Why growth mat­ters

It’s the dif­fer­ence be­tween the dis­rup­tor and the dis­rupted

Accounting Today - - Contents - BY DOM ES­POS­ITO

I was once asked, “Why is growth im­por­tant?” My short an­swer was it comes down to per­spec­tive. Do you want your firm to be rel­e­vant and be a dis­rup­tor, or do you want your firm to be ir­rel­e­vant and be dis­rupted? With­out growth, your firm will cer­tainly be the lat­ter. Let me ex­plain by shar­ing my per­sonal ex­pe­ri­ence. Dur­ing my 47 years in the ac­count­ing pro­fes­sion, I was with two firms, Cohn­reznick and Grant Thorn­ton. As I re­flect on them, they were clearly dis­rup­tors in their day.

In 2002, when I joined Cohn­reznick’s pre­de­ces­sor, J.H. Cohn, the firm had three of­fices. Rev­enues were $52 mil­lion and the firm was ranked No. 43 na­tion­ally. We were stuck in the mid­dle like an Os­car Meyer sand­wich, as we were con­sid­ered a small firm that lacked mar­ket per­mis­sion to han­dle so­phis­ti­cated clients. When clients wanted to raise cap­i­tal, the in­vest­ment bank­ing com­mu­nity would say, “Who is J.H. Cohn?”

The firm’s lead­er­ship had a num­ber of big thinkers who weren’t afraid to take cal­cu­lated risks (not ranch bets) and wanted to be a mar­ket­place dis­rup­tor. We de­ter­mined that the great­est op­por­tu­nity for the firm was to be­come a much larger player. The econ­omy was be­gin­ning to show signs of fa­tigue and we were con­cerned about our earn­ings. The pro­fes­sion, while do­ing well be­cause of SOX (a short-lived earn­ings pop that gave CPA firms some pric­ing power), was be­gin­ning to come to the re­al­iza­tion that ro­bust rev­enues and prof­its (pre-fi­nan­cial cri­sis) were not sus­tain­able. The Big Eight had dwin­dled to the Big Five (soon to be­come Four) and it was ob­vi­ous the mid-mar­ket mar­ket was go­ing to be un­der­served.

We wanted to be a Top 10 firm with more sub­stan­tial clients, we wanted to at­tract bet­ter qual­ity clients, and we wanted to make more money. So we set our­selves on a path that re­quired four key in­gre­di­ents: Ad­vi­sory and con­sult­ing ca­pa­bil­i­ties; In­dus­try spe­cial­iza­tion and dis­tinc­tive ser­vice char­ac­ter­is­tics;

Merg­ers and ac­qui­si­tions for geo­graphic ex­pan­sion; and,

Brand recog­ni­tion, in­clud­ing a na­tional spokesper­son. Over the next 10 years, we:

Grew our ad­vi­sory and con­sult­ing prac­tice to about 10 per­cent of firm rev­enues;

Got very se­ri­ous with in­dus­try spe­cial­iza­tion;

Con­sum­mated 15 merg­ers and ac­qui­si­tions; and,

Re­tained Joe Torre, who has done a marvelous job in rais­ing mar­ket­place aware­ness.

To­gether with or­ganic growth, the firm went to $250 mil­lion in rev­enues and was ranked No. 22 na­tion­ally. Most im­por­tant, our bot­tom line be­gan to get very healthy.

While we were proud of our ac­com­plish­ments, we weren’t where we wanted to be: a Top 10 firm. We didn’t want to wait an­other 10 years to ac­com­plish our goal, so we de­cided to ex­plore a three­way merger that would dis­rupt the pro­fes­sion and leapfrog us over our com­pe­ti­tion. The three-firm deal even­tu­ally was re­duced to two firms, and Cohn­reznick was born. To­day, it’s ranked No. 11 na­tion­ally, and its rev­enues ex­ceed $625 mil­lion, with more than 20 of­fices, in­clud­ing one in In­dia. If you ask me if the firm would do it all over again, the an­swer is a re­sound­ing yes! The firm is on the path to cre­at­ing a na­tional brand, has be­gun to move the client base up­town, and has be­gun to at­tract bet­ter qual­ity lat­er­als. Ku­dos to a dis­rup­tor!

Grant Thorn­ton’s story was not much dif­fer­ent ex­cept that, in its day, its dis­rup­tion played out on much big­ger stages — the U.S. and in­ter­na­tional mar­kets. It had two key moves:

To play in­ter­na­tion­ally as one global brand (circa 1985); and,

To cap­i­tal­ize on the un­for­tu­nate Arthur An­der­sen op­por­tu­nity (circa 2001).

