[EP 047] Buying, Selling and Merging Accounting Practices

Tax man turned entrepreneur

In the mid 90’s, I started in the tax profession as a tax lackey. I’m a tax man by trade, if you like. And in the late 90’s I got involved in what is referred to in the industry as fee funding and up until the GFC in 2007/2008 I ran and owned the country’s biggest fee funder called Smartfee.

I also on the back of the business had okay cash flow and I thought that I might start a suburban type roll up and, in that process, thought I was a practice broker of choice I might get to see things I’d want to buy before anybody else and buy them and get paid to sell the ones I didn’t want to buy, which was a nice way of closing the loop. I started the journey then. But with the GFC and some resulting career moves around, I started in 2010 back into the industry with Buy Sell Merge Pty Ltd and pitched myself as a practice broker and since 2010 have been doing that somewhat successfully.

In more recent times, we launched Merge to Retire which was aimed at the 60 plus year old suburban accountant sole practitioner with no succession opportunities and that’s been very rewarding because you can seriously affect someone’s retirement plans and outcomes and we team them up with the aspiring, so the aspiring and retiring coming together is a rewarding way to spend the day.

What makes selling accounting practices different?

At the moment just demand from buyers. We have a general practice broking side to our business broking business and the lead times and the hunting for buyers is nothing like it is in the accounting space. There’s a hundred buyers lining up to purchase what I would consider pretty ordinary accounting businesses every day of the week.

The demand is crazy and it comes from all places. It comes from accountants struggling with organic growth or marketing and think that the way to bulk up is by way of acquisition or with an aging demographic, blooding young partners in sometimes difficult for people to divvy up the pie so they think that if they acquire an extra parcel of fees, it’s a way of getting that next younger partner in and then demands come traditionally and historically from other professionals as well.

And the first one there, and the obvious one, is financial planners. But in more recent times we’ve seen some property distribution businesses that can get a really quick return on half a million, a million bucks of fees most times represents quite a number of client groups that only got to sell a few properties and they’ve recouped their purchase price.

When you’re selling an accounting business, you’re really selling to the next person an opportunity to continue marketing professional services to a list of clients. That’s what it is. That’s what the transaction is. That’s what the goodwill is.

The property guys are able to leverage on that bit of the trust that’s being built up to maybe short cut some of the fears around property investment because it’s coming from Bob Jones the accountant that we’ve had for 30 years. It’s an easier marketing distribution tool.

Valuation multiples for accounting practices

There’s a couple of things there. There are some listed players so their multiples are more in line with traditional listed company multiples which skew things in a huge direction and some of these are actually being driven by overseas venture capital groups at the moment. So those guys are willing to pay well above the odds.

And then it’s about a line in the sand at 1.2 to 1.5 million in fees where it goes from the yardstick industry rule which is cents to a dollar to people looking at multiples of return on profitability and it really is, in my experience anyway, been about at 1.2 to 1.5 million. So up to there, which is the majority of the industry at cents per dollar, and then people looking at returns. But if you go traditionally someone back in history made this rule, a third a third a third, so a third expenses, labor and then profit. Three times earnings you’re back at a dollar anyway.

But then with the use of technology and parcels of fees being transportable because of that and then you know bolting on to better systems we’re seeing $1, $1.20, $1.30, $1.50 even if the business is a really good one and plug and playable. If you’re a suburban guy, you’re probably still getting nearly a dollar for your fairly ordinary business just because of the need, the demand.

What can accounting practices do to make themselves more attractive?

Well there’s a whole bunch of things you can do. But the first question I ask of vendors is why are we selling. It’s okay to get a million bucks for your million dollars in fees but where are you going to get a return? Like even a fairly ordinary accounting business should be outperforming property stocks and obviously cash.

So my first question if anybody rings me saying I want to sell my accounting business, okay well why? And is selling the best thing to do? Because you can really engineer your accounting business and almost turn on an annuity stream. I asked the question on the older guys well which is how “Merge to Retire” came to the part. It’s a program that we run for the 60 plus year old accountants with no succession plan.

Why sell if you can bolt it in and get a lifetime value out of it until you’re really ready to hang up the boots because older practitioners make really great business advisers and you can take all of what we call the noise away and go two or three days of quality, meaningful work a week and you can do that until you’re 70.

Ways to build an income annuity stream

Merging the aspiring and retiring together is our answer to that. I would suggest find someone with the youth and enthusiasm and maybe across the technology a little better to come and integrate the older guys’ client base in so that it becomes more profitable day one and then is sustainable over a long period of time. Move from compliance work to advisory work and both parties should be pretty happy and you’ll find clients are happy because they’re finally getting some service which traditionally they might have been missing out on because it’s all been too hard for old Bob.

Importance of understanding the “why” of the transaction

Our starting point is what we call discovery, which is an intensive planning process and initial sessions around all the why. What are you going to do? How are you going to do it in transition and then if you actually fully retire? There’s a huge psychological piece that became very clear to me probably four, five years ago with these older professionals because their identity, their individual personal identity has been tied to this small parcel of clients for such a long period of time.

They do the deal on Friday. They wake up Monday, put their slippers on and they go “Who am I now? I used to be Bob the accountant. Now I’m Bob the retiree.” It takes tremendous planning to ensure that the steps are done properly, and the outcomes are sustainable and what people actually decide is the starting point.

