Creating a successful exit strategy isn’t just about the numbers

by Neil Davidson

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08 Jan 2013

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Exit Strategy

MID-SIZED ACCOUNTING FIRMS seeking an exit strategy for the New Year need to seize every opportunity to ensure their firm is as appealing as possible to potential buyers.

In October 2012, Ernst & Young's M&A tracker revealed a slowdown in the market. It notes that due to the current economic environment businesses are taking a very cautious approach to deals. However, there are ways a firm can ensure it is as attractive as possible to potential merger & acquisition activity.

Cultural fit is key to any successful M&A activity, but cultural fit is hard to monetise. The most effective way for a business to secure the value it is looking for in a sale is to consciously improve profits. It's therefore vital that firms have a profit improvement project forefront of mind, especially when the EBITDA metric is typically used to value the business. This means that a business can strengthen its negotiating hand and significantly increase return with every £1 added to EBITDA. Firms must provide proof of healthy profits driven by strong commercial management – the ability to scope and structure client engagements so that they are delivered on time and on budget. This suggests strong client retention and satisfaction, the foundation of a business with a strong potential for growth.

However, growth does not always ensure more profit. As midsize accounting firms grow, their finance and admin teams typically grow with them, driving costs up and margins down. Yet if they can become a lean organisation, growing without scaling operational costs, they are in a stronger position to become the attractive acquisition target they seek to be and secure the best purchase price for the firm.

Main attraction

Efficiency is the cornerstone of reduced operational costs and increased margin. For example, our calculations show that if a typical accounting firm operates a 100-man business and is able to capture and bill just one extra billable hour at £150/hour per month from each employee, it can boost the bottom line by £180,000 a year. While strategic KPIs vary from firm to firm, they should include improving operational excellence for project delivery, utilisation rates (hours salaried staff are billed to the client) and the finance and admin organisation.

Business systems that aggregate data based on business processes are crucial to tracking and providing real-time performance against KPIs. Not only does this give firms the insight to make informed decisions on delivering the most profitable engagements, but it also provides the acquirer with information needed to assess the financial health of the business.

Purpose-built systems are the key to mining and connecting the right, relevant data for accounting firms. By collecting data based on business processes specific to the industry, a clearer insight into critical information is afforded, reducing unnecessary admin. A recent IDC survey, commissioned by Deltek, supports the finding that midsized firms which use disparate or home-grown business systems are 42% more likely to spend an additional six to ten hours on admin per week, compared to those with accounting industry-specific systems. With admin an enemy of profit – it reduces hours that can be billed back to the client – any unnecessary time can negatively affect the bottom line.

Additionally, the survey also found that firms that had not implemented a purpose-built business system were 30% more likely to lack visibility into the business's performance against key business metrics such as resource management, project execution, proposal development and growth, amongst others. Many firms which lack this kind of insight are often forced to make ‘guesstimates' on important decisions when forecasting the client project pipeline and resource needs – one sure way to create inefficiencies within the business. The survey also found that these firms were more likely to struggle with executing agreed project activity, on time and on budget.

Midmarket accounting firms must manage operational efficiency across the engagement portfolio and against every measurable KPI if they want to drive profit and margin. Deep visibility into business performance and actionable insights will drive informed strategic decisions for growth that must sit at the heart of any exit strategy.

Neil Davidson is UK managing directorof Deltek

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