Merger-Minded? Optimize Your Firm’s Sales Value

In last week’s post we identified long-term steps your firm can take to insure you’ll maximize your return on a potential sale.

This week we’d like to follow up with short-term specifics to be addressed when you’re more actively considering an eventual merger.

In the 2-3 years prior to starting the sales process:

• Minimize your office lease obligation. If you just signed a 10-year lease in an expensive building with few prospects of subletting, this could kill a deal.
• Resolve “dirty laundry” and “sacred cow” issues. Example of dirty laundry: The seller has one or more clients that engage in questionable business practices. A sacred cow is a long time, often expensive staff person long on tenure and short on competency.
• Be current on client work, WIP and A/R.
• Seller’s office should look neat and organized. No files, documents and papers on the floor or stacked on top of file cabinets in an unsightly manner. The office should impress, not dissuade.

Before negotiations begin with potential buyers, sellers should realistically assess what they want for themselves:

• Why does the seller want to sell? This may sound obvious, but many sellers don’t think this out. A classic reason for selling is that the sellers have reached 65 or older, have grown tired of the grind and feel it’s time to retire while young enough to do other things. But the key questions: What are those other things? What will sellers do with themselves after they stop working? The vast majority of retiring CPA firm owners have few hobbies.
• Will the point come soon where the seller misses the work?
• Do they want to sell the firm outright and stop working “cold turkey?” Or do they want to have the flexibility of working full and/or part-time after the merger?

Does the seller want a one or two stage deal? A one stage deal is an outright, immediate sale. A two-stage deal is one where the seller first works for 2 or 3 years for the buyer, usually full time. Then, after the 2 or 3 years, the second stage kicks in – the actual buyout, the price of which was agreed upon in advance.

Sellers have a tendency to focus on financial terms while underestimating the importance of intangibles.  Sellers who want to maximize the money they can get for their firms will almost always do better by working until they no longer can than by selling the firm.

Over the years, build relationships with potential buyers. This way, when the time is right, sellers can tap into these relationships when beginning the sales process.

Hire an experienced, reputable merger consultant. I apologize if this sounds self-serving, but it’s good advice. Most sellers have no experience with mergers. The sale of one’s firm is a huge, once-in-a-lifetime experience; why re-invent the wheel and risk making uninformed decisions? Use a consultant who has worked dozens of mergers to:

• Tell you what the market is like.
• Identify potential buyers that fit the seller’s parameters.
• Assist in negotiations.

Sellers should decide on their major deal-breakers and non-negotiables. This is a critical stage that is often abused by greedy sellers. My friend Terry Putney of Transition Advisors calls these the “must-haves.” The longer the seller’s list of must-haves, the less attractive the firm will be to buyers.

Must-haves pertain to financial as well as intangibles terms. A reasonable must-have: The seller wants to work for the buyer after the sale. An unreasonable must-have: a 68 year-old seller wanting to be guaranteed full-time work for 7 years.

Active buyers have lots of merger opportunities. For every deal they do, 10 are considered. Simply being a profitable, desirable firm with “good metrics” is not enough to get the deal done. Sellers must be careful to avoid throwing so many obstacles in front of buyers that they lose patience and go on to the next merger opportunity.

Merging your firm is one of the most important decisions you’ll ever make. Go in with your eyes open: consult our monograph CPA Firm Mergers: Your Complete Guide.