A Leading Accountancy Practice Broker Advises on Buying into an Accountancy Practice
If you spend any time looking at accountancy practices For Sale listings in the accountancy press or on merger and acquisition brokers’ websites, you’ll notice that there is a significant difference between the largest and smallest gross fees, but almost all of them fall into the category of ‘small firms’
This is because of the very flat size-profile of the accounting firms. Around 65% – 70% of all 38,000 practices (both qualified and non-CCAB firms) are either sole-practitioners or have two partners/directors. In this context ‘small’ equates to turnovers of £500k. At the other end of the scale, the top-100 firms by size in 2010 start with turnovers of £1.5M rising exponentially with the largest of the big-4 having gross fees of £2248 million.
Owing to the flat profile of accounting firms, the vast majority of purchasers are themselves the owners of small firms seeking to acquire either small firms or small blocks of fees. Therefore, the bad news is that almost all practices for sale attract huge interest. The accountancy practice broker, APMA (www.apma.co.uk) recently sold a £40k block of small fees, which attracted no less than 106 would-be buyers. The good news about this sector is that historically purchasers are very reluctant to pay more than the ‘going rate’, which is currently a multiple of 0.9 – 1.2 times the annual recurring turnover. Consequently the chances of a purchaser being gazumped by another buyer is very remote. But this means that the seller can usually be very selective when deciding to whom they will sell and will often select a short-list where prior relevant experience is a must.
16 key Issues when Buying into an Accountancy Practice
- It may be more difficult to obtain external funding in this segment of the profession because there are usually very few “hard assets” such as machinery and equipment, that third-party lenders like to see.
- As a CCAB accountant you must be have a practising certificate.
- You should be the kind of person that is comfortable with offering an intangible type of personal service to clients.
- Good interpersonal skills are required. Many service-businesses were started by accountants who came out of industry or commerce, ‘low-balled’ (under cut the fees charged by the local competition) to attract a nucleus of clients, building their business with a limited client base who are undercharged for the service offered. A practice started this way often makes insufficient profit to enable it to invest in junior fee-earning staff, which results in the principal also doing the very low level work at a very low charge rate. To earn a ‘living wage’ the principal has to work excessive hours with no hope of a solution.
- Are you comfortable dealing directly with clients? You must ensure the client relationship will continue after you buy. The seller of the practice may be “the business”. If the current owner has built long-term relationships with the clients and they see him as the face of the business, will the business transfer successfully across to you?
- In buying a practice or block of fees, you will want some protection in case the purchased clients don’t transfer to you. This is done via a suitable ‘claw back’ clause being included in the Sale Agreement which your broker can advise on. More specific details may be found on APMA’s website (www.apma.co.uk). Remember that the purchaser will always be at risk if the seller intends to continue locally as a practising accountant.
- What are you really buying? Remember that there is no contractual ‘ownership’ of a client – he can ‘walk’ at any time!
- Will the seller give you a reasonable handover period to give you the best chance of retaining his transferring clients? Will you simply expect some handholding or will the seller work for you for a time on a consultancy basis?
- Does the seller currently visit his clients at their place of work or do they bring their books into his offices?
- Is the seller proposing you buy the individual fee income attributable to each client or is he selling the aggregate sum of those fees? If you are unsure of the relevance of these two methods, contact your broker or visit APMA’s website (www.apma.co.uk).
- Is the practice limited to operating from its current offices or are the fees portable?
- How easily can any senior employees quit and become your competitor? Is there a suitable restrictive covenant in their employment contract?
- What can you do to build the business? Can you offer additional services to the existing client base?
- During the due diligence phase be certain to investigate the client files alongside the time records to ensure they are being serviced profitably.
- Check that Money Laundering regulations are in force and up-to-date.
- Decide whether to employ a solicitor or whether to buy a standard Sale Agreement, which your broker will usually provide free of charge.
If each partner/director (or sole-practitioner) has a client base valued at at least £200k, and if his share of the staff gross payroll cost is no more than one third of the turnover, the practice should make 50% net profit. The working capital is usually no more than three to four months of turnover.
An accountancy practice will usually make higher than average profit margins compared to other businesses and can provide you with an excellent platform to grow. As it grows, its value increases and it can provide the owner(s) with a good income stream.