Today's 5 Drivers of CPA Firm Growth

And Why So Many Other Firms Are Falling Behind.

By Rick Telberg
CPA Trendlines Research

The nation’s CPA firms seem divided these into two camps: Those gunning for growth with innovation, professional development and strategic acquisitions of top talent and books of business.

And those who aren’t. They’re coasting towards the exits, holding tight on the purse-strings of new investments in people, technology or new clients. This group is quietly leaving the competitive battlefield, content to gather their winnings from a lifetime of hard work and go home. Maybe someone will buy up their small, aging books of business. But it won’t amount to much. From a coldly competitive point of view, they won’t be missed.

The first group, on the other hand, are the ones reshaping the profession for the future. They’re forging new trends. Re-writing the CPA rule-book. Redefining the business. They’re the firms to watch.

And they’re not hard to spot. They also happen to be making waves in the market. The new 2015-2016 annual Rosenberg MAP Survey shows how.

The new study of almost 400 small and mid-sized firms presents news both good and bad—and more of the latter than the former.

• The good news: CPA firms revenues and profits are increasing.
• The bad news: The increase in revenues is less than last year. And a lot of it is only due to mergers. Growth was slowest for the smallest firms. And the increase in Income per Equity Partner is especially sluggish.

Most worrisome is the finding that organic growth— which is to say real growth not generated artificially by mergers—was actually a bit lower than last year, dropping from 5.2 percent to 4.7 percent.

So is this really the end of a golden age for the profession? I don’t think so. Our data at CPA Trendlines suggests a paradigm shift in CPA firm economics. The new future-ready firm is nimble, technologically advanced, client-centric, and diligent in recruiting and developing top talent.

To be sure, mergers account for across-the-board growth, but even merger-driven growth is slowing. Mergers now generate 30 percent of top-line growth, up from 22 percent last year. And that’s especially true for firms with revenues under 20 million – the up-and-comers. Larger firms are seeing a radical decrease, from 25 percent down to 16 percent, in merger-related revenue growth – a sign perhaps that the merger frenzy is topping out. Larger firms, as well, are growing organically at more than 7 percent, well above the rates at mid-sized and smaller firms.

A growth rate of 7 percent isn’t too shabby, but it falls well short of spiffy. And it’s certainly better than in the darkest days of the recent recession. What’s worrisome is that the rate declined even as the economy grew. Apparently there are other factors at work here.

Anecdotal explanations from CPAs give us some likely explanations. Here are the four leading factors:

1. Baby Boomers – The once-burgeoning baby boomers are getting boomed out. They’re retiring, and as they fade off to Florida, they shut down or sell off their business. And every time they do so, a CPA firm loses a client, generally one that has been growing for several decades. Paradoxically, baby boomers in the accounting profession are reluctant to retire. They’ve gotten good at what they do, and they’ve learned to love what they do. Their clients have become their friends. So why retire at 65? They might slack off a bit, but they often want to keep working until they’re 70 or more. But the get-up-and-go of younger days now gets up and goes golfing. The firm loses some of its hustle. A decline in hustle means a decline in growth.
2. Mergers – If you’ve ever been a principal in a merger, you know what work it is. A merger can generate the appearance of revenue growth, but the fact is, it distracts people from the organic growth of finding and developing clients. More mergers means less organic growth.
3. Labor Shortages – The accounting profession suffers a worsening shortage of professionals. With firms short on staff, efforts to expand clientele just don’t seem worth the effort. In fact, expansion can be counter-productive if it spreads staff too thin.
4. The Economy – The recovery from the recession ain’t all it’s cracked up to be. Some companies are booming, yes. Wall Street is doing fine, but Main Street is still hurting. And many regions are still in the economic doldrums. The impact inevitably hits CPA firms, especially the smaller ones.

Profits increase as income per partner lags

If revenue growth is slow, income per partner is barely better than stagnant. The Rosenberg MAP survey finds that CPA firm profits are rising just 2.6 percent, to about $392,000. The survey attributes the increase to modest billing rate increases and the organic growth of revenues. But a host of other influences is holding profits back. Among them are: realization, fees per partner, fees per person, staff-to-partner ratios, and overhead spending.

