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8 Ways to Prepare a Firm for Acquisition or Merger
Savvy firm owners seek to not only reap the rewards of building the practice but also take steps to maximize its value as an acquisition target or merger.
Professional accountants who own their own practices, or are part of a small partnership, often spend much of their time creating that firm. In that sense, the staff, the clients, and even the building itself can feel like a family member, not just a business entity.
That’s why—whether or not you have always considered your firm to be your retirement package, or as an entity that will sustain itself after you pass it on—the firm is often the largest financial asset that a partner has. If a firm is allowed to simply disintegrate back into the ether, then its potential value goes completely unrealized and wasted. Savvy firm owners, on the other hand, seek to not only reap the rewards of building the practice, but also take steps to maximize its value as an acquisition target or merger.
How to Prepare Your Firm for an Acquisition or Merger
Selling or merging your firm is a very emotional decision for most professionals, so it’s important to try to be objective during the decision-making processes. To do this, you need a plan of action and eight steps to follow.
- Check Your Emotions
- Setting the Right Price
- Consider Other Pricing Conditions
- Timing of the Sale
- Understand Valuation Terminology
- Make Your Firm Successful
- Be Technologically Adept
- Use an M&A Consultant
One of the first things that strikes many professionals when they start thinking about selling their firm is often a surprise. It’s emotional. Of course it is. Selling a business that you may have started from scratch and that you certainly spent years, if not decades, building and nurturing is akin to sending a child off to college and beyond. It’s important to realize that objectivity can be difficult when faced with such emotions, but it is essential to be rational when it comes to maximizing the price you receive for your practice.
Determining the optimal price for your firm takes a good deal of knowledge about not only the firm’s revenues and debts, but also general rules of thumb when it comes to valuation multiples. Buyers will look at the industries your firm serves, specific client characteristics, the capabilities of your staff, and the technologies you use, when making an offer. While pricing your firm too high can push buyers away, a perception of it being underpriced can also cause potential buyers to be wary.
There are some instances where the firm owner may choose a specific path for the future of the firm that does not involve the highest bidder. Whether choosing to pass the firm along to a long-time junior partner or merging with the specific goal of building a stronger practice, these goals should be clearly set and rationally discussed prior to making decisions.
When and how you sell your firm can also have a significant impact on the financial success of the transaction. Depending on the firm’s core services, seasonal issues (such as taxation) may cause buyers to be more or less compelled to act. Issues that affect core client groups, such as agricultural or vacation-related business industries, can also compel buyers. It is important to remain flexible in timing in order to maximize the value of the firm. Attempting to push the sale to meet a desired retirement date, or because of a sudden personal need for cash, will absolutely diminish the price.
From business basics (cashflow) to more detailed concepts (capitalization rates, discount rates, intangible assets, excess earnings methods, and goodwill value), understanding the terminology of mergers and acquisitions is vital to successfully negotiating the most beneficial arrangements.
It is fairly intuitive that the more profitable your firm is, the greater the potential price you can realize during a sale. The measure of ongoing success, however, is more than simply looking at prior period profits. The firm must also be positioned well for the buyer to have confidence in its continued success and growth. There are several metrics that firm partners can use to assess the health of a firm: client retention and satisfaction, engagements per client, new client acquisitions, and potential future earnings from clients. Knowing where your firm stands on each of these, and being able to explain it, will help position the firm for greater value.
Your firm doesn’t need to be the most cutting edge to realize the greatest value, but you can’t be tech Neanderthals, either. Firms that have adopted modern accounting, tax, practice management technologies, and workflow processes, are more agile. Likewise, the staff at these firms have a greater ability to adapt to new technologies and practices, and their clients are more likely to be willing to collaborate using technology. This makes them attractive acquisition targets for expanding firms. Conversely, firms with antiquated systems, such as old software and hardware (still running on Windows XP or 7), are more likely to have clients using old systems, which results in inefficient workflow and billing processes. It makes them attractive only to similar firms that are not growing or seeking acquisitions.
As an accounting professional, you’re a small business specialist and offer valuable services to your clients. However, you probably don’t have much experience in pricing, marketing, and selling accounting firms. That’s why you should turn to specialists who do this every day. These consultants, often CPAs themselves, have experience negotiating mergers and sales of accounting firms and will take market conditions, benchmarking, and many other factors into consideration when helping you determine your pricing and timing goals. They will help promote your firm, prepare it for optimal selling conditions, and act as the broker. They also often have advanced knowledge of firms that are already looking to acquire firms like yours.