Accounting Firm Acquired for 11X EBITDA? State of M&A and More w/ Geoff Bruskin
Podcast
Summary
In this episode of the Growing Your Firm podcast, host David Cristello welcomes Geoff Bruskin, founder and managing partner of White Tiger Connections.
They dive into the dynamic landscape of mergers and acquisitions (M&A) within the accounting industry, exploring how recent trends have created a surge in acquisition interest.
Geoff discusses the impact of cloud technology and the shift towards distributed employment, which have transformed the M&A space.
The conversation also touches on the importance of viewing accounting as a nucleus for offering diverse services, particularly for young professionals entering the field. Tune in for insights on navigating M&A and recruitment in today’s evolving market.
Guest Bio
Geoff Bruskin is a distinguished figure in the realm of mergers and acquisitions (M&A) within the public accounting sector, serving as the founder and managing partner of White Tiger Connections.
With a career that spans over five years in M&A, Geoff has quickly established himself as a thought leader and trusted advisor, particularly in the lower market and lower middle market segments.
His expertise lies in navigating the complexities of M&A transactions, recruitment, and monetized partnerships, making him a sought-after resource for firms looking to expand their service offerings and enhance their operational efficiencies.
Geoff’s journey into the world of M&A was fueled by a keen understanding of the evolving landscape of public accounting, especially in the wake of the COVID-19 pandemic. He recognized the unprecedented challenges faced by firms, including a talent crisis and the impending retirement of the baby boomer generation.
This insight has allowed him to guide numerous firms through the tumultuous waters of acquisition, helping them to not only survive but thrive in a competitive environment. His philosophy centers around the idea that accounting should not merely be viewed as a service but as a nucleus from which a multitude of services can be offered, thereby creating expansive opportunities for growth and profitability.
Throughout his career, Geoff has been instrumental in facilitating successful transactions that have yielded impressive returns for his clients. He has a unique ability to identify firms with high potential, often achieving EBITDA multiples that exceed industry standards.
For instance, he recently orchestrated a deal for a firm with a top-line revenue of $3 million, securing a nearly four times non-adjusted EBITDA multiple. This achievement underscores his commitment to maximizing value for his clients and his deep understanding of what makes a firm attractive to buyers, particularly private equity firms.
Geoff’s approach to M&A is characterized by a strong emphasis on building relationships and fostering collaboration. He believes that the key to successful transactions lies in understanding the nuances of each firm and its unique value proposition.
This philosophy extends to his work with private equity firms, where he differentiates between those that prioritize short-term gains and those that are committed to long-term growth and integration. His ability to discern the right partners for his clients has earned him a reputation as a reliable and insightful advisor in the industry.
In addition to his M&A expertise, Geoff is passionate about addressing the recruitment challenges that many firms face today. He advocates for a proactive approach to talent acquisition, encouraging firms to leverage remote work and explore partnerships with offshore service providers.
His belief in the importance of cultivating a motivated workforce is evident in his strategies for attracting and retaining top talent, which he views as essential for sustaining growth and ensuring a firm’s long-term success.
Geoff’s ethos is rooted in the idea that accounting professionals should embrace their roles as business owners and strategic thinkers. He challenges the traditional mindset of viewing accounting as a mere hourly service and encourages his clients to think creatively about how they can expand their service offerings.
By fostering a culture of innovation and collaboration, Geoff empowers firms to unlock their full potential and navigate the complexities of the modern business landscape.
Detailed Synopsis
The mergers and acquisitions (M&A) landscape in the accounting industry has seen a significant increase in activity, particularly in recent years.
This surge can be attributed to several key factors, primarily the retirement of the baby boomer generation and a notable talent crisis within the industry.
Retirement of Baby Boomers
As the baby boomer generation reaches retirement age, many accounting firm owners are looking to exit the business. This demographic shift has created a wave of opportunities for younger firms and private equity (PE) buyers to acquire established practices.
The urgency for retiring owners to sell their firms has intensified, leading to a “tidal wave” of interest in acquisitions. Many of these retiring professionals are eager to cash out and either start anew or transition into different ventures, further fueling M&A activity.
