Kevin Reed, Accountancy Age, Thursday 9 September 2010 at 00:45:00

Tough economic conditions are hitting the price buyers are willing to pay forpractices


Baby boomers have had a bit of bad press. They cost the UK 6 for every 5they spend, and their healthcare and pensions requirements could bankruptBritain, so reports suggest.

Ironically, boomers in accounting practices have tried to avoid draining thestate later on in life ? instead, expecting that a successful and lucrative saleof their firm would provide for a comfortable retirement.

But their expectations appear misplaced. Tough economic conditions and areliance on simply selling a list of clients for a big payoff have hit the valueof their businesses.

Where multiples of fees were once the norm for a practice?s sale, only thefittest will pick up beyond one times their annual income. So must they runtheir firms until their dying days? Are good payouts a thing of the past? Or canpractitioners apply a proverbial lick of paint to improve how their practicelooks to buyers?

Marriage brokers for accounting firms agree that the perception issuesurrounding the value of practices must be dealt with first and foremost.

Partners must get to grips with the fact that, unless a practice is operatingexceptionally well, big returns are unlikely. The reason? Firms are often tiedinto long leases; have variable quality among their staff; and lack focus onmaking the most of their client base.

If a firm is on a long lease then it?s a cost that potential buyers will takeinto account. ?Don?t sign a 10-year lease,? says Ron Goldsmith of practicebroker Goldsmiths.

Staff worries

Incumbent staff can be a huge issue for acquisitive firms. Within a?lifestyle practice?, where the owner/partner is running the firm in aneasy-going manner, employees? unproductiveness can be left to fester and thegreatest value is failed to be made from clients. Potential buyers want theseissues dealt with prior to a sale.

Deal with unproductive staff before you sell, says Julian Hamilton, anotherbroker, but beware trying to move them on during the sale as the buyer, underTUPE rules, must keep them after the purchase.

While the rule that 20% of your clients will be responsible for 80% of yourturnover, it is likely there is more money to be made from other clients. Thebrokers advise revising client lists to look for more value.

Firms also face structural difficulties ? people, rather than bricks andmortar. The senior partners in small practices struggle to let go of control oftheir client base to other staff, fearing they will be stolen away. But brokerswarn this attitude is counterproductive. The closer the selling partner is totheir client base, the lower their value to a buyer, or even a sale to otherpartners within the practice.

?It?s about separate recognition of the partner as a worker, and then as anowner,? says Robert Jackson, CEO of account*ing and financial service firmMontpelier, which has been buying up practices. ?They get precious about theirrelationships for fear staff will run off with clients, so it?s catch 22. Youshouldn?t be frightened of delegating client portfolios across the organisation? it enhances staff retention.?

Internal sales, or selling an interest to other colleagues in the same firm,are also fraught with difficulties. The process is complicated if a firm?s deedsfail to contain details of internal sale prices. Often there is also littleinformation on calculating goodwill ? the premium earned on the originalinvestment. In an attempt to avoid soured relationships, ad hoc prices are oftenset but, as Andrew Jenner warns, other partners will want the same deal whenthey leave.

One option is to create a corporate entity with shares.

Who?s buying

The next big question is who will buy a firm in the current marketconditions? The range of buyers has been stunted by the banks reining inlending. And younger partners, like the banks, seem unwilling to take the leapand invest capital. ?Banks? decision-making is going to a higher level?sometimesabove regional man*agers. This has gummed up the market,? says Hamilton.

The travails of the big consolidators Vantis and Numerica (RSM Tenonexcepted) has discouraged others from following suit. Those that do purchase arekeen to ensure they are making a sound choice. Due diligence is vigorous. Buyerslike Montpelier look for a sustainable earnings model rather than turnover.Experts say they have paid one to five times the price affected by factors suchas the quality of the staff, clients, and the firm?s record of generating incomethat can be sustained.

But is it worth spending up to 12 months looking for a sale? The brokers sayyes. ?It?s worth it in terms of the sale price. If you say it can?t be done,then do you have the appetite [to earn more]? If you want value you have to workfor it,? says Jenner.