And now to the other side of the coin. My first article on behalf of Foulger Underwood last month covered how to optimise the value of your practice in terms of a sale. This time, I’m covering how to make great-value and strategically important acquisitions.
At first glance you might think: ‘Well, I can learn about buying a practice based on your first piece looking at the sale process?’.
I’d certainly recommend giving that blog a good read – however, buying a practice is not just the mirror image of a sale.
A plan view
From a planning point of view, understanding where you want your practice to head is vital. It certainly doesn’t always happen, of course – but plotting a path for success puts you in a stronger position for gauging where an acquisition fits in that plan, than otherwise.
In doing so, you’re likely to avoid making knee-jerk decisions. For example, when a practice nearby comes up for sale and you feel compelled to make an approach. Without understanding what your practice is and where it’s headed, you won’t be able to make a fully-formed judgment.
"We like to work with practices that have the longer-term plan,” says Foulger Underwood UK MD Keith Underwood. “Those that have identified growth that can’t be achieved organically, where an acquisition will help lift them to a new level of profitability.”
Geography can be a reason to make an approach – it just doesn’t have to be the nearest practice. It may be that you’ve local clients sewn up, and a practice ‘out of that reach’ becomes attractive. This could see you improve margins from economies of scale – particularly if offices can be consolidated.
Compatibility of client base will also be important. Practices strong on high-net worth individuals will be attractive if you can offer them a broader range of accounting and tax services. You may also be able to offer wealth management-style and accounting services to your new client base.
If you have found your practice specialising in one or two areas, for example farming contractors, or small-end SMEs, you may decide that another sector or service specialism is needed to spread risk.
Younger partners are always a valuable asset and an opportunity to acquire a practice, buy out the older partners and bring i nthe younger partners as part of the deal - a positive move. A deal in these circumstances could help provide the younger partners with greater opportunities – while allowing the retiring practitioners to take home their capital and goodwill with an earn-out arrangement.
Bear in mind though, that high-performing partners will want that to continue in their new practice. Can you provide them with the work required? Do you expect them to bring it themselves? And what if their profits are three times those of other partners? These are the types of considerations that require your time.
The $64,000 question...or is it $63,000?
So moving onto the even thornier issue: How do you value a practice?
Well, you need to delve into their numbers – and that will require cooperation. According to Foulgers’ Keith Underwood, you often find firms unable to produce up-to-date and relevant management accounting information – this may tell you something about how that operation is being run…
On the flip-side, many acquisition-hungry firms have the opposite problem to acquisition targets - in not knowing what information to ask for…
“Most firms undertake a cursory DD process and don't do the level of analysis to identify incompatible factors that will often absorb management time post-completion to integrate or resolve,” Underwood adds.
As was mentioned earlier, you need to gain an understanding of their client base before gauging future profits. Most deals will run at three/four years’ payback.
Setting sensible calculations towards a practice merger is not easy to summarise in a few hundred words. Nor is covering off things like how to get your existing partners onside with the deal. For example, it may seem strange, but it can be harder to get their agreement when the impact on them is financially minimal as opposed to something major - because they then question whether the effort and risk is worth it.
At this juncture perhaps it's best I leave you to contact Foulger Underwood if you wish to find out some more…
Kevin Reed is a consultant – content and engagement, for Foulger Underwood on a part-time basis. He is a former editor of Accountancy Age and Financial Director