Talent Crisis
At the same time, the accounting industry is grappling with a talent crisis. The demand for skilled professionals has outstripped supply, resulting in increased burnout among existing staff. This crisis has reached a “calamity level,” as firms struggle to find qualified individuals to fill essential roles.
The combination of a shrinking talent pool and the pressure to maintain service levels has prompted many firms to consider acquisitions as a viable strategy to enhance their capabilities and ensure continuity.
Market Dynamics
Geoff Bruskin, a managing partner in the M&A space, highlights that the landscape has shifted dramatically post-COVID.
The convergence of the talent crisis and the retirement wave has created a unique environment where firms are not only looking to acquire talent but also to enhance their service offerings.
In the lower market segment, defined as firms with revenues between $100,000 and $1 million, multiples range from 1 to 1.5 times gross revenue. In contrast, the lower middle market, with revenues between $1 million and $10 million, is experiencing multiples of 3 to 11 times EBITDA, depending on the firm’s structure and service offerings.
Strategic Acquisitions
Firms are increasingly recognizing the potential of M&A as a strategic move to expand their service offerings and client base.
For instance, firms that can integrate ancillary services—such as wealth management, payroll, and advisory services—into their core accounting practices are likely to see higher valuations.
This diversification not only enhances the firm’s appeal to potential buyers but also positions them to better serve their clients in a competitive market.
The Evolving Landscape of Mergers and Acquisitions in Accounting
The Current M&A Climate
Geoff highlights that the M&A landscape has transformed dramatically, especially post-COVID. The talent crisis has reached a critical point, with firms struggling to find competent professionals.
This shortage has led to increased burnout among existing staff, creating a pressing need for firms to consider acquisition as a viable strategy for growth and sustainability. Additionally, the retirement of the baby boomer generation has opened the door for younger firms to acquire established practices, further fueling M&A activity.
Valuation Multiples and Market Segments
In the discussion, Geoff breaks down the valuation multiples for accounting firms, emphasizing the differences between lower market and lower middle market segments. For firms generating $100,000 to $1 million in revenue, multiples typically range from 1 to 1.5 times gross revenue.
In contrast, lower middle market firms, with EBITDA between $1 million and $10 million, can see multiples ranging from 3 to 11 times EBITDA. This disparity underscores the importance of firm size and service diversification in determining valuation.
The Role of Private Equity
Private equity (PE) firms have become increasingly prominent players in the M&A space. Geoff notes that around 70-80% of buyers in the lower middle market are now private equity firms.
While PE has historically received criticism for its aggressive tactics, Geoff points out that there are “good” PE firms that focus on long-term growth and integration, providing a more favorable experience for sellers.
The right PE partner can offer better valuations and a smoother transition post-acquisition, making them attractive options for firm owners looking to sell.
Diversification of Services
One of the key takeaways from the episode is the importance of service diversification in enhancing firm value. Geoff discusses how firms that offer a broader range of services—such as tax advisory, wealth management, and payroll—can command higher multiples.
For instance, a firm with $10 million in EBITDA that provides a comprehensive suite of services could potentially achieve a valuation of 15 to 17 times EBITDA. This highlights the strategic advantage of viewing accounting as a nucleus from which various ancillary services can be offered.
Recruitment Challenges and Solutions
The podcast also delves into the recruitment challenges faced by accounting firms, particularly in the context of M&A. With many firms experiencing high turnover rates and difficulty in finding qualified talent, Geoff advises against relying solely on a single successor. Instead, he encourages firms to build a robust ecosystem that includes nearshore and offshore resources. By leveraging remote work and outsourcing, firms can create redundancy and flexibility in their staffing, which is crucial during the M&A process.
The Rise of Private Equity Firms in the Lower Middle Market
In recent years, private equity (PE) firms have emerged as the dominant buyers in the lower middle market, particularly within the public accounting sector.
According to Geoff, approximately 70-80% of buyers in this space are now private equity firms. This shift can be attributed to several key factors that make PE firms more attractive to sellers compared to traditional public accounting firms.
1. Better Valuations
One of the primary reasons sellers are gravitating towards PE firms is the superior valuations they offer. Traditional public accounting firms often struggle to compete with the financial backing and resources that PE firms bring to the table.
