Acquisitions FAQ

There are three common methods of expanding your practice. You can acquire one client at a time, develop a marketable niche or merge/acquire another practice.

Growing your practice one client at a time is slow and often expensive. Developing a marketable niche is a very good business practice. But this takes time, significant effort and, if you are starting a new niche, it usually requires a significant, upfront financial commitment without necessarily receiving a predictable ROI. Acquiring a practice is often the quickest and most effective method of growing your practice and should be a part of your strategic plan. If structured properly, it is the most efficient and effective manner to acquire new clients and opportunity.

As you review this section, examine your goals for wanting to acquire a firm:

  • Do you want to create synergies or add similarities of service or clients?
  • Are you looking for a satellite office? If so, why and where?
  • If growth is a goal, are you willing to consider all forms of growth – such as a merger – or just growth through acquisition? If you would only consider one of the two please examine the benefits of both before ruling one out.
  • Are you informed and aware of the current market for offers and terms?
  • Can you effectively communicate to a potential acquisition candidate your value as the successor firm?
  • Is your offer (not just the financial portion) fair, equitable and one that will help both parties achieve their goals? Or is it an offer that screams, “I am in this just for me!”?
  • What is your acquisition mission statement? Can you communicate it effectively enough to generate interest from a firm seeking to be acquired?
  • Do you have the capacity to take on additional work?

 

