The massive CPA firm M&A frenzy of recent years will continue for quite some time. But future sellers beware: the market is shifting from a seller’s to a buyers’ market. Why? (a) Buyers are more selective (b) Many buyers are flooded with sellers to cherry-pick (c) Many buyers need time to digest their recent mergers (d) The universe of potential sellers is somewhat “picked over.”
So, here’s our message for current and prospective sellers: Get your firm acquisition-ready so that you stand out from other sellers and appeal to buyers. Sellers should make sure they avoid the twelve items listed below, each based on my personal experiences helping sellers ink a deal. We’re using the term “merger” to refer to true mergers as well as outright sales; the items below relate much more to owners wishing to continue working for a few years than to outright sale scenarios.
- Seller’s unrealistic expectations for the two primary deal terms: the purchase price of the firm and the compensation to be paid to the sellers while they work full time for a few years after the merger. Regarding the compensation, sellers whose profitability has been strong must understand that buyers can never match that profit level because of huge differences in the ways the two firms operate: Smaller firms often squeeze every profit dollar out of the firm whereas buyers invest significant dollars every year into the firm for quality staff, technology, office space, training, marketing and others. So, sellers shouldn’t expect to be paid their pre-merger compensation when working for the buyer. There’s got to be something in it for the buyers.
- Lack of “stickiness” of the seller’s clients. If the buyer’s ability to retain the seller’s clients is in doubt, this will scare away most suiters. What was a great thing to the seller for decades – close relationships with long-standing clients – can be a negative to buyers unless other members of the seller’s firm play important roles with those same clients. The more indispensable the owners are to their clients, the more doubt buyers will have regarding their ability to transition these relationships.
- Excessively long list of “must-haves.” Think of it: Does anyone engaged in any kind of discussion – whether it’s talking to your child, spouse or employee – like hearing a laundry list of “must-haves” thrown at them? Of course not. Mergers are no different. Sellers should keep this in mind. It’s OK to identify your deal-breakers early, but don’t come across as overly demanding and picayune.
- Your practice is a mess. Papers & files everywhere, behind on client deadlines, WIP and A/R that are way past due, technology in the dark ages and weak or non-existent time records. These may not be a deal-breaker for buyers, but it’s a guaranteed turn-off and it will cause some to take a pass.
- Seller focuses too much on financial deal terms and not enough on personality fit. (Note: this applies mostly in situations where the seller will continue to work for the buyer for at least a couple of years). The number 1, 2 and 3 keys to the success of a merger area culture and personality fit, culture and personality fit and – you guessed it – culture and personality fit. When sellers are overly focused on the deal terms to the exclusion of the intangibles, this sends a message to the buyers that sellers don’t have their priorities in order and are somewhat greedy.
- Office lease with many years remaining. Obviously, this only relates to mergers where the seller will be expected to move into the buyer’s office. Since the duplicate rent usually reduces the buyer’s cash flow below acceptable levels, most buyers have no interest in absorbing the unneeded office lease.
CPA Firm Mergers: Your Complete Guide, was written because every year, hundreds if not thousands of mergers – up, down and sideways – are taking place. Yet relatively few firms have much experience in one of the largest deals they’ll ever transact. The book addresses ►keys to successful mergers ►the 21 steps in the merger process ►how to assess cultural fit ►benefits of merging upward ►why buying a firm for one times fees is a steal ►what larger firms should expect to see from smaller firms & vice versa ►how to negotiate a merger – from both buyer and seller view ►14 items letter of intent should address ►data that should be reviewed ►due diligence
- Response time. Mergers can take many months, even in the best of circumstances. There are dozens of milestones during the merger process that need to be met and passed. Sellers must realize this and realistically assess their ability and willingness to respond in a timely manner to multiple buyers’ requests for documents and information, phone calls and emails. A consistent lack of responsiveness by the seller sends one or both of the following messages: (a) The seller isn’t really interested in merging and is therefore, wasting the buyer’s time and (b) the seller is rude and this behavior is indicative of how he/she will act after the merger.
- The age of your staff. The majority of small firms employ legions of “older” staff with limited technical and leadership skills but play a vital in performing work for the seller. But it’s a turn-off to buyers. The larger the buyer, the more likely it will be that they will restrict their search for sellers with younger talent, regardless of the attractiveness of the seller’s clients and profits.
- Underwhelming financial performance. Need I explain this?
- Bank debt on the seller’s balance sheet. Thankfully, I don’t see this too often. The seller’s balance sheet has substantial bank debt on their books, usually from borrowing money to prop up the partners’ compensation. When these firms meet with buyers, the sellers often expect them to absorb the debt which almost always is rejected. The debt it so high that the partners can’t afford to pay it down themselves. A real “Catch-22.”
- Sellers’ control over their clients. If you are the seller, you must understand why the buyer is paying you lots of money – it’s for your clients. Pretty simple but surprisingly elusive to many sellers. Some are a bit naïve about how their lives – thirty years or more of controlling their clients and enjoying the work and the relationships – are going to change. If sellers communicate to buyers that they expect nothing to change after the merger, buyers will make a beeline for the exits.
- Non-solicitation agreements with seller’s staff. This is nuance-laden. Most small sellers do not have their staff sign non-solicitation agreements, despite it being a best practice. Buyers understand this and ordinarily, it will not deter them. But in some cases, sellers have staff that, due to their odd behavior in the firm and conduct in interviews with the buyers, seem like they could have intentions of leaving the firm and taking clients. This is where the lack of non-solicitation agreements could nix the deal.