Adamson Advisory

M & A is Hot – Information to Help You Play the Game

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.

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