Note: The following article was written by Ira Rosenbloom, chief operating executive for Optimum Strategies.

By Ira Rosenbloom

Mergers and acquisitions (M&A) in the accounting industry are hotter than ever, and all signs point to another active year. They also point to increasing challenges for deal-making. 

Staffing difficulties, plus the “graying” of practitioners who are looking for a better exit, are shifting the traditional M&A emphasis from practice growth and economies of scale to prioritizing business excellence and competitive advantage.

To make a practice attractive to suitors seeking impactful business upside, players need to go beyond the traditional key performance indicators (KPIs) that normally guide a CPA firm in business operations, and focus on factors such as the following 10 non-traditional metrics

1. Referrals. The nature, dollar value, and frequency of referrals — both in and out — will likely uncover synergies and potential advantages. Referrals of all natures must be tracked so they can highlight features that may become realities in a merged firm (or that will never come to fruition).
2. Pipeline and turnover. Lead generation and closing success are going to be essential for the merged business. The history of performance with leads will tell the parties whether the entrepreneurial cultures are aligned, and in what way greater resources could affect the result for generating and closing leads. Parties should be diligent about compiling and collecting this kind of information. Clearly, the better the results are, the stronger you can differentiate your firm. However, the nature of failed results may also spell huge potential for another firm. It is equally important to understand your time to close and success rate. Closing rates better than 65% would certainly gain attention.
3. Profit margin by service line. All parties will be interested in identifying the firms’ best service lines and knowing just how good they are. Profit margin by service line will provide relevant information.
4. Engagement budget viability. Knowing the frequency of engagements being performed within an established budget — and knowing how well a firm budgets their engagements — speaks not only to strengths, but also to blind spots. Efficiencies and effective processes are necessary for a strong transition and profitable marriage. All parties need to be sure they have compatibility on engagement management, and have an open-minded approach to improvement. 
5. Days receivable. If a firm’s days receivable — or days sales outstanding (DSO) — is growing, it means the firm is not getting paid as quickly as it could be. This might signal that clients are having financial troubles, or that they are not satisfied, or that your team is not being effective with collections. In an M&A situation, cash flow and working capital are essential. The more the parties understand each side’s financial behavior, the better they can anticipate success or difficulty.
6. Average fee by service line. Firms may be drawn together because they are similar or different. The average fees for the different service lines will provide grounds to answer how similar or disparate they are, and whether the parties are a match.
7. Concentration of revenue. Risk and reward are huge in the M&A decision process. Much can be determined by knowing the percentage of revenues that come from the largest engagements, and from fees in varying bandwidths (especially the low end). Early in conversations, the parties should delve into revenue concentration to determine risk/reward and the degree of effort that may be required for transitioning.
8. Production of staff. Profits are highly dependent on personnel costs. ROI will vary from firm to firm, but managing ROI and targeting results should be routine for parties. Often, there may be potential to re-engineer and train people to work on more sophisticated projects or capitalize on more efficiencies. Knowing the production per staff member is an important barometer for evaluating deal upside. 
9. Realization trends. Realization percentages are helpful to understanding the client engagement experience. Examining the trend will tell players whether engagements are improving in performance, and what it takes to generate the improvement. The number and type of engagements that stagnate at a subpar level will be relevant to the timing and viability of a successful integration. It’s also helpful to know how close to the market rate your firm’s realization rate is when correlated to the market rates per hour. Tracking realization rates for different service lines will be helpful as well. 
10. Client input. All firms rely on strong client satisfaction. The more authentic and in-depth your client input is, the better the integrity of the satisfaction barometer. Client surveys and interviews should be compiled with the metrics available for analysis by all parties at the M&A table.

Successors need to see realizable potential. Robust metrics are key to enabling the successors to make their decision. Sellers need to be ready to step up their entrepreneurial behavior to compete with other sellers, and to have analytics that best tell their story. The metrics noted here will convey the data and narrative to potentially support a smart business decision for all parties to win at M&A.  

Ira Rosenbloom, CPA (LR), is chief operating executive for Optimum Strategies . He is known as The Merger & Succession Solver℠ for his objective and proven guidance in evaluating and completing M&A transactions. As COE of Optimum Strategies, which he founded in 2010, he advises CPA firm leaders on matters of internal and external succession, including optimizing competitive advantage and improving performance and profitability. Ira previously served as managing partner of a mid-sized regional accounting firm, practice director for a national firm, and as regional partner in a national CPA M&A advisory firm.