- Size of practice
- Profitability of the practice
- Down payment
- Term (number of years) of the payments
- Length of time before the purchase price is fixed
- Extent and quality of client transition
- And finally, the multiple of revenue being paid
There is no question that M&A is hot. The 2012 PCPS Succession Survey asked multi owner firms (509 participants) whether they had been in active M&A discussions in the last 24 months and /or if they were planning to be active in the next 24 months. Forty percent said yes!
One of the most interesting tidbits from the survey was a question directed to the 432 responding sole practitioners (solo) about practice continuation agreements. The idea is that the solo enters into an agreement with a larger friendly firm to “step in” and acquire the practice in the event of the solo’s death or disability.
Ninety four percent of the solos said that they do not have a practice continuation agreement with another firm. Your initial reaction might be that there is a big opportunity here and you should contact all of the solos in your area and start getting these negotiations and in place. That would be the logical but incorrect answer.
The message here is that there is just something about the sole practitioner that makes them want to practice as a solo in the first place, that gets in the way of executing something that seems to make so much sense. My suggestion is that if you are a larger firm, you probably should look to other options besides chasing practice continuation agreements.
One option is a two step deal. The basic notion is that in step one the solo and the larger firm cohabitate while the solo maintains quite a bit of the desired independence and continues to serve clients. Step two is down the road in two or three years and is when the buyout really begins.
The survey did provide some guidance on deal multiples and terms from the perspective of those same sole practitioners. There are a lot of factors in any deal that influence the multiple including things like geography, projected profitability in the acquiring firm, up front cash, retention/guarantee clauses, payout periods and the overall size of the transaction. Experience tells us that for most deals under two million dollars, four to six years is fairly common and we see most multiples ranging from 1 to 1.25.
If you are thinking about getting in the M&A game, I have heard a lot of partners say that they don’t want to do a particular deal with this or that firm because they will be fixing someone else’s problems. I’ve got news for you. If you are the acquirer, you are always fixing someone else’s problems. Make sure that you fully understand what they are.
As we work to move our firms forward and to improve them, feedback from our two most important contingencies, clients and employees, has never been more critical. Knowing how we are doing and where we need to focus to improve is especially important in this slow recovering economy. We just have less of a margin for error to work with as top line growth has slowed or disappeared and we have tightened our belts.
My clients are hungry for data and are turning more and more to surveys to gather it. When I was in the managing partner role with my prior firm, I wanted to know how we were doing and even more important, how do we compare relative to our peers. That data was not available.
The independence of the collection process combined with peer benchmarking (how do we compare?) elevate the value of the information and the ability of the firm to make good decisions based on the data.
Unfortunately there has not been a consistent, reliable source of data for the profession, beyond financial surveys, that firms can depend upon. Recognizing that void, a new company has been formed. It is SurveyCPA.com and it is dedicated to building national benchmarking data and helping firms with the following surveys:
• Upward evaluations of partners and managers
• Employee engagement and satisfaction
• Client satisfaction
The surveys provided by SurveyCPA have been developed specifically for cpa firms and the questions reflect the uniqueness of our profession. The benchmarking data will be on a national scale with the plan to stratify that data both on geographic regions and also size of firm.
SurveyCPA is a joint venture between Rita Keller, a national consultant consistently named to the top 100 most influential people in the profession, and Gary Adamson, CPA, author of this article.
Every firm has an “A” client list – the largest and most profitable clients for the firm. Hopefully, you have already identified them and you make sure that they receive the best “care and feeding’ and the highest priority from the firm.
If you haven’t, do it now and decide what it means in your firm to be an “A” client. We need to be reminded from time to time that our best clients are also the top targets for our competitors. And, they are being courted constantly.
Something that we did for our “A” clients when I was a managing partner is worth sharing because I don’t see it in a lot of firms. We called it our “Save the Whale” program and it worked as follows.
I visited our top clients along with the firm’s marketing director. Our purpose was to express our appreciation for their business, solicit input on our services and people, find out if they had any suggestions for the firm and to give them updates on what was happening at the firm. It was not a sales call.
If part of the above description sounds like a client satisfaction survey, you’re right, it was. How much better do you think it was received and perceived when the managing partner makes a personal visit to see them and talk about their satisfaction with the firm?
Your “A” clients deserve to be treated in a special way. This is an idea to show them how important they are to the firm and to help cement that relationship. It take some time to work through the list, but we got a lot out of it and the clients loved it.
Communication (or the lack thereof) in every organization is critical. It is especially important in the accounting world where we have populated our firms with great CPA’s who are most likely not also great communicators. It’s just the nature of the beast and we have to work a little harder at it.