Acquisitions

  • How do I value an accounting firm?
    There is an expression in the merger and acquisition industry, "Beauty is in the eye of the beholder, and so is value." From that expression, we will build a foundation for value determination. Every firm you consider as an acquisition candidate will value out differently. If you begin to value out your acquisition target based on their asking price or requested multiple, you are not riding the horse... the horse is riding you. This is a common mistake. Often a firm refuses to meet with a potential acquisition candidate, or does so with inherent disinterest, because there is a perception that they are asking too much. An acquisition should not be decided on what you pay, it should be decided on what you get. Let's use a working example to clarify this position:
    • Firm A does $750,000 in gross billings annually. The service mix is 15% review; 25% compilation; 10% consulting; 50% tax related work of which they prepare 270 individual tax returns at an average of $650 per return. One owner and five competent staff.
    • Firm B also does $750,000 in gross billings annually. The service mix is 12% review, 22% compilation; 12% consulting; 54% tax related work of which they prepare 305 individual tax returns for an average of $600 per return. One owner and five competent staff.
    Firm A wants a price multiple of 1X. Firm B wants a price multiple of 1.1X. If we focus just on the expected multiple we begin to realize separation between the two. At this point, most would identify Firm A as being more attractive. Unfortunately, we now have the horse riding us, instead of us riding the horse. The price (or multiple) is rarely the critical factor. Why? Because, at this point, we are missing four key success variables which in their totality determine the fifth... the multiple. Value is heavily influenced by these five variables:
    • Down payment at closing, if any
    • Length of payout period on balance due
    • Profitability of the deal including the tax treatment of the payments
    • Duration of the post-closing retention period and adjustments for lost clients.
    • Multiple
    When a prospective client calls your office to ask what you charge for (fill in the service), you probably answer the question with a fee range depending on the complexity of the requested work. When the prospect says, "That's too much!" and hangs up, you're frustrated because the price shopper doesn't even know what services he/she would get for your fee. Do not make the same mistake with price valuation. You cannot make a price conclusion based on a snapshot of the practice (or declared multiple) without finding out what you can get for your money. What you can get is often not clear on a practice or profile summary. Take the next step to further your knowledge of the details of the practice and the terms of the potential deal. If the next step had been taken in the examples of Firm A and Firm B it would have been discovered Firm B was offering much better terms and that two of the staff members are young, talented CPAs with great futures, a very attractive circumstance in our profession. For example, let's say Firm A wanted 1X but required 15% down, a 5 year payout, 2 year retention period and 50% allocated to good will. Firm B wanted 1.1X but no cash down, a six year payout and retention period structured in a method that yielded the buyer a current deduction. Which deal is more attractive to you? Without understanding your firm's definition of growth or having a clear picture of the reasons, priorities, goals or expectations for an acquisition, you will not be able to efficiently evaluate or value an acquisition opportunity. More information on practice valuation:
  • How do I choose the right practice to buy?
    There are several things you must consider when choosing the right firm to acquire:
    • Expertise. Does your firm have the ability and appropriate licenses to assume the work being done by the seller?
    • Excess capacity. Does your firm have the excess capacity to replace the time and roles being performed by the seller and whatever staff may not be coming along with the sale? Do you have the excess capacity to bring in the staff and retiring partners into your space to realize the benefit of redundancy reduction?
    • Chemistry. Do the seller and buyer seem comfortable with each other personally, professionally and philosophically? If the two parties are not on the same page it typically does not bode well for retention of clients and staff. As discussed in the Transition section clients choose a professional with whom they are comfortable. If you are not comfortable with the other professional (or vice versa), chances are your clients will not be comfortable and client retention will be at risk.
    • Culture. The word culture means many things to many firms. There is a culture to how clients are serviced, the work environment, billing methods, IT and so many additional items. If the firm you are acquiring does not fit your culture, this is a deal you should likely pass on.
    • Continuity. Most accounting firm clients have a number of firms to choose from. If you feel you would have to make substantial changes that your clients would notice; such as fee structure, billing procedures, using the cloud and portals instead of getting visited regularly..., the risk of poor client retention looms high.
    • Strategy. What is the reason you are interested in this practice? Is it their client base? Staff? Synergies? Cross-selling opportunities? Selling price? Do these opportunities fit within your long-term growth strategy?
    • Price. Is this a practice you would purchase if the price were 5% higher? (If the answer is no, re-examine the reasons you are purchasing the practice. If you cannot justify an additional 5% there is a high probability the practice is not as attractive as you thought).
    • Synergy. Does the practice complement yours or just add mass? A practice that complements is usually more attractive but not always. Adding mass can be also strategic if you have excess staff capacity with skills or abilities within a narrow range such as tax, bookkeeping, etc.
    More information on choosing the right practice to acquire:
  • How do I maximize the retention of clients and staff?
    Continuity equals retention. Clients typically have many choices and choose a firm based on varying criteria including comfort, trust, fees, location, niche expertise and service philosophy. This question must be answered, "Will the clients of the seller see you more as an addition to the equation or will they see a huge change?" Change is not comfortable for many, and if the client perceives the change will be negative, whether from a location, fee or service methodology perspective, client retention may be adversely impacted. Maximizing continuity traditionally helps retain a much higher percentage of the clients. Change is inevitable. Therefore how you choose to manage the change and the methodology of initiating the change is critical to retention and will enable future opportunity. All the time, effort, energy and resources expended putting together an affiliation between firms will be wasted if absolute measures are not taken to ensure success. A detailed transition plan is critical because without a plan the parties are inviting failure - or, at the very least, encouraging challenges that are not necessary. There are several keys to client and staff retention. Use the acronym "TRACK" to help you develop a transition plan.
    • Transition plans must be jointly developed and executed. This will ensure a well-represented plan.
    • Realize that change experienced by the clients (not necessarily just internal change) produces questions and insecurities for both staff and clients. A good transition plan addresses most, if not all of, of these questions.
    • Acknowledge that a good transition plan includes all components of practice management such as technology, personnel, training, location(s), processes and timelines, workflow, licensing, etc.
    • Continuity equals retention of both staff and clients. Keep initial changes that the clients will see (for example, they won't care if you change the software) to a minimum and implemented over time.
    • Keep emphasizing to all (staff, clients and partners) the gain of the new combined firm: partners, talents and services, not the loss of the old one.
    More information on client and staff retention:
    • How to Maximize Client Retention After a Merger by Joel Sinkin and Terrence Putney, Journal of Accountancy, c2014
    • Keeping it Together: Plan the Transition to Retain Staff and Clients (Part 2 of 2) by Joel Sinkin and Terrence Putney, AICPA, c2009
    • The Long Goodbye by Joel Sinkin and Terrence Putney. Journal of Accountancy, c2013
  • What should I review in due diligence?
    There are many aspects that due diligence should focus on including but not limited to billings versus collections, age analysis of receivables, and seasonal cash flow. There are four key considerations when reviewing these and each is instrumental to the success of the deal.
    • Cash flow and profitability. These figure heavily into the twelve key contributors to valuing a practice. The time and timing of a deal must be matched against practice revenue streams. If they do not match up well, adjustments to practice payments or the manner in which practice payments are determined should be addressed.
    • Loyalty of the client base. Loyalty of the client base is potentially a double-edged sword. The longer the client has been a client the greater the existing loyalty. Contrary to popular believe, loyalties can be readily transferred but only with the proper transition and announcement strategy. As counter intuitive as it sounds, the greater the loyalty the higher the retention rate should be if a proper transition plan is executed.
    • Seller's billing rates. Billing rates constitute one of the great mysteries of accounting and tax work. Many think that a deal won't work because billing rates are different. Deals with different billing rates at the partner level can be challenging.  However, more often than not the work does not necessarily need to be done all at the partner level. If this is the case, it could produce potentially more profit than generated by the seller. The buyer's focus should be on determining the time, effort and level of staff that will be needed to complete the work, and the subsequent billing rate and client fees, as compared to the seller's current capabilities.
    • Workpapers. The buyer in any deal must review the seller's workpapers in order to:
      • Learn what services have previously been provided, what new services can be added, and if a significant amount of time needs to be invested in order to improve the records.
      • Estimate the time, effort, and staff needed to complete unfinished work and confirm profitability.
      • Reviewing potential liability and malpractice issues.
      • Confirm that the seller is not taking unacceptable accounting or tax risks.
    • Profitability. The buyer should review the seller's profitability, but the focus should be on the likely profitability after the acquisition is complete. The seller's profit should be a starting point, not an end in itself. Due diligence should focus on both revenues and expenses. An acquisition that enables the buyer to take over a practice with little incremental increase in overhead can be tremendously profitable.
    • Equipment and software. What, if any, of the seller's equipment and software is being purchased in the deal? What condition are they in? What does the buyer need to handle new clients? Are there any leases or liens in this equipment?
    • Staff. What staff does the seller have? What is the role of the staff in the firm, and how much contact do they have with the clients? Do they have employment agreements that include non-compete language; is it assignable? If some of the seller's employees are part of the acquisition, the buyer should examine compensation and benefits, as well as the staff's strengths and weaknesses. How does all this compare with the buyer's staff?
    • Services provided and not provided. The buyer should have the skills, technology, licenses, and time to handle the services currently provided to the seller's clients. In a business environment of growing niche services, the buyer should determine what services the seller does not provide currently but the buyer could profitably add after the acquisition.
    • Office facilities. The seller's clients and staff are generally accustomed to their current location. If the buyer is not taking over the lease, adequate space to house the practice and keep clients comfortable will have to be provided. If the buyer is taking over the space, a due diligence review of the current lease should be performed.
    • Stability of the client base. Are the seller's clients, especially the larger ones, in good financial shape? Are some of them aging and thus likely to be lost to sales, relocations, or retirements?
    • Technology. Does the firm being acquired have current technology? How and what will it take from a technology perspective to integrate the firms?
    • Culture. How are they the same and how are they different and what do the differences mean?
    More information on due diligence:

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