Why I Wouldn’t Buy Your Accounting Firm

Last month, I was fortunate enough to be invited to speak with the CPAs Sunshine Coast discussion group on the topic of Accounting Practice M&A.

I wanted to come up with an attention-grabbing title for the session – something that would really stir up the crowd. Eventually, I came up with:

“Why I wouldn’t buy your firm. But don’t worry, I have a buyer for it.”

I figured that would do the trick.

The conversation was aimed at an audience whose fee revenue is under $1M and more likely around half a million, which I believe is the fee band that represents the average accounting business here in Australia – when considering a number of industry participants at least.

As such, this issue of “The Deal” is targeted at the same audience.

Here’s how my controversial presentation began

As very much a NO PowerPoint kind of guy, I didn’t prepare any notes for my presentation. Rather, I kicked it off by throwing straight to the attendees, asking them the question, “Who’s done a transaction before?”

This led to a vibrant discussion with a variety of Accounting Practice M&A questions and answers that I really enjoyed.

HOWEVER, I still had to ensure I covered at least something related to my provocative session title – that being why I wouldn’t buy their accounting businesses.

Here’s what I told them.

5 major reasons why I wouldn’t buy your accounting firm

Experience tells me that each transaction has its own peculiarities, meaning the reasons why I wouldn’t buy something will differ every time. But, to keep this to a few minutes of reading, I’ll run you through just a few of the major reasons that come up most often.

1. Your pricing structure is wrong

For me, when it’s all said and done, re-pricing is where small practice M&A is at. This means fixing your prices so you can attract the best buyers – usually bigger firms. Why? Because when exiting your firm, the transaction usually takes one of these forms:

• You sell some or all of your equity to an up-and-comer. In this scenario, pricing may not be an issue for this younger practitioner, as they’re often acquiring your firm in a Junior Partner role to progress their career (they’ll toe your line) and make the first step into business ownership.

• A lateral merge, where you sell some or all your equity to a business owner (sole practitioner) just like you. Again, pricing is probably not a big concern here, as they are likely underselling themselves just like you are!

• You are a “tuck-in”, where a larger multi-partner firm acquires your business. This is when the trouble starts for you, as their pricing is greater than yours right across the board.

In the past eighteen months or more, what I’ve seen is more and more sole practitioners doing deals through my shop because they “don’t want to be alone anymore”.

COVID and the post-pandemic landscape has been tough, and the majority of deals I’ve done in recent times is to find homes for these solo operators.

The majority of the time, this means trying to jump onto a bigger bus. Thus, the re-pricing problem has become the headline DD item and discussion point.

But the solution is actually REALLY simple.

If you are considering an exit within the next three years, you need to start thinking and pricing like a bigger firm. You have to start treating it like a real business, not just the self-employment activity you currently enjoy.

2. You, yourself, only generate the revenue

This is a huge issue, as without you, there are no billings, and there is no revenue. You’re the main fee earner for your firm, or as my buddy, Rob Nixon, would say, you have a low score on the Sustainability Index.

What’s that? I hear you ask. Well, the way Rob works out this equation is to take the revenue contribution of the firm’s Partners (you) away from the overall firm profit, and show this as a percentage. A low or negative result (26% of cases in his recent benchmarking report had a negative result) indicates a business that is not sustainable.

If the result is 0%, then the Partner revenue contribution is equal to the entire firm’s profit. If the result is 10%, then the Partner revenue contribution is 90% of the overall profit. Of course, there could be an argument to add an overhead component to the Partners’ revenue, however, the answer remains the same. If you have a low percentage score on the Sustainability Index, then there is simply too much reliance on you. You are supporting everyone else.

This then means that your transaction starts to look like “Partner Recruitment” (i.e.: let’s find somewhere for you to continue your self-employment), rather than a sale – because you really have no actual business to sell.

3. You touch everything

This glaring issue, and another reason why I wouldn’t buy your accounting firm, follows on in quick succession from the point above. In fact, often the two are essentially the same issue.

If every client will only speak to you, every job must pass through your hands, and absolutely every decision made within the walls of your office is made by you, then, to acquirers, you seriously look as if you have no actual business at all. Rather, you’ve simply got a hobby that keeps you in the game.

4. You’ve checked out

I’ve turned away many vendors before who have come to me when they think they are “ready to go”, but they’ve done absolutely nothing regarding the “ready for sale” process. They simply think that their decision has been made, so someone should quickly offer them $1.20 for the fees.

Not likely.

The problem is that they switch off three to five years out from the finish line, a point in time that they’ve not shared with anyone, and thus, only they know about.

This mindset often means that they’ve not kept pace with industry innovations (that quickly become standards) or spent any money on developing their team and culture, their office environment or their client relationships. The business performance then plateaus with no year-on-year growth – in most cases even experiencing negative growth. They are stagnated, and at best, they’re only replacing their outgoing clients to maintain revenue.

Essentially, they’ve failed to understand and exploit why their clients come to them in the first place, and they haven’t put in place any of the systems, processes and people that they need to supercharge their exit.

5. You’ve got no client engagement

Typically, there are two main issues here.

First, you have no annual client engagement process. This should ideally be paired with a monthly in-advance subscription type fee agreement.

Second, you have no regular communication with your client base.

Accounting Practice M&A is all about retention, and maintaining revenue with a degree of certainty. To achieve this, you need to show an acquirer that there is sustainability in your regular (monthly) income, and you need the ability to communicate the reason why you’ve entered a transaction.

Remember that you are selling “trust” – trust that your clients will understand and be guided by you (trust you) to stay with the new owners of your firm. How can you fulfil this requirement if you don’t regularly stay in contact with your clients?

But don’t worry… it’s not all doom and gloom here.

In fact, I’ve never not sold an engaged vendor’s accounting business.

Would you like to know why? Reach out to schedule a chat and I’ll be happy to explain everything.

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