playbook-Perfect Pitch-September 2011
Jonathan Hamilton publishes an influential newsletter called Accounting News Report from his offices in Henderson, Nevada, and he is quite enthusiastic about the recent growth record of Minneapolis’ largest accounting firm, LarsonAllen, LLP, including four acquisitions just in 2011. He notes that the recent deals are for firms a long way from Minneapolis, from Orlando, Florida, to Seattle.
“I remember when it was maybe a $45 million firm, and that wasn’t even 10 years ago,” he says. “Now they are pushing $300 million, and all of a sudden they basically have offices on the East Coast and West Coast. And I assume they are going to make a couple of more deals this year on the West Coast.”
The U.S. accounting industry has been consolidating at a rapid pace, with 40 mergers closing in just the first six months of the year, up from 32 in the same period of 2010. Reasons for this trend include the fact that many accounting firm principals are approaching retirement age, and getting equity out of any business without selling it is an age-old challenge. And the world is getting more complex, with rising demands for professional expertise leading many smaller-firm principals to conclude that linking arms with a bigger firm is the only way to stay in the game.
Hamilton, who covers the industry from the Big 4 on down, says that even in an active market for mergers and acquisitions, LarsonAllen stands out. It is pulling away from other traditionally regional firms into a tier of national firms that includes CBIZ/Mayer Hoffman McCann and BDO USA, LLP, both with more than a half-billion dollars in annual revenue in their most recent full years. And Hamilton assumes that LarsonAllen’s M&A edge has to start with CEO Gordon Viere. “If it were easy to close that many deals, everybody would be doing it,” he says. “When Gordy sits across from the principals of these firms, I don’t know what it is, but whatever it is, it is quite compelling.”
Much of what Viere told me sounds like common sense—good practices of an effective acquirer. For example, the firm takes pains to discuss deals as mergers, no matter the deal size. “We always say that to everybody,” he says. “We have just merged. Yesterday we were the old LarsonAllen. Today we are the new LarsonAllen.”
But a couple of aspects of Viere’s and LarsonAllen’s story do stand out. Viere has been in his role since 1989, having joined the regional firm in the mid-1970s out of college. The origins of the recent M&A activity go back to the mid-1990s. That’s when the leaders of the firm got together and held the first session of what they came to call the “dream process,” which was envisioning what the firm could and should be up to 40 years out. They still did budgets and planning, Viere says, but the dream process put a framework around their shared aspirations. And growth was very much part of it.
One aspect of the plan was to develop practices in particular industries, such as health care services. With only so many hospital systems to work for in the Minneapolis–St. Paul area, the firm began to look into adjacent markets. And to have a shot at success, they would need experienced and skilled staff. A very good place to find such talent was at other firms, and the best way to have that talent work with LarsonAllen was to merge. And so it went.
As the firm developed, the executive team elected to give up tight control of the front end of the M&A process—an uncommon practice in any business. Instead, local executives and practice leaders are encouraged, without first checking with Viere, to approach owners of other firms to discuss having them join LarsonAllen. They don’t have the authority to close deals, but they can start the discussion.
“Probably 30 people or so are empowered to have conversations,” Viere says. “For the principals of these firms, it’s a little different if you get a call from somebody down the street you may know.”
That’s how one of LarsonAllen’s most significant deals came about, with LeMaster Daniels of Spokane, Washington, a $40 million firm with 300 employees and 12 offices. The firm merged with LarsonAllen less than a year ago. Viere says a significant move into the West Coast was probably overdue, and the team identified Washington as preferable to California at the time.
The LeMaster Daniels transaction includes a provision that LarsonAllen will write into most of its deals, a sort of prenuptial agreement Viere calls the “window.” The details vary, but generally it is a provision that allows the principals of the merged firm to unwind the deal in the first 12 to 18 months. They can take back their stock, their name, their clients, and LarsonAllen is obligated to assist in that process. However, LarsonAllen also retains the option to unwind the merger.
Viere can’t say how common provisions like his window are, but he doesn’t know first-hand of similar approaches in other firms. And as Hamilton notes, “LarsonAllen hasn’t had any blowups,” and the rights in the window have never been executed in any LarsonAllen merger.
Viere says, “If you empower them to look for their own mergers and acquisitions, if you empower them to build their own business plans, if you empower them to determine who to hire, if you empower them to develop the culture . . . well, we just don’t have acquisitions not work.”
It may appear that LarsonAllen uses the windows in its deals for protection, but the intent is more in the opposite direction. It’s part of what the firm calls emotional ownership, and it applies to new hires as well as newly merged firms. There’s a job, there’s a job with equity ownership, and then there is passion for serving clients and building a business—that’s emotional ownership. Without evidence of the latter, you just may be asked to get on with your life’s work elsewhere.
With that background and an excellent record so far, one would think that the window provisions get forgotten about in a file drawer the day after a merger closes. But that isn’t the way LarsonAllen plays it. Viere insists that he and his new partners check in on how things are going along the way. “We sit down and discuss it, before the window closes. ‘Either we are a team right now going forward, or let’s just end it,’” he says. “That is a very powerful conversation to have.”