The 5 C’s of Building or Buying Alternative Practices
It’s now becoming common knowledge: accounting firms are slowly but surely transforming themselves from tax and audit firms into multidisciplinary professional service firms, offering everything from IT to HR, marketing, strategic planning, web development, insurance, recruiting and more. In fact, the advisory practices for the Big Four firms are growing much faster than their other service lines.
Many of these services a firm can provide relatively easily. If the firm is already assisting in traditional areas such as payroll and benefits administration, human resources may be a natural extension of those services. But sometimes developing and growing these advisory services is a challenge. The firm may have the attention and trust of their clients, but fail to recommend other services to their clients because their infrastructure is not set up to deliver consulting. Or only a few partners or managers feel comfortable providing consulting services to their clients, and they’re too busy managing their book of business and staff to focus on consulting or hire and train the talent they need.
That’s why many firms have opted to buy existing practices offering these alternative services rather than build them in-house. In fact, the AICPA/PCPS Merger & Acquisition Tracking reported that as of October 18, 2017, 26% of the largest US firm acquisitions in 2017 were of non-CPA firms. Thirty-seven percent of those acquisitions were for technology skills.
Here are a few items to consider when deciding between building and buying an alternative practice.
The initial costs of buying a niche practice are what typically influences the decision to build versus buy. However, the real price of building a niche practice is difficult to quantify. The key is to ask how much time the firm can save over the course of a year by purchasing an existing practice, including its existing clients, marketing, expertise, talent and other factors.
When you purchase an existing practice, you may not get to be selective about the clients you want. Does the character of the clientele fit where you want to be? Does it offer the opportunity to cross-sell existing services? Building a practice from the ground up will take more time, but you are better able to target and work with quality clients that fit your firm. Also, the clients you earn are more likely to stay long-term because they chose to work with your firm in the first place, rather than having your firm forced upon them because you bought the business.
CPAs are no strangers to dealing with compliance issues, but are you as familiar with the rules and regulations that govern other niches, including human resources, cyber-security, insurance, wealth management and others? Unless you’re able to hire people with the necessary skillset and experience to help you navigate new compliance structures, you may be better off acquiring a firm that already has them in place.
Accountants are well positioned to provide high-value advisory services to business owners, but doing that profitably requires moving beyond time-based compensation. Billable hours simply aren’t an effective pricing strategy for most alternative practices, so firms will have to get comfortable with value pricing.
As Marc Staut cautioned in a previous article, “Whether they build it or buy it, I caution firms not to attempt to run a consulting firm like their traditional tax and audit practices. Otherwise, you’ll spend a lot of money and might not get what you were hoping for in return.”
Buying a practice obviously requires an initial and immediate investment, but acquiring established clients, employees, and potential referrals can provide immediate cash flow. On the flip side, some consulting services take years to pay off.
If you are thinking about buying a niche practice, make sure you perform due diligence, including obtaining information about the client base of the firm you choose. Acquiring a firm with the talent you need can be challenging in itself, but even a small, targeted acquisition of specific talent can be the boost you need to grow a niche practice.
Jim Boomer, CEO of Boomer Consulting, Inc., is an expert on managing technology within an accounting firm. He serves as the director of the Boomer Technology Circles, The Advisor Circle and the CIO Circle. He also acts as a strategic planning and technology consultant and firm adviser to CPA firms across the country. Accounting Today called him a “thought leader who can help accountants create next-generation firms.”
Jim is a prolific writer with a monthly column in The CPA Practice Advisor and has been published in a number of industry publications including Accounting Today, Accounting Web, the International Group of Accounting Firms and several state society publications.