Fit first: Why buyers and sellers must look beyond price
Written Chris Sheedy of The Hard WordA competitive market for accounting practices can be good for buyers and sellers, but Kev Ryan says some emerging behaviours risk putting price ahead of positive, sustainable outcomes.
When it is going through a sale process, a good accounting practice will naturally experience competition as various buyers recognise its value. Some competition is a good thing, but some is not.
When competition becomes urgency and FOMO (fear of missing out) begins to drive decisions, buyers and sellers both need to be careful, says Kev Ryan, transaction advisor from SELLERS.
Ryan says he is increasingly concerned about particular behaviours he sees in the practice broking market. Those concerns mostly arise when potential transactions are being promoted in ways that create a false sense of urgency and force decisions to be made more quickly than they should.
“We’re really not liking the behaviours of brokers spruiking prices and creating these boiler-room type environments on transactions,” he says.
“That pressure to move quickly can discourage and damage due diligence. It can also mean buyers might pay more than their firm can comfortably support.”
“If they’re rushing in, they’re potentially paying overs because of the fear-of-missing-out environment some brokers are creating. Rushed deals are never good deals. They’re never good for buyers and they’re never good for sellers, and this is not good for our industry.”
“Transactions need to be for the future benefit of the accounting sector, not for brokers to make a quick buck.”
The cost of overpaying
For younger accountants buying their first practice or the typical small tax firm, Ryan says, the reality is usually an office in the suburbs and a business that is either run by a sole practitioner or with just a few employees. Annual revenue is typically below $1 million.
If that business then acquires another for an inflated price, they’re behind the eight ball as soon as the deal is done.
Inflated prices in the market can also have a self-perpetuating effect. Vendors begin to assume their own firm should command the same price irrespective of its characteristics. So, they’re attracted to the broker who offers the highest valuation.
This can be dangerous for the seller.
“Don’t just go with someone that’s going to tell you what they think you want to hear,” Ryan says. “Trust the process. Do it properly. The only way to real success is fit first, price second.”
Fit first, price second
Importantly, Ryan is not arguing that sellers should accept less for their businesses. Actually, the opposite is true.
Focussing too heavily on the multiple, on the headline figure, can prevent the identification and asking of vital questions during the transaction process, including whether the buyer is capable of successfully taking over the business, looking after the clients and triggering retention payments.
In a typical deal, Ryan says, the seller might receive 75% to 80% of the agreed amount up-front. The other 20% or 25% very much depends on what happens in the year or two after the transaction.
If things fall apart even a little over that period, a high initial offer can suddenly become significantly smaller when you factor in the lost retention payment.
Ryan’s philosophy for a successful and sustainable transaction is what he calls “fit first”.
“The parties need to look and smell like each other for this to work,” he says. “We’re always about fit first. If you get that right, everything comes together much more easily and sustainably.”
And so, the best outcome doesn’t necessarily come from the buyer offering the largest amount up front. Success, and greatest financial value for both parties, is about compatibility, experience, capability and client satisfaction.
“We’re not saying you should accept less,” Ryan says. “We’re saying you should make sure the fit is so good that you get it all.”
Due diligence works both ways
Better transactions require advisors to run due diligence on buyers before they allow access to sensitive information.
“We know that some brokers are not vetting buyers,” Ryan says. “I’ve met buyers who have told me I’m the first advisor to speak with them, much less vet them.”
“And from the other side, I’ve even heard of a guy who picks up every IM [information memorandum] to do his own benchmarking!”
“We will never give any information on any of our vendors to anybody we haven’t personally vetted. And if I was a vendor, I wouldn’t want just anybody to have my data because, if people are smart enough, they can work out who is the vendor, even when that data is de-identified.”
Buyers have a role to play, too
Professionalism doesn’t just involve advisors and sellers. Ryan says buyers must also demonstrate why they deserve access to an opportunity.
“Tell us about yourself,” he says. “You’ve got to sell yourself because vendors are spoiled for choice.”
That is particularly important for first-time buyers competing against established practices with proven financial capacity and transaction experience.
Ryan says prospective buyers should put together an information pack explaining their background, capabilities and ambitions. They should also develop and nurture relationships with advisors, be prepared to demonstrate their financial capacity and, most importantly, be selective.
One potential buyer once put forward an offer on every practice Ryan had listed.
“I obviously realised he’s not serious,” Ryan says.
For some prospective buyers that don’t appear ready to take on an acquisition, Ryan’s advice sometimes helps guide them into a joint venture, a merger or some other structure.
Many brokers won’t offer such advice because it won’t result in an immediate transaction for them. And that’s precisely the point, Ryan says.
“The brokers are in it for themselves, for the money and not the buyers, the sellers or the industry,” he says.
A healthy practice sales market ultimately depends upon more than achieving the highest original offer. It requires sellers with realistic expectations, buyers prepared to demonstrate their suitability, advisors willing to properly vet both parties, and time and space for everyone involved to make an informed decision.
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