Consolidation continues: positioning the small firm; how to prepare for it--or defend against it.

• Author: Pirolli, William

Several years ago, consolidation of the accounting industry started as a whirlwind sweeping through some of the largest firms in the country. Although that whirlwind has diminished to a breeze, with some successes and failures, our industry, and those who would participate in it, still find themselves working out the major issues of consolidation.

During the height of consolidation activity there appeared to be no end in sight. You could almost envision the formation of super firms, owned by financial giants, threatening the very existence of regional and smaller firms. Many of us looked to banks and the insurance industry as future consolidators. Reality has proven to be quite different.

So is this a post-mortem for consolidation? Hardly. There is still much activity among regional firms that initially were not targets of the consolidators, producing many exciting opportunities--or threats--for small firms.

For purposes of this article, the focus will be on small and regional firms. By AICPA criteria, a small firm is one with fewer than ten professionals. These firms include sole practitioners, and small multipartner firms, as well as larger firms whose reach is generally within a local geographic region. Regional firms vary in size, but, for purposes of this article, consider them to be in the range of 20 to 75 professionals.

The regional firm challenge: acquiring critical mass

Regional firms generally provide a wide range of services including traditional tax and audit, specialized consulting such as elder care and business valuation, personal financial planning, litigation support, information technology, merger and acquisitions, and many other services. They may typically belong to a national organization of allied firms and their service reach may extend far beyond their own back yard.

Legislation regulating commissions and contingent fees in many states allowed these firms to expand into commission-based products such as investment management, insurance, mortgage origination, and payroll processing. In short, these multidisciplinary practices are attempting to leverage their client base by forming a one-stop financial resource.

The challenge for these firms is to acquire a sufficient critical mass of clients and sell these new products and services to them. In many cases, the firm may not have a sufficient internal client base to carry each new department. The choice then is between marketing for clients one at a time in traditional fashion or consolidating other firms and leveraging the new client base.

The small firm dilemma

What are the options for small firms? In today's market you can choose to embrace the opportunities of consolidation or remain independent. For many, the latter option works fine. I believe the role of the small practitioner is strong and will remain that way for...