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February 5, 2024 Focus: Accounting

Accounting merger activity heats up as aging partners eye retirement, firms look for growth

PHOTO | CONTRIBUTED (From left) Michael Sabol, Stephen Giamalis and James Mahoney. Mahoney and Sabol lead Glastonbury-based CPA firm MahoneySabol, which has absorbed Giamalis and Co. in a recent merger.

As founding partners in small accounting firms age, they are faced with few options for retirement.

Some can pass the company down to an up-and-coming partner, but a continuing workforce shortage in the accounting industry means fewer young people are joining the profession or moving up the ranks.

As a result, many smaller firms run by aging Baby Boomers are looking for merger opportunities with larger outfits, a trend that shows no signs of slowing, industry experts said.

In early January, accounting firm Giamalis and Co., with nine employees, merged with much larger CPA firm MahoneySabol, both based in Glastonbury.

Farmington-based accounting firm Federman, Lally & Remis, with about 13 CPAs and 18 employees, recently announced it has been acquired by national accounting firm Marcum LLP, which has Connecticut offices in Hartford, West Hartford, New Haven and Greenwich.

A year ago, Glastonbury-based CPA firm Fiondella, Milone & LaSaracina merged with Bregman & Co., which has offices in Stamford and Avon.

Drew Andrews, managing partner and CEO of Hartford-based accounting and consulting firm Whittlesey, said the main factor driving mergers is the significant number of smaller firms with aging partners who are looking toward retirement, but don’t have the “backup” on staff to fill their shoes.

Whittlesey Managing Partner and CEO Drew Andrews in his company's Hartford office.

Andrews said he often gets calls from smaller firms looking for a merger partner, but making deals happen isn’t easy.

Michael Sabol, a founding partner at MahoneySabol, said a recent survey by consulting firm Rosenberg Associates found 25% of all partners are over the age of 60, and 60% are over the age of 50.

Those numbers in Connecticut are likely higher, and ages older, as the national statistics may be skewed by many young partners in much larger firms nationwide, Sabol said.

“Smaller firms are headed by partners close to retirement, and they have two options, merge or have younger leaders take over,” Sabol said. A challenge for many small firms is having the right people in line “who can take the torch and continue.”

This is a challenge for many firms due to another industry roadblock, labor, as there are fewer students seeking accounting degrees and taking the CPA exam.

The accounting program at the UConn School of Business, for example, has seen dwindling enrollment, from about 160 undergraduates at the peak in 2017, down to around 90 this past fall, school officials said.

Additionally, Bureau of Labor Statistics data shows more than 300,000 U.S. accountants and auditors left their jobs in the past few years, leading to a 17% decline in employed accountants compared to 2019.

Connecticut employed 15,960 accountants and auditors as of May 2022, BLS data shows.

Buyer’s market

Andrews said mergers have always been an industry option, but 10 years ago, it was more of a seller’s market. Today, it’s more of a buyer’s market.

“There are probably 10 firms out there for every two people looking to buy,” he said.

Rosenberg Associates said “the merger frenzy continues with no end in sight because a substantial number of aging partners in the CPA industry have been unable or unwilling to develop new partners.”

They have been “prioritizing the here and now – taking care of clients – at the expense of succession planning,” Rosenberg Associates said.

Andrews said he fields calls continuously from smaller firms looking to discuss a possible merger. He said he looks at every deal that comes across his desk, but it has to make sense.

A deal would not be worth the time or investment if all it brings to the table is a few clients with tax returns and financial statement preparation, he said.

“Usually, we look at the clients and the mix of clients, what they have for internal staff,” he said. “A lot of times the profitability of those smaller firms might not be there.”

For services like tax returns and financial statement preparation, a larger firm might have to charge a client two, three or even five times more “to make it worth it,” Andrews said.

But when a smaller firm merges with a larger one, clients also get a larger pool of resources that may not have previously been available, Sabol said.

Giamalis and Co. brings with it to MahoneySabol, clients primarily in the restaurant, real estate, automotive dealership and construction industries, Sabol said.

“The world’s gotten more complicated, and many clients now need services that maybe a smaller firm doesn’t have in-house,” Sabol said, such as estate planning or cybersecurity consulting.

Larger firms also typically have more staff and advanced technology, like artificial intelligence. More accounting firms are embracing AI as a helpful tool to tackle some of the more repetitive and rule-based tasks, or invoice processing and account reconciliations, experts said.

Federman, Lally & Remis, in announcing the Marcum deal, said its clients will benefit by gaining “a richer array of services,” including enhanced assurance, tax and advisory services in areas such as R&D tax credits, international tax, transaction advisory and cybersecurity.

The acquisition was struck about a year after Federman, Lally & Remis’ managing partner, David S. Federman, died at the age of 79.

Sealing the deal

Absorbing a firm is no small undertaking, Andrews said. Details of most mergers are not disclosed, but deals often come with retention clauses, particularly for retiring partners, and the whole transition takes about three years to complete, Andrews said.

Accounting is a very relationship-driven business, he said, so it’s imperative that a partner stay on during the transition, especially for client retention.

Most smaller-scale mergers and acquisitions, like several in Connecticut, involve a payout over time, usually a percentage of a firm’s gross revenue.

Mergers allow acquiring firms to continue their growth by offering more services with a larger staff, Sabol said.

Kirsten Piechota

Kirsten Piechota, marketing and communications director for the Connecticut Society of CPAs, said mergers and acquisitions are not new, but they have been on a steady uptick over the past 10 years.

Deals are coming together more frequently now after a short hiatus during the COVID-19 pandemic, she said. The society doesn’t keep statistics on mergers, but Piechota said January is traditionally a busy month for deals, as buyers and sellers want a fresh start at the beginning of the year.

As firms get larger after mergers, they are able to invest more in technology and AI, which changed “almost every aspect of the profession,” she said.

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