Bruskin notes that institutional public accounting buyers, which can range from small to large firms, typically do not match the cash offers and valuation structures that PE firms can provide.
This is particularly evident in the lower middle market, where firms with EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) of over $1 million can attract significantly higher valuations from PE buyers.
2. Enhanced Integration Experiences
Another critical advantage of PE firms is their ability to deliver a more favorable post-acquisition integration experience. Bruskin highlights that many public accounting sellers report dissatisfaction with their integration experiences after closing deals with traditional firms. This dissatisfaction often stems from unmet promises regarding financial and cultural integration.
In contrast, reputable PE firms tend to focus on long-term growth and stability, ensuring that the integration process is smooth and beneficial for both parties. This approach not only preserves the value of the acquired firm but also enhances the overall experience for the seller.
3. Focus on Growth and Synergies
PE firms are often more strategic in their acquisitions, looking for synergistic opportunities that can enhance their existing portfolio. For instance, a PE firm may acquire a public accounting firm that specializes in tax advisory services to complement its wealth management offerings.
This strategic alignment can lead to increased revenue streams and operational efficiencies, making the acquisition more appealing to sellers who want to ensure their firm’s continued growth and success.
4. Long-Term Investment Perspective
Unlike some traditional buyers who may prioritize short-term gains, many PE firms adopt a long-term investment perspective. This approach allows them to invest in the necessary resources and infrastructure to support the growth of the acquired firm.
Bruskin emphasizes that the right PE firms are committed to building value over time, which can be a significant draw for sellers looking for a partner that will support their vision for the future.
5. Market Dynamics and Talent Crisis
The current market dynamics, including a talent crisis in the accounting profession, have further fueled the interest in PE acquisitions. With many firms struggling to find competent staff, the ability of PE firms to provide resources and support can be a game-changer.
Sellers are increasingly aware that aligning with a PE firm can help mitigate the risks associated with talent shortages and operational challenges.
The Evolving Landscape of Mergers and Acquisitions in Accounting
In recent years, the mergers and acquisitions (M&A) landscape within the accounting industry has undergone significant transformation, driven by various factors including technological advancements, demographic shifts, and changing market dynamics.
This evolution presents both challenges and opportunities for accounting firms, particularly as they navigate the complexities of selling or acquiring businesses.
The Surge in M&A Activity
Geoff Bruskin, founder and managing partner of White Tiger Connections, highlights that the last couple of years have seen a “tidal wave” of interest in M&A, particularly as the baby boomer generation approaches retirement.
This demographic shift has created a unique opportunity for younger professionals to view accounting not just as a career, but as a nucleus from which they can expand their service offerings. The rise of cloud technology and distributed employment has further fueled this interest, allowing firms to operate more efficiently and attract potential buyers.
Valuation Multiples and Market Segments
Bruskin emphasizes that the valuation multiples for accounting firms can vary significantly based on their size and service offerings. In the lower market segment (firms with $100,000 to $1 million in revenue), multiples typically range from 1 to 1.5 times gross revenue.
However, in the lower middle market (firms with $1 million to $10 million in EBITDA), multiples can soar to between 3 and 11 times EBITDA. This disparity underscores the importance of building a diverse service portfolio.
For instance, firms that offer a combination of tax advisory, wealth management, and payroll services can command higher multiples due to the perceived value of their comprehensive service offerings.
The Role of Private Equity
Private equity (PE) firms have become increasingly prominent players in the accounting M&A space. Bruskin notes that approximately 70-80% of buyers in the lower middle market are now private equity firms.
While there are concerns about the negative reputation of some PE firms—often associated with short-term gains and staff reductions—Bruskin points out that there are also “good PE” firms that focus on long-term growth and integration.
These firms are willing to pay a premium for businesses that demonstrate strong cash flow and a solid client base, making them attractive partners for sellers.
Recruitment Challenges and Solutions
The ongoing talent crisis in the accounting profession has compounded the challenges faced by firms looking to engage in M&A. With many firms struggling to find competent staff, the risk of losing key personnel during the sale process can jeopardize deals.
Bruskin advises firm owners to diversify their talent acquisition strategies, including leveraging remote work and exploring partnerships with firms in countries like India or the Philippines. By building a robust support system, firms can mitigate the impact of turnover and maintain operational continuity during transitions.
