Delighted to produce the first of what will be a regular series of blogs on behalf of professional services advisers Foulger Underwood, covering key aspects of a practice’s lifecycle. The blogs will be in my own words, but interspersed with commentary from Foulgers - and hopefully with some sage considerations from within the practice community.
As an accountancy journalist of, well, creeping towards 20 years, news about mergers and acquisitions among practices has always interested me. Reading the press releases and interviewing the main protagonists (usually the managing and senior partners) was a rare opportunity to get under the skin of where the newly-created practice was heading – in the context of where they’d both been heading before and if the newly-espoused direction was actually new.
Unfortunately I’d often end up confused or disappointed. Sometimes both.
That’s because there never seemed to be a very transparent reason behind the deal. Vague synergies’ would be floated around – and it’s very possible that many deals are based on a ‘light-touch’ strategy, or that it’s a deal that gets the parties out of a tight spot, perhaps enabling a partner or two to leave.
Practice buyer and sellers - different considerations
The issues and considerations for a practice buyer and seller are very different; so let’s focus this time on those looking to sell.
Firstly, selling a practice requires a great deal of focus and attention. Planning and preparation are required for pre-sale, then agreeing a deal – and how that impact all the parties post-deal. It may require consultancy periods and earn-outs, so the timeframe of making a deal work will not be dissimilar to that of the purchasing practice.
Ultimately, a seller is looking to maximise the value of their practice. This is by no means a short process itself – and this phase could be two-to-three years prior to the practice being on the market.
This is the phase where the practice needs to be profiled – so you understand how your practice works, is perceived in the market by clients and other practices. It’s about understanding strengths and weaknesses – and how they affect the price you’ll be able to set.
This will include looking at the nitty-gritty of your practice: What are your chargeout rates? Your conversion into invoicing? Plan as early as possible to find problems and resolve them.
Other things to look out for include how long your office lease has to run…some acquirers are uninterested in adding to their property portfolio…
'A strategy for compatibility'
As strange as it may sound, you will want to understand who an attractive acquirer would be – this will also aid in moulding your firm to make it as viable as possible for that potential acquirer (or acquirers). This ‘moulding’ is a process to help create a match.
“Set your practice to be as compatible as possible with the policies and procedures of another entity,” says Foulger Underwood MD Keith Underwood. “It doesn’t necessarily have to be a particular firm, but a group of practices who you see as being interested in your clients, who have a compatible servicing style, or perhaps similar service and sector specialisations.”
Alternatively, some practices may look at complementing their existing offering with those outside their current catchment area.
Value is, of course, a subjective issue. Key things that will help shift the value up include: profitability. This isn’t rocket science, but we know that many practices don’t spend enough time managing their structure and operational processes…but strong margins will make a big difference to value.
Another thing tied to profitability is your client base. For example, high-net worth clients will normally be high-margin. They will be hand-in-hand with specialist staff in your practice – both clients and staff will be attractive in an acquisition. Secondly, if you’re not charging clients enough, then acquirers will be wary – they don’t want to be the ones to raise fees and push clients out. Client fee management should be an ongoing process and carefully considered longer-term.
This disruption and change of direction is likely to make a big impact on the practice partners or directors. It will likely clarify in their minds where they are heading – which might not necessarily be with the new owner. For some practices looking to sell, the process will help move people on, and sometimes people will be lost that you would consider as an asset. Again, longer-term planning helps mitigate these situations.
But now, let’s consider the final steps. Some six months should be set aside to undertake the merger negotiation and sales process. The last couple of months will hopefully be about dotting the ‘Is’ and crossing the ‘Ts’. At this point, other practice staff – and your clients- need to be informed about the new owner.
If this all works out, then for the older partners looking to retire, their consultancy and earn-out period should be straightforward and low-risk.
Of course, for those staying on, that success will be focused on how well-planned and structured the acquirer is - and that’s a story for another day…