As you manage your accounting practice, sometimes your attention gets diverted to things that might not be as important as others.
Of course, you worry about hiring and retention, partner performance, marketing/sales, facilities and the general reputation of the firm. Lots of time and energy are expended on short-term activities. Maybe it is time to escape the day-to-day and think about what might be good for the firm long-term. When have you really contemplated profitability and the long-term future of your firm?
Profitability is not just about partner salaries. If you are profitable, it enables you to fund future growth of the firm, attract and retain the most talented professionals, explore new services, offer the best technology to your staff and clients, and so on.
If you are not as profitable as you would like, you could simply give up and sell or merge your firm into another firm. Or, you could get larger by growing organically or by being on the acquisition side of a merger.
Many firms are merging as a way to achieve more rapid growth. It helps increase market share and, sometimes, eliminates competition. It also provides more resources to be able to produce products and services to meet the demands of a wider client base.
Keep in mind, a merger is a professional marriage and you need to know your future partner. Take time to look at a merger from all sides and be sure that both sides understand how a combined firm will operate. Involve an experienced outside facilitator. Give me a call if you want to simply discuss your specific situation.
I have worked through many merger negotiations, several as managing partner of my own firm, and even more during consulting engagements.
As an acquirer, there is one question I have always asked. I suggest that you should ask the same question as you approach any merger/acquisition situation.
Here’s the question: Do you have any sacred cows?
A “sacred cow” can be described as one that is often unreasonably immune from criticism or opposition. Someone or something that has been accepted or respected for a long time and that people are afraid or unwilling to criticize or question.
Often the topic of sacred cows does not come up when the two firms are in the discussion stage. However, if not talked about up front the sacred cow situation will undoubtedly surface once the two firms are living together. It is also wise for the firm being acquired to ask the same question of the acquirer.
Most often the situation is a long-time employee that cannot be terminated (for any reason). Sometimes, it is even a partner whose performance hasn’t been up to par for years.
Another example is software. I have heard many firm leaders say, “We will not change our tax package.” To me, that is a deal breaker. For optimum efficiency, the entire firm should be using the same software packages. Develop the entire technology plan (hardware and software) up front and document how the conversion will be implemented.
Before you sign on the dotted line, be sure you can live with the sacred cows.
Tax Season 2013 is over and the M&A frenzy will pick back up again where it left off. So, what is your practice worth? What can you expect whether you are a buyer or seller? One thing is for sure – Baby Boomers are selling at a rate that the profession has never seen before. It is still a sellers market, for now. But the demographics and the thousands of practices that will soon be for sale suggest that may change over the next few years.
We are often asked by our clients about the market and what firms are selling for. Everyone wants to know “what’s the multiple?” But, it’s not just about the multiple; it’s about the overall deal structure and terms. The multiple is only one piece of the puzzle. The important components that go together to make up and influence the structure are:
Size of practice
Profitability of the practice
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
For more information and a discussion of the deal components outlined above click here.
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.
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.
Having completed five mergers while the managing partner of my firm, I learned many lessons along the way and have some of the scars to prove it. There is no question that I was smarter on number five than on the first one. Regardless of whether you are the buyer or the seller, here are few tips that will help you find and seal the right deal.
1. Average Billing Rate.
As accountants we all love to dig into the numbers on a prospective deal as we well should. To save you some time, I have developed one litmus test that should be at the top of your list. It is average billing rate per hour which is simply the billed revenue of the practice divided by the total charge hours. The average billing rate can tell you a lot of things about a practice including level of billing rates, types/size of clients, level of efficiency in performing the work, etc. If there is a significant gap between the two firms you need to quickly dig into why. My experience is that there usually aren’t quick fixes and if the difference is too great you need to take the advice of Alan Boress: “next”.
2. Sacred Cows.
In any combination of firms there is one guarantee and that is change. Typically the seller is coming into a larger firm and should expect to adopt the buyers processes and software. It’s not a democracy and that needs to be understood very soon in the dialogue. Don’t try to take the best of both firms because then no one knows “how we do it”.
I have two suggestions for you that will help both sides get through the change.
First ask for a list from the seller, in writing, of the ”sacred cows”. In other words what things, processes and people can’t be touched. It’s a good step for the seller to do to really know whether they are ready for the change that is coming. It’s also a pretty clear message to the buyer on whether there is going to be a problem or not. If it is a long list, run!
Second, as I indicated above the seller needs to commit to learn the processes and systems of the buyer and the integration needs to happen very soon after the merger date. Good ideas and better processes should always be considered. Just do yourself a favor and consider those for the whole firm a year or so after the chaos of the merger has died down. Continue reading →