The traditional concept of valuing goodwill is being disrupted, so accountancy firms cannot take its worth for granted anymore.
By Ryan Painter
While it’s unlikely the accounting profession will see the end of goodwill in the next decade, there are risks to be aware of. Efficiencies such as automation and offshoring labour are already transforming the field and may diminish the value of traditional goodwill.
Goodwill represents the value attributed to a practice outside its net tangible assets: the value of the people, intellectual property, brand or reputation, established systems, type of customers and future profits. Goodwill is most pertinent to accountants looking to exit or retire and bring in a replacement partner, or practices seeking to buy or merge with other firms.
While the accounting profession is relatively stable and not typically affected by economic cycles, it does have its own rhythm. This rhythm typically sees firms aggregate during tough economic times and break up when business is buoyant. We are currently going through a phase of consolidation, with even the Big Four accounting firms interested in businesses of under A$10 million in fees.
In the past, this phase would be followed by a break-away of highly profitable partners attracted by smaller operations where they get to keep the lion’s share of their production, rather than cross-subsidising large corporate costs or underperforming divisions.
"To remain competitive, independent practitioners will have to drop their fees or provide other value-adding services as they will not be able to survive simply on compliance."
However, this may not be the case next time around. The current challenging economic environment is resulting in a shift to more efficient processing, the primary vehicles being offshoring labour and automation. This could make it harder for “break-aways” to compete with larger firms in the future and the intangibles which make up traditional goodwill for independents may lose value.
Offshoring, for example, may become such common practice that we will see specialists fly in from low labour-cost countries to give face-to-face business advice to clients. In an ideal scenario, they would be qualified to do so, having been the clients’ accountant for a number of years and proficient in Australian tax law, as well as having an international business degree.
They would most likely also have the backing of well-known companies, with access to data to improve clients’ businesses remotely and in real time. If this were to happen, then it is conceivable that there would be a diminishing of goodwill in the traditional sense. Relationships are key, but without adding value they are not likely to be enough to sell.
Tax aspects of buying and selling a business: understand the tax implications involved in buying and selling a business and the choice of business structure.
Due to the offshoring of labour and technology, we are already seeing the Big Four firms competing strongly for work that’s traditionally been the domain of the mid-tier firms.
To remain competitive, independent practitioners will have to drop their fees or provide other value-adding services as they will not be able to survive simply on compliance.
With technological threats such as standard business reporting and online income tax returns already a reality, it’s naïve to hope that other disruptors are not waiting in the wings. Consider the impact Uber has had on the taxi industry or how the consumption of music has transformed in the last few years. Financial services, insurance and health cover, too, are all but dominated by online interaction and offshore service providers.
So how can you protect your firm’s goodwill in the face of these multiple challenges? Here are a few suggestions:
- Ensure you remain your clients’ trusted adviser by understanding their needs, wants, goals and objectives.
- If you are not managing their investments, make sure you know who is and what they are doing. Build this into your clients’ long-term plans.
- Offer multiple value-adding touch points by linking clients to people and services within your own network. For example, get to know your client’s banker and make sure they have a relationship with their bank. It is easier to do business with people you know.
- Be proactive and anticipate needs that may arise both from an increase or downturn in your client’s business. Monitor cash flow, debtors and creditors.
- Take an interest in their credit rating and suggest ways to improve this. It counts when borrowing money.
Remaining central to your clients’ financial affairs makes it much harder for someone else to appropriate their custom, and maintaining your independence is a critical defence against bigger, more competitive organisations.
If your clients feel like you are a key part of their journey they are less likely to leave – this in essence is your goodwill.
Ryan Painter is a financial consultant, BOQ Specialist.