The current mergers and acquisitions climate may be tepid, but there’s been significant activity in the financial and professional services industries being driven by aging Baby Boomers and accountants and financial planners ready to join the retirement ranks.
It’s creating a situation where many financial firms are expanding by buying out competitors. Yet, there is a sense organic growth still is important and possible if smaller companies seize opportunities created when larger businesses merge.
Carl Johnson, managing partner of West Hartford’s BlumShapiro, said his accounting firm expanded recently using both mergers and organic growth.
Last month, the company acquired a suburban Boston firm, Friedman, Suvalle & Salomon PC of Newton, Mass., growing its New England footprint and adding 24 new staffers including four partners.
Recent deals in Massachusetts and Rhode Island have allowed BlumShapiro’s specialty departments to experience organic growth as they move into new business markets, Johnson said. The firm, which does $70 million in annual business, also predicts revenues from its $10 million consulting unit will grow as new markets open up.
Johnson said there has been a mergers and acquisitions “mania” the last five years in New England and nationally in the accounting industry.
“A lot of CPAs are retiring at this point and a lot of partners are at retirement age,” but haven’t built succession plans, Johnson said.
Business succession issues have gotten worse with one generation not wanting to pass a business onto the next, said Hartford attorney William Bouton, who chairs Hinckley Allen’s corporate and business law group. In recent years, many firms held off selling with hopes that valuations or economic conditions would get better.
“You haven’t had any defining moment that says it’s a good time for expansion,” Bouton said, adding that merger and acquisition activity overall isn’t “super-hot right now.”
Since the 2008 financial crisis, businesses have been holding back trying to figure out what to do next, Bouton said. Business development has lagged in most areas. If you look at the last five or six years “you would think there are a lot of pent up deals … that would start popping up,” Bouton said. “I still think it’s a little tentative. It’s still just plugging along. Deals are still going on but it’s not going gangbusters. People are more risk averse than they used to be.”
Robert Laraia, founding partner and wealth advisor at Northstar Wealth Partners, said his firm, which has six locations in Connecticut, has been actively acquiring other outlets.
“We’ve had pretty dramatic growth since about the start of the crash,” said Laraia. “In our industry a high percentage of financial advisors will retire in the next five-to-10 years,” which is causing many advisors to think about transitioning their practices, either by selling their firm or being bought out.
Laraia also said there will be “more bodies in motion than new bodies coming into the industry,” which will lead to advisor shortages just as more people need retirement services.
“It’s a great time to be in our business,” he said. “There’s a supply of good clients [balanced] with a demand for financial advisors. That’s what we see happening.”
Financial services firms are priced to sell, Laraia said. After the recession, financial advisory businesses were undervalued compared to other industries because of the human capital involved. In last 24-to-36 months, however, values have risen and there’s “a lot more buyers than sellers,” Laraia said.
Meanwhile, banks are seeking out wealth management acquisitions because it helps improve non-interest income, said Bouton. Private equity firms are also acquiring financial advisors.
“We’ve also seen some activity in the health area, whether its doctor affiliates or other health service industries,” Bouton said. “That’s reasonably active as we have huge changes in the healthcare system.”
Leadership issues are also spurring acquisitions in the accounting industry, BlumShapiro’s Johnson said. Twenty years ago there were 50,000 accounting grads, but that number fell to 30,000 grads a decade ago, which has led to a shortage of partnership-ready accountants.
“That’s causing a merger frenzy and it doesn’t look like it’s going to stop for a while,” Johnson said.
But not all accounting firms are going to need to acquire or merge, Johnson added. Smaller CPA firms have opportunities for organic growth. Mergers create gaps that smaller firms can fill. But it’s best to make sure there is young talent to help the firms grow, Johnson said.
One factor slowing M&A activity overall could be the state’s high cost of doing business, including its heavy tax structure, Bouton said.
“Connecticut businesses looking to expand more often are looking elsewhere,” Bouton said, “to more welcoming environments.”