And I think also too is that the letting go. Sole practitioners are sole practitioners for a reason and sometimes part of those reasons is that they can’t get along with others and they can’t delegate, they are control freaks and the transition process just multiplies some of these psychological failings if you like or areas that haven’t been properly addressed. The planning is critical, like anything.

Merge to retire program

In our Merge to Retire program we address these things in agreed periods and outcomes with both parties. We might say that there’s a two-year transition and things have to happen. If not us personally, we team their clients up with a mediator, a professional peer to peer type relationship where at trigger points might be three months, six months, 12 months, 18 months.

The parties come together with this mediator to make sure things are actually happening and if you’ve got the contract of sale right, you can enforce penalties. If you bring Bob in as a tuck in for his retirement planning and he doesn’t play ball, he can be penalised and exited. The passing of control is very important. The acquirer can’t be seen or feel like a junior partner, he needs to be in control.

Our business sales and acquisitions services

Aspect Legal has a number of great services that help businesses prepare for a sale or acquisition to help them prepare in advance and to get transaction ready. And we’ve also got a range of services to help guide businesses through the sale and acquisitions process.

We work with clients both big and small and have different types of services depending on size and complexity. We provide a free consultation to discuss your proposed sale or acquisition – so see our show notes on how to book a time to speak with us, or head over to our website at Aspectlegal.com.au

The acquirer demographic

Generally speaking, the people I’m seeing in that space let’s call it 40 years as an age demographic that have been in second tier and might be travelling an hour each way to the office to work for a boss they don’t really like. There’s no equity opportunity there, ever. And if you did, you would have to remortgage your house twice to actually buy in and you’re still going to be junior partner. Why would you do that?

And so those people I think are really disillusioned and they can step out of those city firms and buy someone in the suburbs and be able to pick the kids up from school. So I think the older, the 40 to 50 year olds might be doing that. But the 25-year-old has never been easy for them to start accounting business. If you get your tax agent number, you’re away and you can service probably double in terms of what you’re earning as an employee pretty quickly from working three days a week at the cafe in your thongs.

So those types of guys are not really acquiring because they don’t see the value in it. I’d probably argue that there’s a mix for them, an opportunity for them if they sought the right aging retiring partner. But your typical buyer is a lateral merge. So a bigger firm looking for tuck in to bulk up fees.

The starting point we do with them is the why. Again, why are you looking to acquire? What are the alternatives of investing money back into the firm for other things? And most importantly, if you come to me as an acquirer, my first question to you is do you already have a tremendously well performing accounting business? Because if you don’t, what’s the point of adding top line revenue to something that’s not firing?

Alternatives to growth through acquisition

Some people can’t be helped, but those that are willing to listen and get some advice, we go through the obvious parts to the accounting business you know what’s working, what’s not, what are the opportunities being left on the table, how efficient are we in producing our core activities. And still today the core activity is tax compliance.

A lot of professionals think that they’re exactly that, a professional. But they’re really missing the point that the business of accounting is manufacturing tax returns and the people that are getting the most out of it have taken a manufacturing view to data in data manipulated data logs to the ATO and get paid. It’s manufacturing 101.

You can start there and get some early wins and then you can say okay well what type of client do we like and how are we getting those? Who’s qualified to do some other stuff? Have we asked the clients what they want from us?

There’s this tremendous amount you can do with a fairly stable and existing accounting business especially over a million dollars revenue before you even need to go on a purchase.

Spectacular wins and fails

I’ve touched on the spectacular fail that Merge to Retire example where a younger gentleman spent a lot of time and effort courting and engaging with the older gentleman for the purpose of managing their succession and retirement issues and six months later sign a contract and the very next day the older gentlemen reneged. So that’s when it can go tremendously wrong.

When it goes right though, it’s really one plus one equals three or possibly four and I had the pleasure of being involved with a transaction in Brisbane two partner firm rolled into a much bigger firm and 12 months later everybody is super happy because those guys were already successful.

The two-partner firm, really great firm, really great guys, good team, very profitable and doing some interesting things. But the clout came from when you can check your ego at the door and get on a bigger bus. The going from one to two partners is sometimes a hard leap for someone. But if you get it right, taking 2.5 million dollar turn over to 3 or 4 million is a lot easier because there is an I.T. person, there is an HR person, there is a marketing person, there’s a CFO. The noise is taken away from the individual partners so they can go out and do what they want to do which is grow their business and their teams.

So if you’re not hitting at least the three in merging, why bother? And when you’re acquiring, spend the time – which nobody seems to do because of the hot market. People are doing acquisitions with almost no due diligence. But I’d suggest get your house in order so that you’ve had the luxury of not rushing into something. Court your vendor over an extended period of time. Make sure you’ve got a good contract over 12 months, 24 months and the integration is well thought through before any money is exchanged.

Coming up in October!

In October, we’re going to invite a hundred of the country’s best accountants at our little mini conference. It’s a one-day intensive called Aspiring or Retiring. It’s focusing on The Future Advisor and what that looks like for everybody regardless of where they’re at in their career.

Tax is the cornerstone of what we’ve been doing for ages but it is changing in the way it’s being done, delivered and priced, and the technology is allowing a lot more information so moving away from compliance into advisory.

Compliance is always going to be here. We live in one of the most over regulated countries in the world so tax compliance isn’t dead. Don’t believe the scaremongers. But what you do with your clients going forward and the demands they’ll put on you is changing and so we’re going to spend a day with 100 great accountants in Noosa, the beautiful Sunshine Coast to talk about those things and it’s an open forum. It’s going to be great.