Positioning your Accounting Firm for M&A Success
October 15, 2018
By: Russell Shapiro
In the world of accounting firm M&A, the numerous issues that could prove challenging and even put deals at risk can at times seem overwhelming.
From evaluating characteristics that are valued in a target firm, to avoiding missteps, let’s take a closer look at what is happening in the marketplace, the primary considerations for firms considering mergers and, where appropriate, discuss best practices.
How Accounting Firm Mergers Work
Most M&A transactions are priced from 80 to 100 percent of annual revenue. However, certain factors will affect that pricing, including profitability, in-place succession and expertise. Most transactions are simply asset transactions in which partners of the smaller firm become partners of the larger firm and the larger firm absorbs the obligations to retired partners. The merging-in partners will have retirement benefits from the larger firm based on the new firm’s retirement formula. Sometimes there is a grandfathering under the old firm’s formula, or credit is given for the time spent at the old firm, especially for the older partners. The merging-in partners will make a capital contribution to the new firm. Occasionally, for tax reasons, you might see a stock deal or a merger; however, more often than not, the larger firm wants to avoid any liability for the prior firm’s obligations, so stock deals are less common.
In seeking a target firm for acquisition, most buyers look for a firm with stable partners and strong profitability. Often, larger firms are looking to increase their geographic footprint in specific markets and will limit their targets to that area. In other instances, they wish to acquire a firm with a niche practice that they currently lack. It can be far easier to acquire a firm where that niche capability already exists than to try to build the same practice organically. And in still other instances, headcount or critical mass is the impetus for growth, the other two factors notwithstanding.
As for firms seeking to be acquired, in my experience, most firms look to merge up because they do not see the next generation of partners as being able to sustain the firm. This impacts their retirement benefits, lateral recruiting and the legacy of the firm. In one instance, a younger partner said he could not do it alone given the dearth of people like him at the firm. Sometimes the firm has clients who require the services of a larger firm or the partners feel that too much work is being referred out or left on the table. More and more firms are identifying technological requirements as being a factor, along with difficulty in recruiting at smaller firms.
Unfortunately, deals can fall apart for myriad reasons. The devil is certainly in the details. I have seen too many deals fall apart before closing because there was never really a deal at the term sheet stage. Things were glossed over that should have been addressed. Other problems arise when a firm agrees to allow retiring partners to dictate what the firm can do after they retire. Sometimes retired partners are given these rights because they insist on assurance that their retirement benefits will be paid; however, these post-retirement rights can hamstring the ability of the firm to do a deal altogether.
To view the full article, click here.