5 Ways to beau­tify your firm for M&A

These five things can make a firm more at­trac­tive for M&A

Accounting Today - - Contents - BY JOEL SINKIN AND TERRY PUT­NEY

It was not that long ago that it was a seller’s mar­ket­place in CPA firm merg­ers and ac­qui­si­tions, but for most mar­ket­places in this coun­try, and es­pe­cially for larger firms, it has be­come a buyer’s mar­ket­place. This is due to a com­bi­na­tion of many things, in­clud­ing, but not limited to, the in­crease in the sup­ply of firms look­ing for suc­ces­sion as­sis­tance; more firms look­ing to merge up to have ac­cess to a larger plat­form of ser­vices and tech­nol­ogy; or­ganic growth; and staffing is­sues. As a re­sult, it has never been more im­por­tant to make your firm more at­trac­tive to a suc­ces­sor firm.

Here are five things you can do to “beau­tify” your firm.

1. Em­brace tech­nol­ogy

If your firm is not pa­per­less, on the cloud, work­ing with client por­tals, etc., your IT cul­ture is out­dated and many firms will look else­where. There are many rea­sons why, and they in­clude the fact that buyer firms have more prac­tices to choose from than in the past, and they may seek to avoid the costs as­so­ci­ated with bring­ing a firm up to date in tech­nol­ogy, which can run as high as $10,000 per staff per­son just in soft­ware and train­ing costs.

But a large rea­son is cul­ture. Re­cently, a firm with which we were con­sult­ing was look­ing at two firms. Firm A had ex­cel­lent met­rics but had not em­braced tech­nol­ogy. Firm B had av­er­age met­rics but had to­tally em­braced tech­nol­ogy. This part­ner chose to go for­ward with the firm that had em­braced tech­nol­ogy. The rea­son? She ex­plained that it took years to get her team com­fort­able with be­ing pa­per­less, work­ing on the cloud, and of­fer­ing re­mote ac­cess. She said that she could make a firm more ef­fi­cient, but couldn’t al­ways con­vince them to throw out the pa­per and get their arms around not only where tech­nol­ogy is but where it is go­ing.

2. “Brand” ver­sus “part­ner” loyal

If your clients will only speak with one per­son in your firm and most, if not all, of your re­la­tion­ships are “part­ner” loyal, that means tran­si­tion­ing clients will be more chal­leng­ing. Try­ing to get your clients more “brand” loyal, where clients are com­fort­able speak­ing to two or more team mem­bers, can be a very at­trac­tive cul­ture.

3. Good clients and staff

Ev­ery firm has a base­ment and a ceil­ing of good and bad clients. Too many times we have seen a suc­ces­sor firm view a seller’s base­ment as “too deep” and not be will­ing to take them on and thus kill what could have been a good deal for both firms. Re­cently, a firm we con­sulted on rec­og­nized that only 10 per­cent of their rev­enues came from C or D clients and be­fore they went to the mar­ket­place to merge up, they fired those clients. They didn’t want to be de­fined by the few $300 1040s they were pre­par­ing. Mean­while, clients that a suc­ces­sor firm is con­fi­dent they can re­tain are ob­vi­ously an en­tice­ment. Good staff that have strong tech­ni­cal and peo­ple skills, youth, and signed em­ploy­ment agree­ments that con­tain a non-com­pete, can be a sep­a­ra­tor be­tween firms. Good staff can be a very strong at­tribute that a suc­ces­sor firm may covet.

4. Niches

As many of the tra­di­tional ac­count­ing ser­vices will even­tu­ally be re­placed by tech­nol­ogy, hav­ing strong niches adds to your firm’s ap­peal. Wealth man­age­ment, hu­man re­sources con­sult­ing, IT con­sult­ing and out­sourc­ing are just a few of the in-de­mand ser­vice niches that could make your firm stand out from the com­pe­ti­tion. If you don’t have a niche as an al­ter­na­tive sell­ing point, you may be able to de­ter­mine if your clients would be re­cep­tive to cer­tain spe­cial­ties. Iden­ti­fy­ing a firm that of­fers ser­vice niches you’re con­fi­dent your clients would wel­come is a smart strat­egy to ap­ply.

5. Re­al­is­tic terms

It’s crit­i­cal to have a re­al­is­tic view of your firm’s value. Last year we were con­fronted by some­one seek­ing to sell their firm and tak­ing the po­si­tion that they paid 1.5X to ac­quire the firm 15 years ago and weren’t go­ing to ac­cept less. Of course, a year later we heard they were still seek­ing a deal. For part­ners seek­ing suc­ces­sion, while you should not be Santa Claus, re­mem­ber, no one will ac­quire your firm to lose money, let alone break even. For firms seek­ing to merge, no one will be dou­bling your pay if you merge with them. While a firm merg­ing up has the right to as­sume that if they bring in sim­i­lar rev­enues and in­vest the same time, with a few ex­cep­tions (such as the case of a seller’s qual­ity con­trol process need­ing more la­bor to rise to the stan­dards of the suc­ces­sor firm), set­ting re­al­is­tic goals so every­one wins makes your firm more at­trac­tive. While there are many other things you can do to make your firm at­trac­tive — such as hav­ing a good own­er­ship agree­ment, a one-firm type of cul­ture and strong lead­er­ship — these five should pro­vide you a jump start to be more at­trac­tive to po­ten­tial suitors. AT

Terry Put­ney, CPA, is the CEO, and Joel Sinkin is the pres­i­dent, of Tran­si­tion Ad­vi­sors (www.tran­si­tion­ad­vi­sors.com). Reach them at (866) 279-8550.

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