You want to be valued, not flattered.
Why is this important for selling your accounting firm? Let me explain.
There is an acquisition strategy common in the private marketplace that seems like flattery when initially offered. Let’s call it the, “structured acquisition”. It goes like this:
“Hi John, this is Stan Harper from ABF (A Big Firm). It looks like you’ve been running a great firm and we are interested in discussing an acquisition with you. We’ll pay you 0.9 times recurring revenue over three years based on retention. Can we talk?”- A Big Firm
“Great to meet you Stan. Sure, let’s talk next week.”- John
At this point the potential seller, Mr. John, has a few thoughts running through his head:
- I must have a great firm if it has attracted the interest of ABF
- 0.9 times must be a good deal because ABF acquires lots of firms and would know
- I don’t think client retention will be a problem because everybody knows ABF
- Wow, now I’ve got a sure-fire exit strategy!
The question is: is ABF valuing the practice? Or, put another way, why does ABF think that the firm is worth buying?
ABF knows John’s firm has good employees and a growing client book with a preferred mix of services they want in order to expand. ABF figures it is a low-risk expansion for them to offer below revenue AND to make client retention a stipulation for pay-out. They hope that as the only offer, John will accept the terms.
When you get an off-market offer, you need to ask yourself a few things:
- Are you actually ready to exit? Do you want to sell?
- Is this offer fair or could I fetch more?
- Is this buyer capable of running my firm? Will my staff and clients like their management style and stay?
Our position on deal terms and price are pretty straight forward. We have seen that earn-out structures like the one hypothetical Stan Harper offered do not benefit the seller. This three-year retention clause creates messy transitions and leaves the seller pay-out at the mercy of the buyer’s abilities. When John judges a deal based on excitement and flattery, he may miss that the ABF’s management style is completely different than his. He offers boutique services and Stan’s big firm treats clients more like a number. That makes retention a lot less of a sure thing. This is why a focus on fit is crucial, but especially so if you have retention clauses. The right fit buyer should keep staff and clients happy and will be motivated to do so because it will influence only their income, not give them a discount on the acquisition.
Oftentimes, buyers will offer far less for a firm if they believe there is little competition. Recognizing your firm’s strength does not mean they see the value. Do not let this cloud your judgment on deal terms or fit. Make sure that even if you have a single offer, you know what your practice would fetch on the open market. This will give you negotiating power. With multiple buyers, we see most firms go for closer to 1X gross or more (depending on the strengths of the firm) with favorable terms. To gain insight on what your firm’s valuation is, you can download our valuation guide.