Mergers and acquisitions have become popular with accounting firms as a growth strategy in highly dynamic marketplaces – but is it the right strategy for yours?
In this post, Lee Frederiksen at Accountingweb examines M&As and how you might be able to successfully use one like a high-growth firm to achieve your goals.
There are essentially two kinds of M&As: strategic and financial. For the sake of this discussion, we’re going to focus on the former because we’re interested in how to foster both rapid and sustainable growth. Financial M&As are typically used to generate cash or solidify a position in the marketplace. They’re not structured to expand service offerings or fill gaps to balance strengths and weaknesses.
Strategic mergers and acquisitions are a different animal. While they can certainly result in increased revenue, they’re really more about gaining industry credibility, increasing intellectual muscle or changing the competitive balance of power to grow your business significantly.
As a growth strategy, they’re ideal for taking advantage of opportunities that might suddenly arise, such as when the owners of a desirable firm are retiring or when a firm changes its structure or business model, leaving it vulnerable and ripe for the picking.
In our recently released 2019 High Growth Study, the Hinge Research Institute surveyed over 1,000 professional services firms with over $1 trillion of combined revenues to gain insight into how and why they grew and the factors that contributed to that growth (or lack of it). We learned that almost 40 percent of both average- and high-growth firms experienced some kind of M&A activity in 2018, contributing significantly to their bottom lines.
So while a strategic merger or acquisition may have worked for them, will one work for you?
Let’s take a look at five major reasons for utilizing a strategic M&A:
1. You Need to Fill a Critical Service or Client List Gap
As client service needs evolve with their industries or regulations, your services may need to evolve as well. Also, if your target audience changes, you may need to quickly acquire relevant clients to make your firm more attractive to them.
2. Your Firm Needs to Acquire New Skill Sets or Highly Visible Experts
Professional services such as accounting rely on intellectual firepower and industry experts as valuable assets. M&As are a good way to quickly acquire either or both.
3. You’re Looking to Leverage Synergies
If the firms involved in the potential merger or acquisition have overlapping services or assets that can cut costs, boost revenues or change the competitive landscape to grab a larger chunk of the market, an M&A might be the way to go.
4. You Want to Expand or Otherwise Change Your Business Model
Perhaps you want to diversify your revenue structure and offer both billable-hours and fixed-price monthly services packages. An M&A is also effective for adding a new business unit.
5. Reduce the Risk and Time Associated with Your Business Goals
Your firm may be fully capable of developing and delivering new services on its own, but it will take more time, money and resources than you’re willing to commit. A strategic M&A can cut the risk and the time it takes to achieve your growth goals.
Any growth strategy requires analysis of the market and how your firm fits in it. That includes a clear-eyed assessment of your perceived value and strength, not just what you’d like to think they are (or wish they were).
Make sure your strategy:
Is based on research: M&A involves significant resources and investment. Use research on your firm and the target firms’ brand to dramatically reduce that risk.
Is proactive, not reactive: Look ahead to where you want to be. Don’t just react in the present to current conditions and competition.
Has an appropriate level of risk: If your strategy is too comfortable, it’s probably not geared for significant success. It’s okay to be a little uncomfortable with it. A little willingness to gamble is good.
Has senior management buy-in: All major stakeholders need to be on board with your growth strategy. If they don’t embrace it, it’s doomed.
Focuses on implementation: Avoid wishful thinking that everything will be just fine. As the old saying goes, “plan your work and work your plan.” Work out the details and follow through.
If your carefully considered business goals point to a strategic M&A and your growth strategy is well thought out, you’re on your way to achieving the high growth you’ve been dreaming of.