Lead­er­ship at Grant Thorn­ton’s pre­de­ces­sor firm, Alexan­der Grant, saw a mar­ket­place op­por­tu­nity for an in­ter­na­tional net­work. The firm tried to do a merger with both Main Hur­d­man and Laven­thol Hor­wath. Both firms had strong in­ter­na­tional as­so­ci­a­tions and mar­quee clients. Un­for­tu­nately, the part­ners weren’t mak­ing mar­ket part­ner com­pen­sa­tion. The firm be­lieved it could build off a strong na­tional brand with about 40 U.S. of­fices. The firm wanted more than an in­ter­na­tional as­so­ci­a­tion (Tans­ley Witt), which wasn’t driv­ing much busi­ness. The firm wanted to be a ma­jor at­test, tax and ad­vi­sory firm that could serve pub­lic com­pa­nies. It found a like-minded U.K. firm (Thorn­ton Baker) in 1980 and changed its name to Grant Thorn­ton in 1986.

To­day, it’s ranked No. 6 na­tion­ally, the firm has 59 of­fices and rev­enues ex­ceed $1.7 bil­lion. Ku­dos to a dis­rup­tor!

There are eight steps to be­ing a great firm:

1. A shared vi­sion about the fu­ture and the strate­gies with ac­count­abil­ity that will get the part­ners there;

2. A sound eco­nomic model that re­wards per­for­mance;

3. First-class part­ners who un­der­stand how to build last­ing re­la­tion­ships with clients and con­tacts;

4. A growth and busi­ness de­vel­op­ment cul­ture that in­cludes every­one with their ca­pac­ity and skill set; 5. At­tract­ing mar­quee clients; 6. The abil­ity to demon­strate that it is dif­fer­ent, that it brings value to all clients that adds to their suc­cess;

7. Smart merg­ers and lat­eral hires that add to its strengths, im­prove its weak­nesses, and ex­pand its foot­print; and, 8. Con­sis­tent and per­sis­tent lead­er­ship. So why is growth im­por­tant? It is im­por­tant be­cause:

It cre­ates in­vest­ment dol­lars that are crit­i­cally needed to plow back into the busi­ness. It helps at­tract qual­ity lat­eral hires. It en­ables the firm to move “up­town” with the client base.

It con­tin­ues to in­crease part­ner com­pen­sa­tion.

And last, and cer­tainly not least, growth is im­por­tant be­cause client per­cep­tion is that big­ger is bet­ter and, there­fore, big­ger is, in fact, bet­ter. That’s not to sug­gest that bet­ter isn’t bet­ter (bet­ter is al­ways a good thing), but if you are not get­ting big­ger, you will have a chal­lenge as size sells, and be­cause clients and prospects re­spect big and, more im­por­tantly, buy big, known brands. The sup­po­si­tion is that if you are big, you must have clients and im­pres­sive cre­den­tials. Growth comes from six key in­gre­di­ents: 1. Build­ing a truly unique firm. An ex­am­ple would be build­ing a firm that be­comes the mid-mar­ket re­source for liq­uid­ity and cap­i­tal mar­kets con­sul­ta­tion and ac­cess (which also feeds trans­ac­tion ad­vi­sory ser­vices).

2. Cre­at­ing a firm that pro­vides value be­yond com­par­i­son.

The key is in­dus­try spe­cial­iza­tion that in­cludes de­liv­er­ables such as sug­ges­tions for EBITDA and work­ing cap­i­tal im­prove­ments.

3. Cross-sell­ing, which is the low-hang­ing fruit.

Hold an­nual client clin­ics to find pain points and how you can help. 4. Orig­i­nat­ing new work. Every­one has a role. Some are rain­mak­ers, some are “mist­mak­ers” and oth­ers are in sup­port.

5. Di­ver­si­fy­ing with ad­vi­sory and con­sult­ing ca­pa­bil­i­ties.

These might in­clude cy­ber­se­cu­rity, due dili­gence, wealth man­age­ment and bankruptcy/ re­struc­tur­ing.

6. Pur­su­ing merg­ers and ac­qui­si­tions for geo­graphic ex­pan­sion.

Over the years, there have been a num­ber of great CPA firms that were dis­rup­tors. Top of mind are Roth­stein Kass (hedge funds) and Kenneth Leven­thal (real es­tate). These firms thought out­side of the box. They made a dif­fer­ence in the pro­fes­sion. Growth was an in­te­gral part of their suc­cess. While growth is easy to say, it is very dif­fi­cult to achieve un­less there is a com­mit­ment at the very top of the firm with goals and in­di­vid­ual part­ner ac­count­abil­ity. AT

Dom Es­pos­ito, CPA, is the CEO of Es­pos­ito CEO2CEO. Reach him at de­spos­ito@es­pos­i­to­ceo2ceo. com or (203) 292-3277.

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