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So, you didn’t make the top 30 this year. No big deal?
If you’re a sole practitioner or even 3 or 4 partner firm, you probably never expected to see your firm’s name appear on that list. But the day is soon coming when you may well find yourself listed in Canada’s top 30 firms.
There are many reasons why, which we’ll look at in a moment, but first, let’s look at some familiar names that have disappeared in recent years, thus opening space in the list for new names.
- Smith Nixon
- Beallor & Partners
- Mintz & Partners
- Goldfarb Schulman Patel & Co
- PKF Hill
- WSBG
- Horwath Orenstein
- Fitzpatrick & Partners LLP
- Cinnamon Jang Willoughby
- Collins Barrow Region of Waterloo LLP
The last five firms listed all have something in common – can you guess what it is? (Answer at the end of the article).
I would have bet the farm on some of those firms remaining fiercely independent for many years to come.
Does that show bad judgment on my part? I don’t think so. I don’t have a farm to bet – but any reasonable person inside the profession might have thought the same. Maybe it came as a shock to you too.
So what’s going on in this crazy profession? Why are so many well known names disappearing so quickly? Is there a John Galt stalking and destroying our public accounting firms so their names disappear overnight without a trace?
No.
The simple fact is that Atlas Shrugged is the only place you’ll find John Galt. No Chartered Accountants actually disappear, and none were harmed in the writing of this article; they simply found an exit strategy that worked for their own personal needs.
Many older practitioners are now facing a tough decision. Well, for them it’s a tough decision. The fact is that it should really be a no-brainer.
We’re at the stage where sellers of accounting practices are facing the decision; ‘Do I sell now at the maximum price I will ever get for this practice in my lifetime, or do I wait until all my fellow baby-boomers are ready to sell and we’ll all come onto the market at the same time, five years from now?’
Geeze, it’s tough isn’t it? D’uh!
Basic economics – what happens when supply of any commodity goes up? Keep in mind that as baby-boomers come to relinquish control of their firms, it will coincide with the time when there are fewer potential buyers (we’re making fewer new CAs – future buyers of accounting firms in 5 to 10 years time). Now, let’s review that situation again. What happens to price when supply goes up AND demand goes down?
If you’re between 65 and 70 years of age and still practicing, give yourself a big slap on the forehead. Now is the time to sell, while there’s a hungry marketplace with open cheque book.
Wait 5 more years and repent at your leisure.
I can hear you saying to yourself ‘wait a minute Mr McIntyre-Smarty-Pants, if things are going to change, why don’t buyers wait it out 5 years and buy at a discount?’
Good question. I’m glad you asked.
The reason is that today’s buyers are in this for the long haul. They still see the value in the book of business you’ve worked hard to accumulate, and they intend to stay in the profession long enough to see out this change in demographics.
Savvy buyers also look at your practice and seek opportunities to provide additional services to your clients, over and above the year-end stuff (that clients don’t want, but have to have and sometimes begrudge paying for) such as business advisory services, what-if analysis and business valuations (using software such as ‘Profit Driver’ and ‘Bstar’ for example).
This is where the gold is in your own practice, and that’s what sometimes keeps the price you’ll get around the dollar for dollar mark for the time being.
These same buyers may well be looking for ‘deals’ (read that as 60 cents on the dollar) in 5 years time, but for now they still see the value in your practice.
It is for this reason that some more of my clients will find themselves in the Bottom Line’s Top 30 list next year, as I help them put more deals together.
Recently I met a sole practitioner billing $1.5 million, and the following week another sole practitioner billing almost $3 million. These are prime targets for growth-minded firms. These potential sellers ‘get it’ and they’ll secure a deal that will make them millionaires over the next few years. That gives me a real sense of accomplishment and pride.
The no-brainer part of securing a deal now is that many practitioners approaching retirement have already tried, without success, to hire an eventual successor who can work for the firm for a few years and eventually take out their employer with an earn-out deal.
If they decide to take action now, and start talking to potential buyers, they will undoubtedly get better price now than that which they might get in 5 years time.
Securing a deal now doesn’t necessarily mean retiring immediately. Many firms who ‘merge’ with sellers now, want to keep the principals around for a few years, retaining them as ‘consultants’ and keeping them actively involved in the practice during the transitional period.
This helps keep retention rates (and thus the earn-out payments) higher than they might have been had the seller simply retired to Florida (for example).
It also means that several new names will be jostling for position in the top 30 next year as more familiar names disappear and new ones emerge from the fringe of the top 30 and onto the list in 2012.
Buying an accounting firm makes a lot of sense from the buyer’s perspective; It’s a lot cheaper than marketing one’s way to volume, it affords economies of scale, it helps to provide better career opportunities (and partnership opportunities) for their best people and thus reduces recruiting costs. It sounds like a real win-win situation to me.
From the seller’s perspective it also makes a lot of sense to take action now. Get the best price for your practice, pass-on your clients to people who will take good care of them, and put some serious cash in the bank. Now, who wouldn’t want that?
Will your firm be one of the new names on the list next year? I guess that’s up to you. The opportunity is out there for those who want to take advantage of it, and if you’re looking to sell, I’d love to hear from you!
(What did the last 5 firms listed all have in common? They were all acquired by MNP!)
© 2004-2011, Steve McIntyre-Smith.
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