The Strategic Value of an Acquisition
Bob Lewis
At the end of each Partner’s career, they retire, doing so with the satisfaction that they serviced their clients well and made a living for their family. As a CPA’s career nears the end, the difference in his or her firm’s value can be the decision to acquire or merge a practice. A primary value building process many use to increase their firm’s worth is practice acquisition.
A few acquisitions can take the value of a firm to a new level. The acquisitions you hear about are when sizeable firms make a move. Those events get press coverage and the word spreads, but no one hears about the acquisition of a local, $250,000 non-branded firm. The difference between large firm acquisitions and small ones is the number of acquisitions that occur annually. For every one or two big names that align, there are hundreds, if not a thousand or more, small firm acquisitions or mergers. Almost all of these never hit the press’s radar screen so few people are aware that they occurred.
Acquisitions are a way of turning a $250,000 firm into a million dollar plus practice. As a small practice grows, it becomes easier to shed fee sensitive clients. Either they leave through attrition or they absorb the fee increases over the years and are converted to a more profitable client. The once $250,000 practice with less desirable clients has now transformed into a more profitable, attractive firm that will be in greater demand when you take your firm to market. Eventually every partner sells his or her practice. It may be internally to another partner or to an outside party, but everyone sells. Firms that steadily acquire practices exponentially increase their value, which will fund their retirement.
Firms that do not use acquisition rely on referrals and direct business development or stay the same size. It takes time for a $250,000 practice to get to $500,000 on referrals, mailing and calling. It can take one well-placed phone call to identify an acquisition to achieve the same growth.
Here are a few items to evaluate when looking to buy, sell or merge:
1. Growth Absorption. A firm grossing $250,000 represents a 100% growth for a firm of the same size. Make sure the seller feels you can handle the addition of their clients.
2. Billing Rates. A $250,000 firm is a blip on the radar screen of a large practice. The larger practice may be financially secure, but the billing rates need to be in alignment with each other or the working relationship will be compromised.
3. Type of Work. A tax heavy, write-up practice may find it difficult to identify a financially secure buyer. Many practices do not want to add once a year clients into their already difficult January to April workload.
4. Investment Services. On the other hand a tax heavy practice sold to a firm that provides investment management may be a great match. The buyer can mine the tax clients for investments and make more off the insurance and asset management than the tax practice.
5. Ability to Payoff the Seller. Risk is a concern. The ability for the buyer to payoff the seller is a big comfort factor. If an acquisition falls apart, the buyer can proceed with business as usual. The seller may have a crumbled mess that cannot be put back together.
For the buyer, an acquisition is more of a transaction. For the seller, it is a career-closing event that is partially funding their retirement. It is an emotional time. For the buyer the clients are still just names and numbers. In a merger, both parties can more readily terminate the relationship, but if offices are consolidated, the firm that moved their practice takes the biggest risk because they will have the largest start-up cost if they need to move out again.
Most firms you contact are not going to want to sell immediately. You might get lucky, but if you begin efforts to communicate with practices in your area you will build a pipeline of acquisitions that can be phased in over time when your short list of sellers become ready to wind down their practices.
The key is to be patient. Timing is the key element for an acquisition or merger. Even the most attractive offer possible will not motivate the owner of a practice to sell if they have not mentally prepared themselves to begin an exit strategy or to take the leap of faith into a merger.
Bob Lewis is the founder of Visionary Marketing, a business development firm that helps CPA firms win business by targeting and communicating with prospects and referral sources. His firm becomes the Marketing Director for small to mid-size CPAs or acts as the Chief Marketing Officer for larger firms. Bob can be reached at (800) 995.9186, blewis@ThinkVisionary.com or at www.ThinkVisionary.com.
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