Seismic Shift: Why SME firms across Canada are consolidating
As technology and demographics disrupt the accounting profession, insiders say SME firms are consolidating across Canada
OTTAWA – As boundaries between traditional accounting and non-accounting related services continue to crumble, and as a new generation asserts its presence in the workforce, the accounting profession and the way it serves the public is undergoing unprecedented change.
Amidst this upheaval, some professionals believe the traditionally healthy supply of smaller accounting firms that serve small businesses in their communities might not be as readily available in the future. They see the "Big Four" accounting giants (Deloitte, KPMG, PwC, EY), as well as the next tier of industry leaders (MNP, BDO, Grant Thornton) taking up a larger share of the profession’s business.
“If you go to the websites of any of the Big Four, you see dozens of types of services offered. It’s just hard for the smaller firms to compete against that,” says Janne Chung, an associate professor of accounting at York University’s Schulich School of Business in Toronto.
Demographics are a key factor behind what many perceive to be a seismic shift in the profession.
Colleen Gibb, founder of Gibb Widdis Chartered Accountants Professional Corporation, established her Ancaster, Ontario practice in 1993. Gibb says many smaller practitioners from the baby boom generation see retirement on the horizon in five to ten years, and that will continue to change the composition of the profession.
“They’re doing some planning and realizing that there are not a lot of CPAs waiting in the wings that want to purchase their practice. So they’re looking at alternatives for retirement plans for themselves and for their clients,” she says, noting that one of those alternatives is acquisition by a larger firm.
One reason for that reluctance to continue the practice, Gibb believes, is a generational shift in attitude.
“The younger CAs in the office want more work-life balance. [They] don’t really want the risks and responsibilities of ownership. They’re quite happy just being a worker bee.
"I don’t want to over-generalize, because there are exceptions. I do know a lot of young people who have those goals and ambitions. But I think as a whole, there are a lot less,” she says.
Vic Durksen, a principal with Bridgman & Durksen, Chartered Accountants Professional Corporation in Virgil, Ontario, a 28-year old firm with a branch office in St. Catharines, and another soon to open in Beamsville, says he is also noticing that trend happening throughout his region of Southern Ontario.
“Most of my fellow associates who used to have their own firms have sold out to the nationals. In fact, I’ve been approached by, I think, five or six of [the big national firms]. I tell them all to go away. But I’ve been getting calls repeatedly,” he says, noting that Bridgman & Durksen, with 25 staff members, continues to expand.
“I have great staff and people wanting to come here all the time. We’re getting fantastic candidates that want to work here as opposed to the national firms,” Durksen notes.
Durksen, like Gibb, believes demographics is a big reason why he sees a number of smaller firms being acquired by larger firms today.
“I think [members of] the baby boom generation … that didn’t plan their exit strategies are getting older and saying ‘now what?’ So the national firms are coming to them and saying ‘we’ll buy you.’”
Durksen asserts that small practice valuation multiples are relatively inexpensive at present and therefore financially attractive. But at least one large firm is willing to dispute Durksen's claim.
Says Alexandre Baril, a partner and corporate development officer in Deloitte’s office in Montreal, “We’re not seeing that,” he says, adding that “usually, when interest rates are this low, you would expect higher multiples because financing is so cheap.”
Baril also disagrees with the assertion that the larger accounting firms, including Deloitte, are snapping up more smaller firms today than the profession has seen in years past.
“I’ve seen nothing different recently than what I’ve seen in, say the last 20 years,” he says. “Deloitte remains focused on finding merger and acquisition targets that help our clients succeed in both the public and private space.”
Bulking up at the bigs
Baril says Deloitte has made about 18 acquisitions of firms since 2013, only five of which involved audit practices. The mergers with audit practices have taken place primarily in Toronto, Quebec City, Laval and Winnipeg.
He says several acquisitions were made to strengthen Deloitte’s ability to provide specialized services in non-accounting service areas, particularly cybersecurity, analytics, capital projects, specialized IT services, as well as some digital marketing.
