Selling your accountancy practice for maximum value
Selling your accounting firm is a momentous moment – perhaps one of the biggest business decisions you’ll ever make. So, when the time comes, where should you start?
Author of four business books, Brett Kelly is the CEO of Kelly Partners, a publicly listed accounting group he founded in 2006. His advice for any business owner interested in selling is to, before they do anything else, “think deeply about why they’re doing what they’re doing”.
Many vendors arrive at the decision to sell from a “reactive position” due to external circumstances like illness or a key staff member’s departure, Kelly says. As a result, the vendor can initiate the sale process before they’re ready. “They haven’t thought through why they’re selling the firm, and they haven’t organised the firm for a successful sale.”
Basic preparation for sale includes putting together a business summary and due diligence, which Kelly advises vendors store in the cloud for easy access by a potential purchaser. Failure to appropriately prepare a business for sale could harm the final outcome and price.
Selling a business is no different to selling a house, Kelly says. “A purchaser is going to look at how well-presented that business is. You wouldn’t put a house on the market with the fridge unemptied and without the place being tidy. Often the biggest mistake people selling accounting firms make is they don’t clean up the firm.”
Valuing your business
Adam Holster is a Professional Services Banking Executive at NAB with bankers in Victoria and South Australia. He says accounting firms are valued in one of two ways. Larger firms with revenue exceeding $2 million are mostly valued according to a multiple of EBIT, (earnings before interest and tax). “Where the revenue of a firm is below $2 million, normally it’s cents in the dollar,” he says, and that typically ranges between 85 cents and $1.20.
In the current climate, Holster says there are “overwhelmingly more buyers than sellers”, which is driving prices higher. “Anecdotally, we know that it’s not uncommon to have 40 enquiries for every seller and, of those 40 enquiries, there can be 10 to 15 legitimate bids put on the table.”
Why is it a seller’s market? Holster says that, historically, smaller firms rolled into larger organisations to attain scale. “Now, because of new ways of working – the adoption of technology and more flexibility around attracting and retaining talent – these small firms are lucrative in their own right, and they don’t need the scale of a larger firm to make them more profitable.”
Firms with the right people – “high-quality accountants that can bridge the gap between compliance activities and business planning and strategy” – command a premium, says Holster. Culture is another drawcard, with owners of existing firms willing to pay more for a practice “to ensure the cultural fit is right”.
Doing your homework
Elizabeth Fritts, Partner for Mergers and Acquisitions at PwC Australia, says the most sought-after firms have a coveted client base, a service provision that is “unique and best of breed in the market”, or a sophisticated technological integration. “Those are areas where you see premium valuations and multiples paid for transactions,” she says.
A prospective vendor must do their homework before a sale, Fritts says. Well before the hunt for a buyer begins, a business owner must be able to articulate their business’s strengths and its “key differentiators”, or what sets it apart in the market.
“What makes it successful? What is the defining quality that would be valuable to a potential investor to take your practice in-house?” she asks. “It’s essentially that ‘one plus one is greater than two’ equation. Where do you provide value-add that would be accretive and of interest to an investor?”
A vendor must also have a firm grasp of their business’s finances. “You should have a clear understanding of your financial performance to date – the growth that you’ve achieved historically, what your pipeline or forecast outlook looks like, and the margin performance of your business over time,” Fritts says.
Also desirable is a clean balance sheet. Have “a clear understanding of your net cash position and working capital, and any employee liabilities, including excess leave balances, that would be considered in the purchase price adjustments of a transaction,” she says.
The importance of the right partners
A vendor has several options to find a buyer. An owner can sell the firm internally to an existing partner or employee, to an external firm or through a broker.
Selling a business is always a sensitive undertaking. The first forays into the buyer universe should take the form of off-market discussions “generally under an NDA or confidentiality agreement”, says Fritts. “That will allow you to gauge appetite before doing a lot of heavy-lifting work in preparation for proper engagement and pursuing a deal.”
Time is an asset when selling your firm, adds Holster. “The key consideration is to start thinking about it and planning early,” he says. “The most successful sales we see have a 24-month lead time.”
Fritts recommends securing the services of an adviser or advisory team to help navigate the complex sale process and act on your behalf in negotiations. “A good adviser is someone who can act as your advocate and really understand your key objectives and what you hope to achieve out of the process.”
Look for a credentialed adviser with a proven track record in negotiating successful business sales of a similar nature. “They’ll have a clear understanding of what is market-standard,” she says. An adviser who is well-connected to “the key decision-makers in your potential investor universe” will also be able to provide timely feedback during the negotiation process, which Fritts says is paramount.
Holster adds that NAB can serve as a valuable resource in the sale process.
“As Australia’s largest business bank and as a banking partner to thousands of accounting businesses nationally, we understand what a good-performing firm looks like,” he says.
“Our bankers can be a good sounding board around ensuring the transaction is structured in the right way and considers the right things to maximise the outcome and benefit for the seller, and to maximise the chances of successful integration.”
Bringing the team along for the ride
Stakeholder management and communication with staff are other critical aspects of a sale. “In professional services deals, your key asset is your people,” says Fritts. A successful deal hinges on buy-in from the firm’s employees and “pre-emptively working through any cultural considerations around integration planning”.
Inform staff of the plan to sell once a buyer is locked in and the deal is confirmed, have difficult discussions early, and offer reassurances where appropriate around job security. “Ensure the messaging around it is really crisp, so they understand that the future growth opportunity is even greater than what they’ve currently been presented,” says Fritts.
Life after the sale
Often overlooked is what happens after contracts have been signed and the new owner takes over. Many vendors are not just selling a business; they’re selling their life’s work. “They’ve put their heart and soul into the business” and often struggle to adjust to change, observes Kelly. “The ones who do it successfully have really thought about the structure of their life after a sale, not just selling the business.”
Kelly advises vendors to create a plan for what they want to do after the sale to fill the void once occupied by their business. “People are thinking about the money; they’re not thinking about how to get their head in the right place and feel good about the next phase of their life,” he says. “It’s a very emotional journey.”