All businesses undergo changes in ownership, or they are liquidated – it’s just a matter of time. Accounting businesses are no exception… so it makes sense for business owners to think about this early and ensure they control the process as far as possible. Panalitix works closely with firms undergoing major “succession events” so we’ll offer some guidelines in this article.
Books have been written on the subject of sales (and/or mergers) of businesses. Many offer value but each situation is different and requires a tailored approach. Here are some guidelines based on our recent experiences with accounting businesses.
Define the “must haves”
You are unlikely to get everything you want in any deal. You won’t ‘hit the bullseye’… but there may be certain outcomes you must achieve. For many, these are financial outcomes, e.g. “I won’t sell for anything less than $1 million”. For others, there may be highly emotional outcomes such as, “I want my name to be part of the company name after the deal”. Get really clear on the “must haves”.
Define the “deal breakers”
“Deal breakers” are similar to “must haves” but are expressed in negative terms so the nuance is different. For example, “If I have to do tax work after the deal, I am not selling” OR “If I have to work a full 5-day week, I don’t want to proceed”. Likewise, be clear on the “deal breakers”.
Define your goals: Is it about you or the business?
Here are the most common reasons accountants sell or merge their businesses:
- The Principal(s) want to retire. At the same time, they want to generate wealth and secure their financial future.
- The Principals want to pursue other business initiatives. They don’t feel the accounting business will help them achieve their financial or personal goals (compared to other ventures).
- The Principals want to enjoy the synergies possible by linking up with another firm. These synergies may include access to a new client base, a fresh service offering or improved processes.
- The Principals believe things are ‘breaking down’ in their business. There may be partner conflict, the threat of litigation or extreme management challenges. Rather than address these challenges, they feel it’s better to transfer the business to new owners.
Defining the goals provides a compass as transaction discussions go forward.
Gain consensus before looking for deals
If there are multiple owners, they should, ideally, share the same goals related to a transaction. If that’s NOT the case, they should at least clearly disclose to one another what they want to accomplish. Note, it’s not only owners who influence these discussions. There could be spouses, partners, heirs or creditors who are interested in the outcomes. Healthy debate and dialogue is necessary to arrive at a common position.
Consider selling outright
One way to structure the transaction is a complete sale. This is usually accompanied by a lock-in period during which the seller ensures the successful transition of the business to the buyer. The seller can then completely retire… but transitions don’t always succeed, resulting in a reduced purchase price or other adverse outcomes. The seller can agree to remain longer to mitigate this risk… but then they’ll need to adapt to the new working environment.
Consider a merger
Combining two firms may unlock new opportunities based on synergies. There are also risks related to reconciling different cultures. A merger may present an opportunity for SOME OF the partners to exit, since not everyone has to proceed into the merged business.
Put yourself in the buyer’s (or merger partner’s) shoes
It’s important to understand your business as a seller, but think also who may be interested in your business as a buyer. What do you offer? Maybe you have a stellar client base? Or a highly profitable business? Or some unique specialization? Or extensive offshore resources? Or an effective marketing / sales engine? Different buyers will value these differently and this will help you target the firms you want to engage with.
Develop your list of suitors
It’s sensible to start early with this list. Relationships are built over a long time and it’s helpful to know a lot about your suitor when you get into detailed discussions. On the other hand, a fresh look at the market can be helpful since circumstances and opportunities are always changing. Don’t lock yourself into one way of achieving your goals – you may miss out on some opportunities.
Create ‘competitive tension’
The best deals occur when there are choices. As discussed above, you are unlikely to get everything you want so evaluating one deal relative to other deals will help you arrive at the best outcome.
Be investor ready
Develop an Information Memorandum to share with potential suitors. And be prepared for due diligence. This can take time and deals can be lost due to a lack of preparation.
These transactions involve weighty decisions and you will probably want to discuss your ideas and strategies. Unfortunately, many transactions fail because news leaks out to team members and clients too early. There will be a time to present developments in an orderly and reassuring way.
Inevitably, business valuations will play a part in these discussions. Firstly, valuations among accounting firms) are NOT formulaic. They can vary (in our experience from 50% to 200% of the annual revenues) based on:
- the personal goodwill of the principals
- the service mix, e.g. individual tax returns will be valued less than business tax returns. High value (advisory) revenue streams will be highly valued by some acquirers.
- average fees per client (higher is better provided there is limited dependence on a few clients)
- a well-organized team. That usually means good capacity utilization.
- well-crafted business processes, including use of technology
- scalability and capacity for immediate growth
- a good reputation
- retention arrangements. Many perceived risks are offset by the idea that the seller will share some of the risk and that affects value.
Once again, the circumstances of each firm are different. A healthy, EARLY dialogue on the options, goals and opportunities is a sensible move.
Consider outside facilitation to get the best results. A facilitator should be able to challenge your assumptions resulting in the best long-term outcomes.