For example, in December 2014, Deloitte announced it had acquired SwiftRadius, an IT consultancy based in Atlantic Canada, which added a team of IT professionals to Deloitte’s consulting practice and also helped to establish a new Deloitte office in Fredericton, N.B.
The press release announcing that deal noted that throughout 2014, Deloitte had made several other varied acquisitions across Canada, including a safety and environmental consultancy in Alberta, a tax boutique in British Columbia, an e-discovery provider in Ontario and a crisis-management boutique in Alberta.
In 2015, Deloitte said it had entered into an agreement to acquire the Asset Performance Group, an asset reliability consultancy based in both Calgary and Burlington, Ont.
“This transaction brings new reliability engineering and maintenance capabilities to Deloitte’s Consulting practice, enabling the firm to deliver a full suite of asset reliability engineering, asset management and performance improvement services to capital-intensive industries across Canada, the U.S. and South America,” the firm announced.
More recently, in December 2016, Deloitte announced it had acquired CleverAnt, a Montreal based company that provides Workforce Management advisory services and a product that facilitates access to enterprise cloud software.
Such acquisitions point to a continuing trend shared by the Big Four, in which audit and assurance revenues have dropped slightly, and advisory services, such as cybersecurity, are responsible for growth.
“One of the questions my students ask me when we go through all the types of non-traditional services that public accounting firms offer is ‘Why do they do those things when they have nothing to do with accounting?’” says Chung.
She tells them that “the need to grow our profession is really strong. We don’t want to be a profession that is just accounting and auditing and tax,” and also notes that part of the appeal of the larger firms for her students is they can offer more services and therefore more career opportunities.
Colleen Gibb worries about the impact that fewer small firms could have on the small business community. She notes that small business clients have traditionally relied upon the small and medium-sized practitioners, and a strong bond has been forged in large part because the practitioner could relate to their small business clients’ problems.
“If the consolidation of firms continues and Canada is left with six or eight big firms, I’m not sure the needs of Canada’s small businesses will be properly met. The market pricing will likely increase and I am concerned that small businesses will move to using non-licensed individuals who really do not have the same level of knowledge, skill and professional ethics as CPAs.” she says.
Vic Durksen asserts he knows of five regional firms in his area that have been sold to national firms over the past few years. Grant Thornton, for example, acquired MacGillivray in Hamilton, Ontario in 2011, and EPR Kielstra in Ontario's Niagara Region in 2014. (EPR Kielstra had offices in Beamsville, Niagara Falls and Fort Erie; despite repeated requests, Grant Thornton would not confirm that these firms were amalgamated in the City of St. Catharines.)
“There are economies of scale to make more money and have everybody under one roof. That’s their choice. [But] I don’t get it. They’re not servicing the local jurisdictions,” he asserts.
Small business competition
Another factor influencing the accounting profession is that the pool of publicly listed entities in Canada that traditionally required audits by the larger accounting firms has been shrinking over the past decade as a result of acquisitions by large U.S. companies, claims Gibb, who also says the big firms are now building small business practices.
“I don’t have the data to say if the number of public companies is actually shrinking,” says Baril.
“But I can tell you our audit practice is not shrinking, and that includes both public and private clients. Our focus on private companies has been enhanced. I wouldn’t say it’s because there are less public companies, though. Private companies are as important to us as public companies,” he adds.
For Deloitte, the purpose of merging with a smaller accounting firm is “not enhancing the service, per se. It’s more closing a gap that’s either geographical or for a specific niche area, like an industry, for example. Whenever we see a key leader in a key market that we’re either underserved [in], or we feel we have a gap in, we’ll definitely consider joining forces with them,” explains Baril.
Even for smaller accounting firms, it has become more of a global world.
‘When I started, everybody that I did business with did business in Ontario. They didn’t venture out to other provinces, let alone around the world. Today my smallest clients are operating around the world. It’s a whole different level of sophistication today,” says Gibb.
Jeff Buckstein, CPA, CGA, is an Ottawa-based business journalist.