“Main Street” Accounting Practice Mergers & Acquisitions
If you are counting on selling your book of clients to another owner-operator in exit you may be shocked at the buyers that take interest. There are fewer owner-operator buyers in the buyer pool for Mainstreet-sized firms (defined here as less than five million in revenue) than ever before.
The industry has been plagued with a talent shortage for years and along with the baby boomer’s exit, it is a bit of a perfect storm. The buyer pool is still adequate, but a shortage of Owner Operator Buyers is evident.
In this article, we will discuss how to obtain a premium multiple and differentiate your firm from the masses of firms that will be for sale over the next few years. By focusing on margin and bill rates, staffing, technology, and client mix, it will put your firm in the best position to attract an owner-operator buyer.
These steps should increase the likelihood of finding the buyer that you are looking for and obtain a premium pricing multiple on your firm.
Margin
The number one variable in determining the valuation multiple is the cash flow margin that a firm has. Cash flow margins vary in the Main Street accounting practice space and can range between 25% on the low end to 75% on the high end (Seller Discretionary Earnings). The extremes are located on the flat portion of a bell curve and generally have extenuating circumstances. The bulk of the bell curve represents cash flow margins between 40% to 60%.
Margin has been and still is the largest variable controlling multiple levels in the accounting practice industry. I speak with many selling principals, and they rightfully admit that they have been pricing too low. If your firm is at the lower end of the margin range, there is little that can be done to obtain a good multiple. In the worst-case scenario, it may make the firm unsellable.
Increase Billing Rates
Even if you are just a year before the sale, increasing the rates you charge to get your margin up is particularly important. No longer can practitioners bring a low-margin firm to the market and expect a one-time multiple of revenue.
- Lower margin firms have difficulty attracting buyers, have trouble attracting and retaining top staffing talent, and typically are not invested in technology and efficiencies available to the industry today.
- Low-margin firms have difficulty qualifying for external bank financing so even if you can find a buyer, there will not be much cash out to the seller at close. I cannot emphasize this point enough.
- Low-margin firms have seen the most multiple compression in the buyer market we see today and will continue to see compression of their sales multiple over time.
Staffing
Assuming the margins are adequate, buyers next turn to the staffing levels of the firm. Many of the buyers today as mentioned above are not owner-operator buyers. They do not have a ready solution for a retiring principal and the staffing concerns evident within the industry have buyers concerned. Buyers want to see an age diversified, credentialed or degreed staff with productivity to manage the firm’s volume. As firms grow it is important that they are attracting younger talent to offset the aging staff.
Exiting Principal Should Consider Staying
With most Main Street firms we sell, the principal still carries a lot of the billing and holds onto the relationships with clients. From our perspective, the owner of the firm should stay on for 2 years or more to ensure that the staff’s capacity for overseeing the volume is in a good place. A principal that stays also helps to hold key client relationships and staffing in place until new relationships are formed with the new buyer. This helps the exiting principal directly in the variable portion of the contracted earnout. It also helps the buying entity to meet service standards and make appropriate hires to fill the capacity gap created when the selling principal fully exits from the practice.
Technology
Buyers like to see some level of technological engagement with the firm they are purchasing. This does not mean that you must be a completely virtual firm. At a minimum, practitioners should consider a portal for receipt and delivery of information needed to process returns and accounting work. Many have worked toward a paperless environment or a hybrid of some kind and have moved to electronic signing.
Still, more have looked at outsourcing the input of the tax return. There are both American owned firms and offshore firms that can complete this service and there a number of outsourcing options using OCR technology to do the bulk of the input work. These tech engagements make firms more attractive. These technological advancements show that the client base and the staff at least have exposure to technology and have a willingness to adopt modern technologies.
You do not need to have the most recent tech stack or be using AI within your practice to gain lucrative buyers but moving into technology and showing a willingness to do so, will add to the level of attractiveness of the selling firm.
Many buyers will have their own operating model in place and either over the long term or the short term will want to integrate your existing firm into their business practices. If a firm is still paper based and is not employing any technology within, the buyers will consider the risk of loss of staff and loss of clients if forced to make substantial changes in the methods used.
Client Mix
Each buyer has their own ideas of the client mix they seek. However, current trends in what we have seen will help you continually craft your own ideal mix. Some buyers have moved away from traditional 1040-based practices unless the margins are lucrative, or they are serviced virtually, or both. Many buyers are looking for business revenue percentages above 50%, where accounting and tax work are completed for these businesses.
Savvy buyers will want to understand the mix of revenue, so do not be surprised at the level of interest in this matter during due diligence. It is acceptable and normal to have 1040 business in the book of clients you are selling. Each business entity should have at least one 1040 return for the principal. That would suggest that around 50% of the tax returns will be 1040 and 50% for a business entity.
The 1040 clients with business services are still considered within an ideal mix. Buyers shy away from the stand-alone 1040 client. Business owners spend more money with the firm and utilize more services, making them stickier in a transition with a more lucrative ROI.
Mainstreet-level valuation multiples can move higher with preplanning. A lucrative cash flow margin, a full-time diversified staff with the selling principal staying on, the use of technology, and the client mix all affect the valuation by changing the resulting supply and demand equation evident with all valuation multiples.
The more variables buyers see in their due diligence, the more demand for the firm rises. Berkshire Business Sales & Acquisitions has been selling Mainstreet-sized accounting firms in Arizona for 15 years. If you would like help preparing your firm for sale or taking it to market, please consider calling Ryan Gipple at 602-614-3583 or using the form below.
