Bargain buys

Baby boomers have had a bit of bad press. They cost the UK £6 for every £5
they spend, and their healthcare and pensions requirements could bankrupt
Britain, so reports suggest.

Ironically, boomers in accounting practices have tried to avoid draining the
state later on in life – instead, expecting that a successful and lucrative sale
of their firm would provide for a comfortable retirement.

But their expectations appear misplaced. Tough economic conditions and a
reliance on simply selling a list of clients for a big payoff have hit the value
of their businesses.

Where multiples of fees were once the norm for a practice’s sale, only the
fittest will pick up beyond one times their annual income. So must they run
their firms until their dying days? Are good payouts a thing of the past? Or can
practitioners apply a proverbial lick of paint to improve how their practice
looks to buyers?

Marriage brokers for accounting firms agree that the perception issue
surrounding the value of practices must be dealt with first and foremost.

Partners must get to grips with the fact that, unless a practice is operating
exceptionally well, big returns are unlikely. The reason? Firms are often tied
into long leases; have variable quality among their staff; and lack focus on
making the most of their client base.

If a firm is on a long lease then it’s a cost that potential buyers will take
into account. “Don’t sign a 10-year lease,” says Ron Goldsmith of practice
broker Goldsmiths.

Staff worries

Incumbent staff can be a huge issue for acquisitive firms. Within a
“lifestyle practice”, where the owner/partner is running the firm in an
easy-going manner, employees’ unproductiveness can be left to fester and the
greatest value is failed to be made from clients. Potential buyers want these
issues dealt with prior to a sale.

Deal with unproductive staff before you sell, says Julian Hamilton, another
broker, but beware trying to move them on during the sale as the buyer, under
TUPE rules, must keep them after the purchase.

While the rule that 20% of your clients will be responsible for 80% of your
turnover, it is likely there is more money to be made from other clients. The
brokers advise revising client lists to look for more value.

Firms also face structural difficulties – people, rather than bricks and
mortar. The senior partners in small practices struggle to let go of control of
their client base to other staff, fearing they will be stolen away. But brokers
warn this attitude is counterproductive. The closer the selling partner is to
their client base, the lower their value to a buyer, or even a sale to other
partners within the practice.

“It’s about separate recognition of the partner as a worker, and then as an
owner,” says Robert Jackson, CEO of account­ing and financial service firm
Montpelier, which has been buying up practices. “They get precious about their
relationships for fear staff will run off with clients, so it’s catch 22. You
shouldn’t be frightened of delegating client portfolios across the organisation
– it enhances staff retention.”

Internal sales, or selling an interest to other colleagues in the same firm,
are also fraught with difficulties. The process is complicated if a firm’s deeds
fail to contain details of internal sale prices. Often there is also little
information on calculating goodwill – the premium earned on the original
investment. In an attempt to avoid soured relationships, ad hoc prices are often
set but, as Andrew Jenner warns, other partners will want the same deal when
they leave.

One option is to create a corporate entity with shares.

Who’s buying

The next big question is who will buy a firm in the current market
conditions? The range of buyers has been stunted by the banks reining in
lending. And younger partners, like the banks, seem unwilling to take the leap
and invest capital. “Banks’ decision-making is going to a higher level…sometimes
above regional man­agers. This has gummed up the market,” says Hamilton.

The travails of the big consolidators Vantis and Numerica (RSM Tenon
excepted) has discouraged others from following suit. Those that do purchase are
keen to ensure they are making a sound choice. Due diligence is vigorous. Buyers
like Montpelier look for a sustainable earnings model rather than turnover.
Experts say they have paid one to five times the price affected by factors such
as the quality of the staff, clients, and the firm’s record of generating income
that can be sustained.

But is it worth spending up to 12 months looking for a sale? The brokers say
yes. “It’s worth it in terms of the sale price. If you say it can’t be done,
then do you have the appetite [to earn more]? If you want value you have to work
for it,” says Jenner.


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