It seems that the market place for buying and selling accounting firms, or blocks of fees, continues to grow unabated.

Maybe it’s the ‘jump-start’ that buying a practice offers that makes it so popular, or perhaps it is because, with the exception of a deposit payable on closing, that it could be a self-financing deal (with annual profits funding earn-out payments to the outgoing practitioner) or maybe it’s because an acquisition promises better results than starting a marketing campaign?

Whatever the reason, the fact is that accounting firms have a seemingly unquenchable thirst for growth by merger or acquisition.

But there are two distinct points I’d like to address this issue that just doesn’t make sense given my opening gambit:

1. Potential sellers still seems unprepared for the event
2. The valuation model used in most deals just doesn’t make much sense

Let’s discuss these two sweeping statements one by one.

Getting Ready To Sell

To generalize, most practitioners start thinking about their exit strategy far too close to the time when they ‘want out’. As a result, they often do not realize the full value that their practice could have created, had they given some long-term planning to the process.

Let me explain…

· The ‘Fed down the road will buy my practice’ Exit Strategy

I know of several practitioners who honestly believe that a competitor that they are fairly close to, who they have built a relationship with, will want to buy their practice when the time comes.

The problem is, that ‘Fred down the road’ is often a similar age to them!

The obvious problem: Fred might sell before they do!

· The ‘We’ve always done it that way’ Exit Strategy

Just because you have always operated your practice in a certain manner, does not mean that it falls under the heading of ‘best practices’. There are many different ways to handle billing issues, cash collection, delivery of service, selling additional services and so on.

Each practitioner develops their own style of practising, over time, and little thought is often given to how this might impact them when the time comes to exit.

Practitioners should, ideally, constantly review how they manage their firm, what the latest trends are in billing (such as monthly billing of WIP, quarterly or at the end of a particular assignment – how you approach billing and collections with clients can have a tremendous affect on your cash flow).

· Information packs for potential buyers

The act of putting an information pack together for potential buyers to review goes a long way to setting yourself up to win. Prospective buyers will use this as a guide to help them determine whether your practice might be merged into their own.

Issues that need to be addressed, and described in an information pack might include:

- At least the last three years financial statements for the practice

- Client list, by industry, age, fee, how long they have been a client and year-end (but no names at this point)

- Staff list by age, length of service, qualifications, technical ability, salary and charge-out rates

- Assets available such as computer equipment, leasehold premises, seating, desk etc and a valuation or desired price for them

- Timeline for exiting the practice

- Availability for consulting after the deal

Obviously, this information should not be allowed to leave the building at your first meeting.

A confidentiality agreement is always required if you get to the point where a potential buyer needs to take this data back to their office (usually after 2 or 3 meetings to determine fit) to discuss with their partners.

Leaving Value on the Table

While some smaller firms and sole practitioners are great at sales, some fail to up-sell or cross-sell additional services to their clients and as such are not as profitable as they might otherwise be. It’s usually a combination of insufficient time to attend to this, a lack of selling skills, or the simple fact that the practitioner is doing well enough financially and is not greedy.

Whatever the reasons, you’re now selling a firm making maybe 37% net on gross fees, instead of 50%. Which one would you say has the greater value to a buyer?

And then we come to the valuation model.

Anything But A Model Valuation

Most deals are constructed on the basis of $1 for $1 or a variation thereof of gross billings of the practice being acquired, paid out on an earn-out basis of somewhere between three to five years.

An exceptionally profitable firm might achieve $1.25 per $1, a less profitable firm $0.75 per $1 of billings. It’s entirely negotiable between the two parties concerned.

Yet, would we value a client’s business based on their gross revenues? I would suggest usually not.

We would look at price/earnings ratios and a stack of other data to help determine a fair market value for the business, wouldn’t we?

I believe that the time is coming when we should treat our firm like a client, and come to a valuation model more considerate of other aspects of the business for sale (yes, I called it a business, and that’s precisely what it is, our business happens to be public accounting).

When the Math is done, it might well be that we arrive at a similar figure as the value of the firm, but at least there would have been some scientific reasoning behind that valuation, rather than our present reference point of gross billings.

Factors that might influence the value include:

· Niche markets served/specialist knowledge in the practice
· Marketing tools developed that are transferable
· Referral sources developed that are transferable
· The team of staff that come with the deal
· The general financial management of the practice (such as billing policies and cash collection)

There are, of course, many more issues that might affect the value, space restrictions prohibit a comprehensive listing, but I am sure you will get the idea from the suggestions offered.

While the race for growth continues, maybe we will, as a profession, start to take the race in a different direction.

If you have any suggestions on how a new valuation model might work, I’d love to hear from you.

I have some ideas of my own which I’d love to share with you. These are featured in a new book I have being published this year, details nearer the publication date.