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1. Increased competition – Although previously led by the Big 4, many firms beyond the Big 4 have opened up their own Transaction Advisory Practice in the last decade. This includes smaller CPA practices, investment banks, as well as closely related consulting firms, all of which capture more and more market share year-over-year. John McSpadden, CEO of Executive Staffing Group and Founder of 10x Advisory, started partnering with Non-Big 4 Firms in the early 2000s to assist them in building out their Transaction Advisory Practices nationally. “I was first retained in 2004/2005 to assist two non-Big 4 Firm with establishing a national TAS offering. This was an uphill climb back then as no other firms outside the Big 4 were offering financial due diligence, operational due diligence, etc., which meant the Big 4 owned 100% of the market. Since then, the market has grown 20x with true global competitors, national and regional providers, as well as even boutique CPA & consulting firms” – says McSpadden. Dealmaking has increased over the past 15 years, coupled with the overall TAS offering expanding beyond financial due diligence. However, the significant increase in competition, has and will continue to drive prices down, which will continue to squeeze margins and top-line growth. The Transaction Advisory sector is in a unique position says McSpadden – on one hand you have seen a slight increase in deal volume compared to a significant increase in M&A service providers. This naturally drives realized rates down, plus causes talent shortages – without a significant uptick in deal volume, the number of professionals within the sector remains stagnant. It’s a demand vs. competition vs. supply issue.
2. Increased commoditization – In recent years, the scope of the financial due diligence deliverable has decreased to favor the most essential inputs to proceed with the deal. Namely requiring solely a Quality of Earnings analysis over of a full scope due diligence. Additionally, the deliverable has reduced to the barest output, the databook. The financial due diligence function in many cases is perceived as a compliance rather than consulting deliverable, with decreasing differentiation across preparers. The view as a standardized product encourages a race to the bottom in the market and brings down prices.
3. Uncertain deal activity – Despite the post-COVID rebound in activity in 2022, first half 2023 deal activity remains subdued. Dealmakers have remained hesitant to deploy dry powder in face of inflation, higher financing costs and the risk of recession. Tempered M&A activity which could continue through the remainder of 2023 and beyond decreases the requirements for transaction advisory services which in turn causes challenges for practices to manage headcount and hiring.
4. Unfavorable labor trends – An outcome of the pandemic is a change in labor trends which has generally favored the employee. This has reduced the supply of labor and empowered existing employees to demand raises and promotions. Additionally, employees have reexamined work, leading to less loyalty and more mobility across employers. Each move also increases the likelihood of increased compensation and promotions. The increased burden to retain talent coupled with flat revenue exacerbates the margin deterioration discussed. Compensation is up 25-30% for professionals between 3-10 years of experience, The Big 4 still owns approximately 80% of the FDD talent in the U.S., which is roughly around 3,500 FDD professionals nationally ranging from staff to partner, while the number of professionals hasn’t increased in the past seven years.
Given these threats, how does a Transaction Advisory Practice grow, how does it scale? How does it find the right people? How does it maintain margins? How does it survive?
Some possible solutions:
1. Recruit talent from the competition Pros – You have a vetted and qualified work product, which requires little training Cons – This requires a bump in pay or an immediate promotion which will likely suppress margins and have underqualified professionals at key levels (e.g. manager)
2. Pull auditors and train them to be diligence professionals Pros – Usually can be obtained at a reasonable cost and there is a sizeable labor pool Cons – Requires a great amount of time in training. Generally, only suitable for senior associates and below
3. Outsource via India – Many firms leverage the low-cost labor pool in India to perform routine tasks in a financial due diligence engagement Pros – Low cost of labor Cons – Time zone can be a burden. Language and cultural differences. In many cases may not be suitable for executing a full transaction or at the directorial level
It maintains the level of quality expected. Our base of professionals are all ex-Big 4, CPAs, CAs, CFAs and have US deal experience. We understand the demands for quality required by US firms and dealmakers.
It is agile and flexible. This supplements an existing fixed base of professionals with variable talent. The variable solution is consistent with the uncertainty and fluctuations inherent in the M&A market. It can ramp up or down depending on need, which lowers the fixed cost of underutilized professionals. There is no delay in deploying the outsourced solution compared to significant delay in hiring.
It is cheaper. Utilizing outsourced resources, we tap into the lower cost of labor which allows TAS practices to get ahead of the margin deterioration that is inevitable.
