The M&A Outlook in 2022

As we emerge from a busy tax season, it’s clear that the dealmakers have been working hard behind the scenes to get a leg up on this year’s mergers and acquisitions (M&A) opportunities. This should come as no surprise—global M&A activity hit record highs in 2021, reaching almost $6 trillion in deals. 

Are we poised to see a continuation of this level of activity in 2022? Or was 2021 simply a rebound year after the impact of the COVID-19 pandemic? What unique opportunities lie ahead for CPA firms advising on a deal or looking for one themselves? Let’s take a look, both from within the accounting and finance industry and a broader view. 

Staffing and Succession Challenges

Many market conditions, risks and challenges are driving M&A, making it likely that activity will remain high this year, but perhaps none more than staffing and succession challenges. Staffing shortages are stunting growth at many organizations. Smaller organizations are losing staff to higher-paying competitors, and baby boomers are clinging on beyond normal retirement age, absorbing payroll budgets with their salaries while having fewer staff to delegate work to. At the same time, many small and midsize companies are continuing to overlook the importance of robust succession planning, leaving holes when aging leaders do finally retire. 

The accounting industry itself is an interesting study of how succession planning has dropped off to-do lists since COVID-19 rearranged priorities. As recently as 2019, the biennial PCPS CPA Firm Top Issues survey found that developing and executing a succession plan was a top issue facing the profession. However, in their 2021 survey commentary, the researchers wrote, “While developing and executing a succession plan has appeared on every firm size’s top-five list in the past, it slipped to the top ten and beyond in this survey.” They advised firms to keep succession planning on their agendas despite the pandemic pressure. 

It seems that COVID-19 challenges have pushed succession planning aside temporarily within our industry, but it’s clear that staffing struggles are a constant across industries. As baby boomers retire in waves, many leaving their organizations without a successor, I believe that 2022 will mark a return to succession planning as organizations seek solutions to holes in the leadership chart and high employee turnover. 

For some organizations, M&A will be that solution, as merging two teams that complement each other, create cross-selling opportunities and enhance margins will be a desirable option. Take note: It’s important for sellers to be seen as synergistic and unique. 

Scaling and Innovation Opportunities

Technological innovations won’t ever slow down, and thus the trend of being able to produce more with less will continue. Organizations that invested in technology have reaped the rewards in agility and efficiency. The current staffing crisis will only drive organizations to make more out-of-the-box decisions. Leaders who scale their operations by deploying innovative processes and technological solutions will maintain the quality of their final product and find ways to accomplish more with less labor. 

However, innovative technological solutions come with a price and many businesses will be looking for a partner who already has those solutions or at least can share the costs. According to Bain and Company’s 2022 State of the M&A Market report, strategic M&A accounted for $3.8 trillion of last year’s deals as technological assets have become incredibly important to buyers. 

Additionally, supply chain issues and inflation will continue to impact organizational sustainability. Last year’s M&A activity was driven in part by abundant capital, low interest rates and a strong economy, but even if interest rates rise and markets waver, organizations will only feel increased pressure to achieve economies of scale. 

Buyers will be eagerly looking for strategic alliances that transform how they deliver products and services, expand their talent pool and lower costs. M&A dealmakers will be seeking ways to pool resources and invest in innovative technologies and recruiting, while trimming down administrative budgets to reallocate that money to more strategic initiatives. 
 

Within the Accounting Industry

If much of this sounds like what you’re facing within your own CPA firm, you’re not alone. As seasonal peaks and valleys become less common for CPAs, firms no longer have the luxury of waiting to address concerns. Many firms will need to reevaluate their immediate and longer-term succession planning needs and become more forward-looking. 

Above all, current market conditions demand that CPA firms innovate to survive and thrive. Without innovation and change, there may not be enough accountants in supply to fulfill the business community’s current and growing demand for strategic financial advice. To this end, technology and process improvements will help overcome staffing shortfalls. 

Firms that have a strong emerging leadership group should take meaningful steps to transition ownership internally to the next generation of partners. These firms will see the opportunities on the horizon and begin to invest in succession planning, their staff, infrastructure and governance models that allow them to be agile and responsive. For many, the buyers are already on payroll. 

Sell-side firms should plan for a sale and complete the tougher tasks of fixing internal problems and creating firm value by tightening up processes, retaining staff and clients, expanding current offerings and approaching the sale of their firm just like they would manage a client project. 

All of this is more or less business as usual, but a new potential partner has emerged: private equity. To see more about how deals with private equity firms could work, the medical services industry offers a visual example. Twenty years ago, many doctors shared offices or managed their own practices. They would handle all of their medical servicing as well as back-office management and medical billing in-house. This was highly inefficient. Doctors don’t do billing and collecting. Doctors treat patients. The recent trend is that most have transitioned from largely individual practices to specialty groups owned by investors and operated by professional management teams. Doctors are allowed to do what they do best while business management is handled by operational teams. 

It’s easy to imagine something similar happening to accounting firms. Some firms will move to the private equity model so their partners and staff can focus on client matters while investors create value and hire professional management teams to run the business side of their accounting firm investments. 
 

Outlook: Sunny

Overall, the market is poised for continued M&A activity. There’s never been a more vibrant time for CPAs to mitigate risks, overcome challenges and capitalize on opportunities—both for their own firms and as a trusted advisor to clients seeking a deal. Small and midsize organizations will continue to pair up to adapt quickly to technological advances and gain economies of scale. Larger organizations will seek targets that gain them an advantage in a highly competitive marketplace. And baby boomer retirements will continue to drive CPA firm deals.

All indications point to increased deal levels in 2022 and beyond, so now’s the time to proactively prepare for your succession. Likewise, it’s a great time to shore up on skill sets and knowledge to help your clients complete M&A deals. 

This article originally appeared on the website for the Illinois CPA Society.