The market of the past year has remained buoyant; high premiums achieved in metropolitan areas.
Premiums were still being delivered as the convergence (legislation change) comes closer to reality. This gave practitioners room to move on areas of weakness in their practices maintaining high prices and questions on what will the new year bring. The fear factor did not shake many smaller practitioners into a sell position although more of this may be seen in the current financial year. Demand still outstrips supply, so don’t under sell your life’s work.
The market is still a dynamic one and while not all practices fit the model sought, given time and the current market demand, structured deals were more prevalent. As the industry continues to lean towards profit through advisory this will definitely impact deal structures and payment terms.
The impact points through the divestment, acquisition or merger over the last year as follows:
EBIT Multiple Vs Cents in the Dollar: The prevalence of the swing between the two most common valuation techniques did not change. What is prevalent is how banks value firms and this focuses heavily on EBIT over Cents in the Dollar. it doesn’t mean one is better than the other, and, to safeguard both the vendor, acquirer, merger or partner buy-in scenario both are imperative.
PROFIT: The search is on, or so we are being told. Remembering the old ‘THIRDS’ rule, we found the market kept on insisting profitability. Profitable practices have always sold well and at higher valuations. Consolidation into other firms helped the less profitable firms earn good valuations, although, this wont be the case in the future as technology opens up transparency of the data.
DATA: The market is being bombarded with all sorts of software, time saving solutions; we are not sure as to how much time it saves. As data is becoming easier to access and the adoption of the CLOUD it means even us as a business have moved from the filing cabinet sale to hard drives to USB sticks and now passwords. Onboarding of firms with similar software choices has helped the market pick up and transition firms in shorter timeframes and less disruption. How wouldn’t pay a premium for this? The cleaner the data, better the deal.
PARTNERS AND STAFF: Who owns the relationship? Questions are being raised regarding level of risk as Partners push relationships down or delegate to maximise results. The old ‘good staff are hard to find’ continues and always a point of conversation and the churn is consistent on Firms and one of the purchasing ideals has been the ability to acquire good staff.
HUMAN RECOURSES: The devaluation factor with the lack of proper implantation can cause significant losses. As we are in a ‘Relationship Service Business’ it is easy to cast our minds back and see that the growth and splinter of staff, clients and fees are prevalent and protected by law. Still though we find practices that have no agreements in place and at point of sale, injury or death see a scattering of the firm’s assets. If you take the model that one person can walkout with 170k in fees, imagine if you are a one partner firm with three accountants; use the average and you will see an instant demise and failure to divest.
ONE STOP SHOP: The interest in the cross sell has flourished. Buyers are seeking practices that haven’t had anything other than tax and compliance work. Historically this has been there has been the fear that wealth related purchases would come through and focus on the low-hanging fruit with out the ability to service the clients, although this thought process seems to have become more flexible as the fight for profit continues as well as the legislation change – will we become one big family? Only time will tell. One thing is for sure wealth have helped push prices up.
ADVISORY: The hottest word in town, but how do you pay for non-recurring? Deals are struck but on a success basis / earn out. This means it may be three years before you see that final dollar. This strikes us closer, but not exactly, to the American style of divestment – imagine 5 year earn outs!
SALES: Selling; it’s still a dirty word in the Accountancy profession but it’s what you do everyday from different viewpoint. We found professionals who more open to communication with their client, assertive and not bogged down with the day to day found a higher rate. Interestingly though the over sell was a turn off and if we think about it, it’s a given. Advisory scripts that are flexible and client centric versus revenue chasing only are paying off over the long time. Clients of firms that are well financial educated never transfer well to a lower level.
COMMISION: “If you haven’t been collecting yours, what have you been doing?” Yes, this is also becoming quite prevalent. Wow! Accountants taking on their inner-salesperson – they always were.
But, NO… this isn’t the case and we don’t mean the inner-salesperson, this is just supplying the service of listening to client and the asking questions to ensure they are being looked after appropriately. Marinating separation from the Wealth industry still bodes well with many practitioner and their firms.
DUE DILIGENCE: Regrettably this is still an area that needs work. We still urge all parties to use a third part. Why? To take the emotion out, to ensure a thorough job is conducted and to ensure no doubt of confliction.
RESULTS: The pendulum currently sits firmly at $ for $. Premiums on general practices within metropolitan areas has been consistent throughout 15/16FY. Regional and rural firms might be in a shock in relation to valuations as their model, the traditional, slightly lower than above, is edging closer to the metropolitan valuations, although, buyers are a limited recourse and this slows the deal down.
BROKERS: They come and go, referrals from outside the industry, recruiters and within one’s own network have helped continue to help the amalgamation of firms to boost profits. Where does this level firms like us? We believe you should always ask everyone for their opinion and especially their experience. Jadeja Partners nurses the transaction from inception to completion. This means we work with both parties to ensure satisfied, culturally, help negotiate points of transaction and clarify points around the contract. Pre- transaction preparation, post-transaction help with transition advice. We have seen most problems, games and structures that ensure the deal is finalised. Make sure you pay for what you want – results!
Article first published in Business Fitness “2016 Good Bad Ugly Report”
