Reality ‘Cheques’

Yes, you read the headline right… Reality Cheques.

Suppose I could tell you what your practice was worth today, AND, how to substantially increase its value as part of a planned exit strategy?

As practising accountants, we look at a multitude of formulae to help determine the worth of a client’s business. P/E ratios, goodwill, market share and so on. Yet when it comes to selling our own firms, we always seem to settle on the ‘dollar for dollar’ theme – the only variant being the ratio attained.

Although it’s verging on nonsense, it is still the way we do things, so what determines whether you get 70 cents in the dollar or a buck-fifty?

In my work with assisting CAs find the right block of fees to buy, I have created a checklist that you might find helpful in determining the value of your practice, and what you might be able to do to positively influence how others see your firm and how attractive it becomes to them:

Quality of working paper files
- Something you have complete control over, and one of the first and most important issues a potential buyer will want to assure themselves of.

Longevity of clients
- It’s all very well saying that ‘Client X has been with my firm for thirty years’ but if client X is nearing retirement, and there is no natural successor in place, that client doesn’t appear to have much life left in them, and thus is not as attractive as a four-year client in their early thirties.

Chare-out rates and recoverability
- A potential purchaser will, ideally, want to see charge-out rates similar to their own if the transition is to be successful (and profitable) for them down the line. But if you’re not recovering at least 85% of time spent on client affairs, then your charge-out rates may be seen to be artificially high compared to your efficiency or when compared to the value that your clients attach to your services. Either way, it’s a red flag for the potential buyer.

Staff
- Some deals I have put together make financial sense if only to acquire a quality talent pool. The fact that their salaries are covered – with money to spare – by the fees that come with them, is just a really nice bonus.

If your staff have been with you for a while, are qualified and well trained, and have plenty of client contact (and get on well with the clients) then these people comprise a huge asset that you can realize a capital sum from.

Net Profitability of The Firm
- If you’re making 40% or higher, you’re doing pretty well. 50% or higher will put you near the top of the upper quartile. Again, a dollar invested in a firm making 35% net is worth less than a dollar invested in a practice generating a return of 50% - common sense!

Availability of Out-going Partner
- For most deals, you’ll need to be available for one or two years, but most of the effort, in introducing the clients to your new ‘Partners’, updating the new firm with information and personal details about clients and their situations and ‘dumping’ information about clients from your head onto paper will take place in the first three or four months.

Over the first year you might need to allow about four hours per client on average.

After that, you might be cut loose or have a minor consulting role to play.

So what are the common problems and how can we settle them?

Tax Treatment of The Deal.
- An allocation of income or a capital transaction? Well, it depends! Both parties will usually have strong preferences in opposite directions.

The Bottom Line? Don’t let the tax consequences kill a good deal.

Full Disclosure.
- If there are any potential contingent liabilities (such as lawsuits against the firm) in the background it is better to get them out in the open early in the negotiation stages.

Nothing frightens off potential buyers more than the fear of an unquantified and often unknown potential claim against the firm. Full disclosure is ALWAYS the best policy.

Under-priced.
- If you haven’t reviewed your charge out rates for six years, then you might anticipate the incoming firm will have difficulty retaining a large percentage of clients who have stuck with you because you’re ‘cheap’.

Knowing this at the outset will save everybody a great deal of wasted time, and you’ll be left talking with potential buyers who know what they’re getting into and can see the value in the deal despite a major hurdle to negotiate.

Selling your firm takes time. It takes time to find the right ‘partner’ and construct the right ‘deal’. Usually (99.9% of cases) the final price will be determined by the retention of the clients sold to the acquiring firm, and so careful selection is essential.

Look at where you are now. How long before you might consider an exit strategy?

Take the above reality checks to heart, to avoid a disappointing reality ‘cheque’ in the future!

© 2004, MFA Group Inc