insight magazine

Growth Perspectives | Winter 2023

Deal or No Deal? My 2024 M&A Predictions

The merger and acquisition landscape continues to evolve at a rapid pace as firms seek to expand their offerings and accelerate growth.
Brian Blaha, CPA


The accounting industry used to move in packs in terms of service offerings, with very little discernable differences between firm strategies. A few years ago, I predicted divergences would begin to emerge. While it hasn’t quite transpired at the pace I expected, we’re seeing more changes in the makeup of firms, largely driven by a variation in merger and acquisition (M&A) strategies, technological innovation, and the expansion of private equity (PE) ownership and influence across the industry.

So, what does all this change mean, and how will it impact the profession? Here are my observations and predictions as we head into 2024.

WHAT’S HAPPENING WITH M&A DEALS?

The M&A landscape across the accounting and broader professional services market continues to evolve. In looking at the diverse competitor set alone, the profile and service offerings of typical accounting firms have changed significantly. Gone are the days of CPA firms focusing exclusively on core compliance, audit, and tax services. Instead, firms today are generally focused on offering a full set of consulting and advisory services built on the foundation of trust, which are then supported by their audit and tax practices.

From 2020 to 2022, the number of M&A deals in the accounting industry increased significantly, with most occurring among the top 75 firms in the country, which has led to more large firms having multifaceted capabilities. There are now 12 firms outside the Big Four that generate more than $1 billion in revenue, and there are even more firms nearing that threshold.

While deal volume slowed a bit in 2023, with 57 deals completed through June 2023, compared to 69 over the same period in 2022, the number of deals in the industry have been consistently high for several years. Interestingly, non-CPA firm acquisitions have risen to 30% of deals in 2023, compared to 25% in 2022. I expect this trend to continue as firms look to acquire other capabilities as the shift toward an advisory firm model accelerates. On average, 32.3% of services are non-compliance related services for most firms, and that number rises to 45.9% for firms with over $150 million in revenue.

Of course, the most talked about topic in accounting firm M&A is the entry of PE into the industry, and many firms are asking important questions on this trend: What does this mean for the future of traditional partnership models? How will they compete with PE-led firms? How will they operate if they were PE-owned?

Notably, PE has impacted the M&A landscape in several ways:

  • Value: Overall, valuations for CPA firms are on the rise. PE firms view CPA firms as attractive targets as they offer them stable and diverse income streams, the ability to navigate recessionary times, and the ability to take advantage of growth opportunities. Because CPA firms don’t report earnings before interest, taxes, depreciation, and amortization in the same manner as companies in other industries, there’s been a push to normalize CPA firm earnings in a similar manner.
  • Structure: With increasing firm valuations, deal structures are changing. There’s more cash being brought to transactions as sellers are asking for some of the risk to be taken off the table. Partner incomes are then recalibrated (or cut) to bring the economics in line. In non-CPA firm deals, a mixture of upfront cash and shorter earnouts are trending, as firms are looking to integrate practices at a much faster clip.
  • Competition: With additional equity infused into the industry, the competition for qualified deals has increased, with more buyers pursuing each potential deal.

WHAT MAKES A DEAL IDEAL?

When evaluating M&A deals, firms typically look for certain elements:

  • Culture: If a culture fit isn’t present, it’s best to walk away and search for the next deal. It might be surprising to know that most active acquirers have a significant number of deals that don’t advance because the culture fit isn’t there.
  • Strategic fit: M&A is a critical component to growth. While many look at organic and inorganic growth separately, inorganic growth often provides room for organic growth to flourish. When looking at what determines a good strategic fit, industry fit, client acquisition, service capabilities, and market expansion are all considerations that support growth.
  • Size: Typically, larger CPA firms are coveted for their scale, industry alignment, and talent expertise. Non-CPA firm acquisitions typically end up being more dependent on deal economics and the buyer’s ability or appetite to close a cash deal.

WHAT’S AHEAD IN 2024?

Considering the trend of CPA firms pursuing advisory service models, as well as a growing need to scale, I expect the pace of M&A transactions to remain robust in 2024. However, I believe the percentage of non-CPA firm deals will increase as a percentage of overall deals. The number of larger firms looking to sell appears to be lessening, so I expect there will be an uptick in smaller deals, particularly among industry-focused boutique firms looking to join larger firms with full suites of services attractive to meeting the expanding needs of their clients. Additionally, I expect deal values could increase due to growing competition for quality firms and the access to PE capital.

Of course, markedly weaker economic conditions may temper some of my predictions. Either way, it’ll be interesting to see everything unfold in the year ahead.

Related Content:

  • Eyes on the Prize: M&As, Leadership Changes Present Growth OpportunitiesMerger and acquisition (M&A) activity among CPA firms has been on a wild run over the past few years. While these deals are often great for leaders at the top, what about the rest? Experienced M&A leaders offer suggestions on how staff can use these transitional changes to their advantage.
  • Selling a CPA Firm or Small BusinessThese 10 essential steps will prove a handy guide to any M&A transaction, whether you’re a founder looking for an exit strategy or a CPA advising on another deal.


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