Retirees and a competitive market have conspired to bring on the latest round of mergers and acquisitions activity in accounting firms. How can you make these forces work best for you?
By Greg Hayes
Every week we hear about firms who have merged or have been sold. Mergers and acquisitions (M&A) activity in the accounting profession is hot at the moment, and this activity is being driven by two key forces:
- The baby boomer generation of practitioners now planning for their retirement and succession within the firm.
- A push to bulk up practice size to achieve scale in an increasingly competitive market.
There are other factors but these two drivers are the key influences in the current market.
Succession comes in many forms. It is not just M&A. For some firms it is about bringing on that next group of partners, either through internal succession, a buyout by existing partners, or the sale of the entire practice.
"The market is generally able to differentiate between high-performing firms and those that are average or struggling."
If you are contemplating succession in the next five years then the real question is: are you succession ready and is your firm attractive to the market?
There is an increasing number of firms coming onto the market and many that will need to manage a succession issue over the next five to 10 years. For every transaction that you see advertised there are about 20 to 30 transactions that happen quietly and nobody knows about them until after the event. Buyers have choices and you need to be attractive to the market.
There are some differences between a sale transaction and bringing a new partner through the ranks. Typically the sale transaction is a sale of the entire firm.
An internal transaction generally involves selling part of the equity of the firm to an incoming partner, normally someone who has worked for the firm for some time.
Ready for sale?
The key focus here is the quality of the client base and its inherent profitability. Staff coming with the transaction may be a consideration, but generally most buyers will be less interested in the quality of your infrastructure and systems because they will overlay or replace these with their own.
The smaller the practice, the truer this becomes. When buyers look at your clients, things they will assess include:
- The spread or concentration of clients. Is there a small number of clients who dominate your fee base or do you have a wide spread of clients? The higher the concentration, normally the higher the risk.
- What is the spread of services that your clients require? Is it all compliance work or is there evidence of a demand for advisory services?
- What is the longevity of the client base? Is there any indication of succession events for the client base? How long will they continue as clients with current fee levels maintained?
- Do you charge rates at market that allow for a reasonable profit return?
- What is the current profit-to-fee ratio? Does it exceed 15 per cent after allowing for a market-based partner salary?
- Do the clients engage with various people in the firm or is it highly partner-centric?
- How many hours do the partners need to work to generate the fees?
- Is there evidence of growth in the firm?
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The inside buyer
For the manager who has progressed through the ranks to being given the opportunity of becoming a partner, the focus will be somewhat broader. They will be continuing to work in the practice with its current systems, infrastructure and style of operation.
They are much closer to the practice and will see its strengths and weaknesses, warts and all. Areas they will look at include:
- The practice’s profitability and cash flow. If they are borrowing to invest, can they draw profits, in excess of their salary, to repay the loan?
- The culture of the firm – is it a good place to work, a happy work environment, and are the people content?
- The growth prospects of the firm – is this a good investment?
- Do they have confidence in the leadership of the firm?
- Is the quality and standards of the firm what they expect?
- Does the firm have a reasonable quality client base, and is the work interesting?
- Are the systems and infrastructure of the firm up to date?
- Is technology being harnessed effectively?
With these incoming partners – particularly those belonging to Gen Y – irrespective of how attractive your firm may be, there will be people who are not interested in taking equity in a firm.
The Gen Ys are not after long-term commitment nor do they see a job for life as being for them. In the past, 80 per cent of new accountants considered it likely they would end up becoming a partner in a firm. Today that number has dropped to nearer 45 per cent.
The market today is far more demanding. The performance metrics for the profession are well-known and the market is generally able to differentiate between high-performing firms and those that are average or struggling.
As sellers outnumber buyers in the marketplace, you need to be able to present your firm as an attractive investment opportunity.
This is not about window dressing in the year before a succession transaction. It is about having a performance culture throughout the life of the practice. The firms that establish this kind of culture will not only benefit throughout the life of the practice – they will be highly attractive when a succession event presents itself.
Greg Hayes is a director of Hayes Knight and CEO of ASX-listed Easton Investments Limited. He is also the author of CPA Australia’s Succession Planning Pathways guide. To access go to: cpaaustralia.com.au/successionplanning