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Tuesday, Mar 5, 2024

Merger Mania

Accounting firms are increasingly having trouble finding and recruiting professionals amid an uncertain economy, and as a result, mergers and acquisitions in the sector have become more popular.

Take the Long Beach-based O&S CPAs and Business Advisors. The five-partner, 36-employee firm recently merged with BPM LLP, one of the largest public accounting and advisory firms in the country. The deal, according to O&S Managing Partner Cynthia Schoelen, was seen as the best solution to better serve clients and expand the range of O&S’s services.

“We were getting more clients, but we didn’t have the staff to do the work,” Schoelen said. “So, you’re turning clients away and you’re also turning away existing clients who bring in stuff out of our wheelhouse.”

The decision to merge with BPM was likely made at a propitious time for O&S.

“External factors, such as potential recession, make a merger or acquisition more beneficial for small and midsize firms, as scale and diversity of industry and geography will help those firms navigate through a recession,” Greg Zelenay, managing partner of Baker Tilly’s Los Angeles market, said. “It’s likely we will see more activity — not less — in the space.”

Schoelen’s firm, which provides tax, accounting, advisory and forensic accounting services and specializes in assisting closely held businesses and nonprofits, has worked with clients in Los Angeles, Orange, Riverside and San Bernadino counties for more than 25 years.

Now that O&S and BPM are under the same roof, Schoelen and her employees can refer existing clients to other accountants in the expanded firm. BPM has approximately 70 partners and more than 1,200 employees.

This is the third strategic combination that BPM has carried out in the past six months, following others in Santa Rosa and Sacramento. Those two mergers added Elliott CPA Group Inc. and Avaunt Ltd. CPAs and Consultants.

Tony Gales, a tax partner in BPM’s Long Beach office, said the core reason for the mergers was people; he stressed that the accounting industry is having trouble recruiting and retaining employees.

Similar cultures

O&S had been contemplating a merger for a while before the BPM deal came to fruition, according to Schoelen, who added that her firm had been talking to BPM for several years off and on. She added that the cultures of the firms were very similar, which see said was a bonus.

“O&S was looking for a while to see what was out there, because senior partners want to retire and they’re finding they can’t really replace their skill set as easily as they used to,” Schoelen said. “Normally, you’d want to bring that skill set up from (subordinates) and promote them, but it has been harder to get people in at the lower levels from college and up.”

The number of working accountants has have also dropped in recent years. A Bloomberg Tax analysis published last year found that in 2021 the total number of employed auditors and accountants dropped 17% from its peak in 2019 of nearly 2 million.

“This is perhaps the most impactful issue accounting firms are facing in that there is more demand for services from accounting firms than the ability to supply the increasing demand,” Holthouse Carlin & Van Trigt LLP Partner Greggory Hutchins said.

Accounting students, who as of recent have more academic requirements to fulfill, are an important part of the supply needed to take on such demand.

According to Gales, CPA licensing requirements once included four uniform tests and one ethics exam, in addition to an undergraduate degree. Now, an additional 30 undergraduate units are needed to qualify as a CPA.

Since a bachelor’s degree consists of 120 semester hours, students looking to become CPAs often enroll in master’s degree programs in accounting to earn the additional 30 semester hours, according to AccountingEdu.org.

“I personally think that is where the change occurred,” Gales said. “If you’re going to do additional schooling, you’re going to do business school, investment banking, or a law degree or something like that. It became a huge hurdle.”

Schoelen echoed that opinion, noting that the additional 30 required units do not have to be in accounting education. She worries that the additional units could deter students from following through on their plans to become accountants, stressing the added time and money needed to pursue those units.

“You don’t really learn how to be a CPA until you start the job,” Schoelen said. “I think that’s what a lot of jobs are. So, I’m not quite sure about the benefit of making young people continue with their education, especially when it doesn’t have to be related to accounting.”

Outside of mergers, the acquisition space has remained busy for firms with a local presence.

Acquisition sprees

Pros: Holthouse Carlin staffers meet at the firm’s West Los Angeles office. (Photo by David Sprague)

Baker Tilly is a global consulting firm that has been active on the acquisition side of the accounting industry.

Last year alone, according to Zelenay, the firm completed seven combinations that broadened its capabilities and expanded its footprint. The mergers included two CPA firms in Seattle and Phoenix, as well as the onboarding of high-end corporate tax services with the acquisitions of True Partners Consulting in Chicago and ACG in the Bay Area.

“Baker Tilly’s acquisition strategy is based on building our scale, capabilities and geography, and those are long-term drivers,” Zelenay said. “Short-term economic conditions, such as inflation and potential recession, don’t have a meaningful impact on our strategy.”

Zelenay added that in the merger and acquisition space his firm is seeing financial structures grow more complex and deals happening at a more rapid pace. In addition, firms are looking to scale increasingly through acquisitions in specialty spaces such as corporate tax.

PricewaterhouseCoopers, a London-based professional services firm with two offices in the Los Angeles region, has also been busy acquiring other companies that expand upon its services.

In the last two years, the firm acquired EagleDream, ACTS, Netrovert and Sagence, all of which reinforced and strengthened PwC’s existing offerings with cloud service providers and platforms.

“Collectively, the business logic for targeting these companies specifically is to increasingly have an impact on the digital fabric of our clients, as well as to have lasting, sustained impact on the operations and trajectory of their businesses,” a PwC spokesperson said.

PwC, as with Baker Tilly, has had to engage in mergers and acquisitions with the long term in mind.

PwC’s 26th Annual Global CEO Survey found that the lure of mergers and acquisitions in challenging times is solid. According to the survey, 73% of corporate leaders were pessimistic about global economic growth, with 60% of those leaders stating that they were not planning to delay deals this year in order to mitigate potential economic challenges and volatility. The survey was released this year.

“Along with the need to grow, we believe that CEOs continue to eye M&A as a way to accelerate transformation of their businesses,” the spokesperson said. “And this is what we are seeing with our clients, as the challenges to organic growth and the urgency for transformation continue to make M&A a viable capital-allocation option.”

Hannah Madans Welk
Hannah Madans Welk
Hannah Madans Welk is Interim Editor at the Los Angeles Business Journal and the Inside The Valley. She previously covered real estate for the Los Angeles Business Journal. She has done work with publications including The Orange County Register, The Real Deal and doityourself.com.

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