Everyone wants to know what’s going on and in most firms your team has several methods for acquiring information. Those include staff meetings, internal newsletters, intranets, group emails, etc. But, what is number one in every firm? The Grapevine! And you as firm leadership don’t control it.
The Grapevine doesn’t sleep. It works 24/7, never takes a day off and if you’re lucky gets “it” about half right. The mystery in most firms about what is really going on is just too tasty and tempting for most of us to resist.
You’re never going to get rid of it but here are a couple of ideas for firm leadership to consider that will help. I’m not a big fan of meetings and especially creating more of them. But these are important and probably not happening in your firm.
First, get your managers together with your managing partner (MP) three or four times a year. Your managers are on the front line for the firm “managing” your clients and staff. The MP should bring an agenda of items to be shared and discussed and then open it up. Your purpose here is to have a dialogue about important issues inside the firm and to give them a consistent message from the top. Your managers are part of firm leadership and should be helping the entire partner group carry the torch.
Second, on a less frequent basis, set up a lunch for all team members, except partners and managers, with the MP. This should be more of an open forum. At first it may seem a little clumsy but the more you do it the more people will open up and talk. We used to call it our “stump the MP lunches”. Obviously not everything can be shared. But you will go a long way toward helping your team feel connected to the firm and, slowing down the grapevine.
I will first give Bill Reeb due credit for the metaphor. Bill used a slide at a partner retreat that has stuck with me for a number of years. The slide showed a boat in the water in the middle of several islands. The boat was spinning because several people were rowing one direction, several were rowing the other direction and some didn’t have their paddles in the water at all. The boat had no chance of reaching any island.
Hopefully this doesn’t sound like your firm or partner group. But, unfortunately it is a pretty accurate depiction of a lot of accounting firms that I have known. The sad truth is that the choice of which island to paddle for is probably not the most important question. Actually, any island would be better than spinning in the boat.
The bigger issue is how do you get everyone to row the same direction or at least keep their paddles out of the water. You’ll get there slower if everyone isn’t rowing but at least you’ll get there.
If you think about your firm and the initiatives that you have undertaken in your practice where you have failed or achieved less than you wanted, how many people in the three groups in the boat did you have?
The moral of the story is that we spend a lot of time intellectually strategizing about a direction or initiative in our firms and far to little time talking about how we will each personally support it. Getting that buy in and personal commitment from your partners up front is critical.
Pick an island that you have a chance of reaching.
I have had several questions regarding my November 11 blog post entitled Five Merger Tips to Help You Seal the Deal. They have centered around my comments on the average billing rate per hour and how that should be one of the early litmus tests in looking at the target firm in a merger.
The question is if the target firm’s partner rates are quite a bit lower than those of your firm, does that mean that it is not going to be a good fit? No – not necessarily. If, for instance, the partners of the target firm are doing a lot of the work, they are going to be retiring soon as a part of the deal with you and you can replace many of their hours with staff hours, then it may very well work. If on the other hand in this example they are staying with you after the merger, think about the two cultures and whether the way they practice is compatible with you.
Remember, my point about comparing average billing rates per hour is for the entire firm, not just the partners. You have to use that indicator as a starting point and get underneath the numbers to understand how you really compare.
The key point holds true. If there is a big difference between the average billing rates of both firms, you need to dig into it soon in the discussions.
I may be making a big assumption but I hope that you are already engaged in partner goal setting in your firm. If done well, it will raise the bar for each partner which in turn will raise the bar for the firm. We all have heard the basic rules of the game including having a limited number of measurable, stretch goals. Here are a few ideas to really juice up your process for better results.
Coaching and mentoring the firm’s partners is one of the most important if not the most important responsibility of your managing partner. Depending on the size of your firm, the managing partner may personally do it or get others involved. The goal setting process is a team sport. The MP and his/her management team sits down with the partners and together they come up with the goals. Equally important is the involvement of the MP in follow up meetings to discuss progress. A good rule of thumb is that you need to have a dialogue every sixty days or so. The biggest reason why goal setting programs fail is lack of follow up by firm leadership.
Hygiene vs. Goals.
I see too often what I call hygiene items listed as goals. There are some things that are like brushing your teeth in the morning – you just need to do it and you really shouldn’t be rewarded for it. Your firm should have minimum expectations for partners that include things like putting your time in, doing your billings, collecting your receivables, etc. They are not goals. Partners should be impact players and their goals should have a high impact on the firm’s success.
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