We expect right now that 25 percent of our service lines within E&Y will have to be replaced over the next four to five years, period,” explains David Price, Area Managing Partner with Ernst &Young LLP for the Lake Erie Area. “Just imagine 25 percent of today’s revenue source not even being here four or five years from now and having to replace that because of this changing new economy.”
The manual process of tax preparation is slowly migrating to the Web and is one of E&Ys new services. Meanwhile, the practice of sending auditors to pore over financial records is well on its way to extinction, Price says, replaced by a new practice in which clients send information to be audited via a secure Web connection.
In addition, Price says E&Y has determined it does not have all of the core competencies necessary to consider itself a full-service firm, leading it to seek alliances with professional service providers while also trying to strike deals with smaller accounting firms to serve as network partners.
That’s not to say E&Y isn’t working to internally diversify services. One of the firm’s creations was a consulting arm that last May was sold to Cap Gemini after the Securities and Exchange Commission urged CPA firms to avoid providing both accounting and consulting services for the same client.
“The SEC said that accounting firms need to dislodge their consulting groups if they were significant,” says Price. “Since ours was very significant, we made a decision to sell them. You’re best to have a first-mover advantage. With it, we think we’ve created a competitive advantage.
“Now, we can do audit work or consulting work for a client, where we couldn’t before because of the audit conflict.”
E&Y has also partnered with a Washington D.C. law firm to establish one of the first alliances between an accounting firm and law firm on this side of the Atlantic. The practice is common in Europe, and is a trend that most analysts say will grow in popularity in the U.S. over the next few years.
So, at the start of a new millennium and in the midst of a new business environment unlike any experienced before, Price says the best stance E&Y can take is to build a company culture that promotes creativity and the ability to turn on a dime. The firm has already “changed at the speed of light” during the past year and a half, he says.
One of those moves was changing professional attire to “business casual” unless clients request more formal dress. The move was a conscious effort to bring on board employees who might fall outside the traditional suit-and-tie business image for which accountants have been known for years.
“Our theory is, we didn’t create this, we’re just moving toward it,” Price explains. “The more diversity you have in your organization, the more creativity and therefore, the greater amount of innovation.”
But what happens when innovation is simply not enough to not only sustain but also grow billing in an industry in which revenue is expected to drop by a quarter in the next five years? That, Fogarty believes, may lead the Big Five into markets now predominantly served by local and regional firms, a move he expects would draw battle lines between the large and the small.
“There are kind of turf battles going on already with some perceptive CPAs trying to expand their boundaries and other ones are trying to protect their boundaries,” says Fogarty. “Probably, the Big Five will continue to make inroads into the middle markets and small markets that had traditionally been served by regional and local firms.”
Survival techniques
So what does a small CPA firm have to do to survive? Most people familiar with the industry have the same two pieces of advice: find a niche and build alliances. Anderson believes that during the next three to five years, it will be key for small firms to brand themselves as experts in providing a certain services or working with clients in specific industries, whether it be retail, hospitality or manufacturing.
A second and crucial part of Anderson’s “survival” plan is to take the strength-in-numbers theory behind consolidation and use it to preserve the independence of like-minded small firms. SS&G Financial Services has already created an organization known as “The Leading Edge,” an alliance that boasts more than two dozen CPA firms spanning the United States. Robert Littman, a partner at SS&G, explains that the concept was used by the industry for years as a way to increase business, but is more useful in building an alliance of firms with similar philosophies, which can share their expertise and experiences with each other.
“What we did was go out and find firms that were similar in size to us, similar in philosophy and culture to us, so we have the same issues,” says Littman. “A firm with 200 people has a whole different set of issues than a firm that has 15 people.”
The next step for SS&G is creating an investment services entity that all of “The Leading Edge” firms can buy into that allows each firm to save on the costs of doing business and gives member firms more industry clout than they would have alone.
Today, SS&G Financial Services is unrecognizable from the 15-person firm it was when Goldfarb jumped on board 13 years ago. One look at how far the firm has come, specifically within the past year and a half, and it is not difficult to see that Goldfarb has heeded what is quickly becoming one of the most popular maxims of the Internet age.
It is no longer a battle between the big and the small, but the fast and the slow.
“It used to be that things were the same way year one as they were year two and year three,” he says. “It’s not that way anymore. You have businesses who were on the top of the hill a year ago, who are literally out of business today because they haven’t kept up.
“It’s a very fast-paced business world and our business is no different from that of any of our clients.”
How to reach: SS&G Financial Services, www.ssandg.com; Ernst&Young LLP, www.ey.com; AICPA, www.aicpa.org; Case Western Reserve University Weatherhead School of Management, www.weatherhead.cwru.edu; Hausser &Taylor, www.hausser.com
Jim Vickers ([email protected]) is an associate editor at SBN.