The Rosenberg MAP survey has been tracking an interesting trend over the last eight years. Up until 2006, income per partner growth always exceeded revenue growth. But in 2007, something happened. Ever since then, revenue growth has exceeded income per partner growth. How come? What’s changed? The survey takes a few stabs at explanation:

1. Baby Boomers – Yes, it’s the generation that just won’t quit. In this case, it won’t quit the firm. Partners stay way beyond the traditional age of retirement. But as new partners come on board, more partners means less profit to each.
2. Mergers –Mergers tend to generate higher revenue numbers, but a merger also generates higher partner numbers – that is, more partners to share the revenue, driving down the average.
3. The End of the Golden Age –Some say The Golden Age of Public Accounting occurred with the advent of the Sarbanes-Oxley Act of 2002. The stiffer audit requirements created the highest demand for CPA services in the history of the profession. The increased demand trickled certain services down to smaller firms. But as soon as the profession caught up with the new demand, the golden profits slacked off.
4. Intangibles –The survey identified “intangible” as increased costs without a direct and immediate impact on revenues. These included:

• Less effective management of people issues (recruiting, training, mentoring, leadership, etc.)
• Retirement of senior partners causing loss of invaluable experience and talent.
• Insufficient leadership development.
• Higher salaries without parallel increases in billing.

The new Rosenberg MAP Survey concludes that these and other unmeasurable intangibles are the dominating force behind the slowdown in revenues and profits.

At the same time, the survey reveals a few significant things about the state of the accounting business—that growth and profit-per-partner are growing at a negligible rate and that intangible people issues are becoming painfully tangible, for example. But some more subtle truths emerge in the gimlet-eyed observations of those who advise CPA firms.

These truths are not self-evident. But with a little analysis, five trends emerge vividly – trends impacting CPA firms large, small, and middling.

So it’s worth having a look:

1. Aging infrastructures in crisis – Roman Kepczyk, of Xcentric, says his company is often called in to improve workflow and efficiency, especially through better use of technology: “Firms overall remained cautiously optimistic, with those that were more specialized/niched seeing solid leaps in growth in both personnel and revenue. These firms brought us in to direct their investments in upgrading their infrastructures, focusing not only on the physical IT components, but in optimizing their internal production processes with the applications they had in place.”
2. Executive leadership heads for the door – Rita Keller, of Keller Advisors, perceives too little focus on preparing firms for the future. Technology is lagging, she says, and the leaders who are moving up aren’t as good as the ones moving out:  “While there has been a great deal of concern about long-time CPA partners beginning to retire and taking with them a great deal of experience and wisdom, there has also been many long-time, extremely knowledgeable and valuable firm administrators and COOs heading down the retirement path. Transition of client relationships is extremely important, but so is the transition of CPA firm management knowledge.”
3. The economy helps some, hurts others –Jeff Pawlow, of The Growth Partnership, is concerned about expansion rates among CPA firms remaining meager despite the general economic growth. The reason, he says, is that the growth of certain client companies has been to the detriment of others: “We are playing a zero-sum game. We have a number of clients that grew well above the average over the past several years, but the challenge at a macro level is that their growth is coming at the expense of other firms, not because the market is getting larger.”
4. Staffing shortage impairs expansion–Chris Frederiksen, of 2020 Group, says the past 12 months have been good for CPA firms and their clients. The problem is lack of qualified professionals: “The single overwhelming challenge for firms in the last 12 months has been how to get the work done and at the same time provide world-class service… We have recently seen firms turning away desirable clients for lack of capacity.”
5. Mergers, consolidation and shake-out –Gale Crosley, of Crosley+Co., observes that mergers are having a number of impacts that go beyond firms getting bigger. She sees mergers suppressing organic growth because the merger process puts real growth on a back burner. She also sees a disruption in the international networks and associations that sustain the quality of the profession and its standards: “Many dynamics are taking place in international associations, networks and alliances. Firm mergers usually cause post-merged firms to abandon one of their two affiliations. This impacts association and network strategies as some of their anchor firms go away, and heretofore exclusive geographies become available.”

Rick Telberg is founder and CEO of CPA Trendlines Research, at cpatrendlines.com, a business intelligence service for tax and accounting firms. The Rosenberg MAP survey cited in this article can be purchased in full at https://store.cpatrendlines.com/shop/map-survey/