Monetized Partnerships as a Growth Strategy
Bruskin introduces the concept of monetized partnerships, where accounting firms can collaborate with other service providers—such as wealth managers or insurance brokers—to expand their service offerings and enhance client retention.
For example, a tax advisor might partner with a wealth management firm to provide comprehensive financial services to high-net-worth clients. This approach not only increases revenue potential but also strengthens client relationships, ultimately leading to higher valuations in the M&A market.
Expanding Service Offerings for Accountants
In today’s competitive landscape, accountants are encouraged to think beyond traditional accounting services and consider expanding their offerings to include ancillary services such as wealth management, payroll, and advisory services.
This strategic shift not only enhances the value proposition for clients but can also significantly increase a firm’s valuation and EBITDA multiples.
The Case for Diversification
- Market Demand : The podcast highlights a growing trend where modern firms are recognizing the potential of diversifying their service offerings. As the industry evolves, clients are increasingly seeking comprehensive solutions that address multiple aspects of their financial needs. By offering a broader range of services, accountants can position themselves as one-stop shops for their clients.
- Increased Valuation : Geoff Bruskin emphasizes that firms providing a variety of services can command higher multiples in the M&A market. For instance, firms that integrate wealth management, tax advisory, and payroll services can see their EBITDA multiples rise significantly. While traditional accounting services might fetch a multiple of 1 to 1.5 times gross revenue, firms that offer a diverse service mix could achieve multiples as high as 15 to 17 times EBITDA, especially if they have a strong client base and efficient operations.
- Client Retention and Growth : By expanding service offerings, accountants can enhance client retention. As Bruskin points out, many wealth managers struggle to find competent CPAs for their high-net-worth clients. By establishing partnerships or acquiring firms that provide these services, accountants can fill this gap, ensuring that their clients receive comprehensive support. This not only strengthens client relationships but also opens up new revenue streams.
Examples of Ancillary Services
- Wealth Management : Accountants can partner with or acquire wealth management firms to offer investment advisory services. This integration allows them to provide holistic financial planning, which is particularly appealing to high-net-worth individuals.
- Payroll Services : The podcast discusses how payroll services can command higher multiples due to their recurring revenue model. By adding payroll to their service mix, accountants can tap into a steady stream of income while providing clients with essential support.
- Advisory Services : Expanding into advisory services allows accountants to leverage their expertise in tax and compliance to offer strategic business advice. This can include business management, succession planning, and operational consulting, which are highly valued by clients looking to optimize their financial performance.
Strategic Implementation
To successfully expand service offerings, accountants should consider the following steps:
- Assess Current Capabilities : Evaluate existing skills and resources to identify areas where additional services can be integrated seamlessly.
- Build Partnerships : Form strategic alliances with firms that specialize in complementary services. This can provide immediate access to expertise and client bases without the need for extensive investment.
- Invest in Training : Equip staff with the necessary training and knowledge to deliver new services effectively. This investment in human capital is crucial for maintaining service quality.
- Market the New Offerings : Communicate the expanded service offerings to existing and potential clients. Highlight the benefits of a comprehensive approach to financial management.
- Monitor and Adjust : Continuously assess the performance of new services and make adjustments based on client feedback and market trends.
Conclusion
In conclusion, accountants have a significant opportunity to enhance their firm’s valuation and EBITDA multiples by expanding their service offerings beyond traditional accounting. By incorporating ancillary services like wealth management, payroll, and advisory services, firms can not only meet the evolving needs of their clients but also position themselves for greater financial success in the competitive landscape. As the podcast illustrates, the right strategic moves can lead to substantial growth and profitability in the accounting profession.
Timestamps
[00:01:30] Mergers and acquisitions interest surge.
[00:06:26] Private equity in accounting firms.
[00:09:16] Expanding services in accounting.
[00:12:34] Wealth management partnerships explained.
[00:15:25] Private equity exit strategies.
[00:20:29] Recruitment challenges in M&A.
[00:22:49] Attracting remote accounting talent.
[00:24:24] Outsourcing and building relationships.
[00:28:31] Maximizing returns for accounting firms.
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