Many practitioners will only be involved in a practice acquisition, sale or merger a very small number of times during their career.
And understanding how these deals are carried out is not particularly easy – the nitty gritty is often kept behind closed doors.
So that creates an environment for opacity and misunderstandings about how these deals are composed, and what it takes to get them over the line. On that basis, I have scoured through previous articles put together by the fine people at Foulger Underwood, and come up with some myths associated with a merger.
Classic sellers’ myths:
‘My practice is worth a premium value, and the proceeds will pay for my retirement’
Unfortunately, many sales are made from a sub-optimal position i.e. a practice has become ‘lifestyle’ for its senior leaders. A less-than-certain economic and political climate, alongside upheaval in service provision to clients through rapidly changing technology, mean that valuations can be less than predicted.
Typically deals are undertake at with a value of 0.8-1.2 x annual fees. A desirable client base is one that the acquirer can leverage to provide higher value services, or can help create economies of scale – so understanding who your clients are and their worth to someone else is an important step in increasing the value multiple.
The proceeds usually represent three or four times annual earnings. Is this really sufficient for a 15-20 year retirement?
‘I don’t need to ‘plan’ to sell my practice – planning is for the acquirer’
A practice’s sale or merger will involve a lot of change and upheaval, and can distract from the job of serving clients – this is dangerous as it will erode the practice’s value. The impact of a sale on other partners, staff and clients must be well thought-through.
Even if you or other partners plan to leave following a period of settling-in post-deal, there will be a moral and financial obligation to help make the deal work. Clearly, thinking through how this will play out prior to the event makes it much more likely to succeed for everyone.
‘I will just rely on practices who approach me, as I find it flattering’
If you and the other leaders in the practice understand its value, the practice’s culture, who your clients are and what they need, then this will help you find a good fit. By sitting back and waiting for offers to come in you lose control of the process.
Without proactivity, you have less influence on the outcome.
Classic acquirers’ myths:
‘It will be clear to work out which potential acquisitions are good value’
As many practices aren’t fully prepared to be acquired, they are often lacking in information about how their practice is performing; or can’t quickly break down what services they are providing, to which clients, and at what profitability.
Acquirers don’t always understand what they’re looking for – and as such will struggle to make a considered decision even when presented with details about a potential acquisition.
‘The hard work takes place after the acquisition’
Certainly, an acquisition will be particularly hard work if adequate preparation hasn’t been undertaken before the deal is signed.
Strong project management needs to be set: this will include an evaluation of technology used by both practices; a plan to transfer client and financial information into one hub; and an evaluation of your staffing requirements post-deal. You may even require a new office to house the expanded practice.
The financial implications of a deal are of course fundamental, and may include goodwill payments, investment in working capital, technology investment and legal fees – so planning how cashflow will be managed is definitely a pre-deal task.
A well prepared acquirer will have a clear idea of the benefits that will accrue, and where these benefits/profitability will be generated and in what timescales. As with all well-run businesses, performance needs to be measured and action taken if deadlines are missed or additional profits fall short of expectations.
‘A similar size acquisition, with a similar type of client, will be the perfect fit’
A firm’s fee income is useful to know, along with other financial ratios and metrics. But, in isolation, it certainly doesn’t mean that a deal will ‘work’.
As for clientele, bringing together two similar client bases doesn’t mean that a deal will prove fruitful.
Firstly, you will need to understand how the other practice provides services to those clients, and what those services are. That will help you understand if the combined operation can undertake that process more efficiently, and perhaps with broader services, than your practice.
Secondly, it may be advantageous for your practice to make an acquisition where there is a different client base or different services offered, enabling the merged practice to either spread its risk or to offer more diversified services across the now expanded client base.
Lastly, an appreciation of your firm’s ‘culture’ is vital – as many mergers fail because of different approaches to work and communication between the two parties.
‘My fellow partners and senior colleagues will back an expansion plan’
Setting out a plan to make an acquisition will crystallise the positions of other team members – hopefully they will all be in favour. However, both buyers and sellers often take ‘collateral damage’ during this phase. After all, it is a huge part of what is often a five-to-ten year strategy – and some may decide it’s not for them, or simply they do not want to invest.
So, thinking about how to communicate an acquisition as part of a deeper strategy is, actually, your starting point. Just be aware that this may prove unsettling, and raise other concerns from partners not previously evident.
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
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