How to maximise the sale value of a practice

As accounting practitioners age, consider retirement and look to exit the industry, accounting practices are being put up for sale. There are several ways a seller can increase the value of their practice to maximise its sale price. A successful sale requires preparation, planning, a deep understanding of a practice’s strengths and weak spots, and fixing any issues that could affect its value.

Getting above the parapet

Keith Underwood, managing director of consultancy Foulger Underwood, advises owners to begin planning at least 18 months out from a sale, and to put their “head above the parapet”, while looking at their business from the perspective of a larger buyer.

The planning phase will require an honest appraisal of the practice’s strengths and weaknesses.

This will encompass a review of the client base, management structure, internal processes and financial performance – including revenue, expenses, profit margin and cash flow.

“Are you commercially running your business with good service, and applying technical tax advice where required, leading to high client satisfaction levels?” Underwood asks. “If that is going to be the larger firm’s parameters for looking at you commercially, do you actually meet that requirement?”

Sellers should also review how their firms operate. Buyers will look for accounting practices that have robust workflow processes, reliable and ambitious people, and financial infrastructure in place. This includes systems for monthly direct debit billing and invoicing, bookkeeping and accounts production, payroll, and compliance.

For instance, that could involve a review of how the practice prepares for, runs and follows up on client meetings, and whether it holds similar and consistent processes for every client meeting without fail, according to Paul Shrimpling, managing director at accounting consultancy Remarkable Practice.

“If there is a systems robustness, anyone doing due diligence on your firm will have greater confidence you have got your act together, which then increases the value of your outgoing business as you leave it,” Shrimpling says.

Improve your financial metrics

Buyers will look for firms that have a profitable operating model, a steady revenue stream with a track record of long-term growth and a low debt burden. Charge-out rates should be reviewed and price increases on low-margin business should be pushed through before going to market.

Businesses that have “shown traction for growth” at least in line with the market or above the market will appeal to buyers, according to Daniel King, associate director for M&A at Azets, one of the UK’s fastest-growing accountancy firms.

Buyers will also favour practices that can push through price increases amid a period of high salary inflation to maintain gross margin, according to King. He said Azets has seen practices with decreasing margins over the past year as “salaries have gone up but pricing increases through the client base haven’t stuck”.

Azets has completed around a dozen acquisitions in the UK and the Nordics in the past 18 months. It is looking to ramp up to 12 a year.

“Finding businesses that are able to put through pricing increases to maintain their margin is going to be quite important,” King says.

King says he looks for practices that produce “good quality management information”. He suggests that firms bring forward some annual or quarterly processes, and run monthly numbers or monthly processes “so when you come to the time of doing a deal you have got much cleaner numbers”.

Sellers should put themselves in the shoes of the buyer, consider what they would be interested in and start to think about how to pull together their financial, HR, insurance and other management information.

“Due diligence isn’t the easiest process in the world for sellers; there is a lot of work, there is a lot of pulling information together,” King says. “It just makes life from a due diligence perspective much easier because they are 90% ready to go rather than 0%.”

Embed your client base

One of the most valuable assets of an accounting practice is the client base ­— and client retention is one of the key metrics that a prospective buyer will consider when deciding the value of an acquisition target.

But clients in small practices are traditionally loyal to the partner, not the firm. It is essential that loyalty continues after the sale, or the purchase price could get whittled down through clawbacks.

Sellers should consider a period of consultancy post completion where they are “bedding in those clients” with the purchaser to avoid losing any money if the deal structure caters for clawback, according to Underwood.

“If you are going to have clawback you are possibly going to lose some of the consideration for people leaving, so you will want to make sure your clients are really well embedded,” Underwood explains.

Buyers will also look for firms with a succession plan in place, and want to understand who are the “up-and-coming stars around the business that will be the future leaders of the business and will be key to continued success”, according to King.

“If an entire partner group wants to retire on a transaction, there is a significant risk that clients and staff might churn, you might be left with nothing. From a buyers’ perspective that is unattractive,” said King.