Profitable, desirable accounting practices do not need to be sold on an earn-out basis. If you own such a practice, then in the overwhelming majority of cases, you can get all cash or all cash equivalent terms at closing-with absolutely no contingencies after closing. This is the first of a 4 part series we will be writing on this topic to explain why this is so. In this segment, we will begin with a high-level comparison of fixed verses contingent purchase price structures, and then go over the market dynamics (Supply and Demand!) for successful accounting practices.
First of all, what is an “earn-out” deal? An “earn-out” refers to a purchase structure where a person or firm buying an accounting practice agrees to pay for the practice over time, based on actual collections experienced by the buyer. An example of an earn-out structure would be where the buyer agrees to a purchase price of one hundred percent of annual collections with payments of 25% down at closing, and then 3 annual payments of 25% for each year after that based on the actual collections experienced by the buyer in that particular year. As you can certainly imagine, not all practices sell at one times gross fees. One can no more say that, than to say that all homes sell for $x per square foot. Some do and some don’t.
However, one of the key effects of this structure is that the final selling price will be based almost completely on client retention experienced by the buyer. (No wonder the seller wants to stay on for a longer-than-necessary transition period in an earn-out deal – to make sure the buyer “gets it right” when it comes to client service. Contrast this structure with a fixed price arrangement where the buyer bears the responsibility for client retention, creating a much stronger incentive to maintain clients and keep them happy. We’ll explore this in further detail later in the series.)
Personally, we believe, and will set out to demonstrate in this series, how a fixed-price structure produces better results for both buyer and seller. Our belief however is irrelevant…because ultimately the market decides. This is where supply and demand comes into play.
Now, there are circumstances where a practice has been compromised and will not fetch a fixed price. One example might be where one client represents a very large percentage of the practice’s fees. Another example might be where there is a recently separated competing partner in the practice’s market. Thankfully, those situations are rare.
Have you built a practice with great clients and a great team? Do you price your services well and is your practice reasonably efficient? Is your practice in a good location? If you are able to answer yes to most of these questions, then your cash flow to owner is probably very good. If so, then you have a desirable practice.
Accounting firms with loyal clients and good management systems can be difficult to find. Building a successful practice from scratch (or turning a practice around) takes talent, skill, time, and effort. Intelligent buyers will understand the value of that. Smart buyers will focus on the best fit for their professional abilities and their management style. Buying the “wrong” practice at the “right” price and terms is still the “wrong” practice. (for that particular buyer)
The fact is that the current market for accounting practices supports cash deals for successful practices. If anyone tells you differently, then they don’t know their market very well. (If you would like to know more about our compiled statistics for deal structure for our 2013 deal flow, please email us at firstname.lastname@example.org with your contact information. Please type “deal flow” in the subject line.)
To see part 2 of this series, click here.
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