How Buyers Evaluate Sellers
Active buyers of CPA firms tell me that they only merge with one in ten sellers they meet. These buyers have—and rarely deviate from—criteria they want a merger partner to fit. First, there are so many sellers in the market that buyers can be highly selective. Second, many buyers, especially those over $15–20M, will only acquire firms compatible with their merger strategy, culture and standards of performance.
The list of evaluation factors below is based on our experiences working in the merger and acquisition arena for over 20 years. No single firm looks at all of these factors, and most have criteria that are not on our list. The relative importance of these factors to the buyer will determine how they evaluate the seller.
Do mergers and acquisitions work?
I’m frequently asked this. My response is always “yes… if you do them right”. A critical factor in doing mergers “right” is to (a) take the time to create a list of evaluation factors, and (b) stick to these criteria in evaluating merger candidates. Too often, I see firms acquire firms without this discipline. Two common examples:
- They “fall in love” with the seller for some reason and go with their gut.
- They have known the seller for many years and regard them highly.
In both cases, buyers relax their due diligence. This is a big mistake.
To avoid falling victim to poor selection process, evaluate a merger candidate properly.
Evaluation Factors for Buyers
(Not necessarily in order of importance)
1. Talent of the seller’s staff, especially the presence of young staff with partner potential. Many buyers feel acquiring talent is more important than acquiring clients.
2. Larger firms (buyers) usually provide more diverse services than smaller firms (sellers). Buyers always assess the potential to increase the seller’s revenues by cross-selling new services to the seller’s clients. Synergy.
3. How much the buyer wants to merge in firms “just like them”… or, conversely, only wants firms that offer something different while compatible with their firm strategy. New location. New services. New niches. Better personnel.
4. Mix of business clients vs. write-up/stand-alone 1040s. Especially important is whether the seller has several business clients with substantial annual fees (say $50,000 and over).
5. “Stickiness” of the seller’s clients. Will they stay with the buyer, especially if the seller’s partners retire?
6. Profitability of the seller including opportunities for the buyer to increase seller’s profits.
7. Specialties and niches vs. vanilla, generalist firms.
CPA Firm Mergers: Your Complete Guide, was written because every year thousands of mergers are taking place but relatively few buyers and sellers have much merger experience in one of the largest transactions their firms will ever be a part of. We address: ►the keys to successful mergers ►the 22 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 things the letter of intent should address ►data that should be reviewed ►due diligence and other issues.
8. Extent that seller does wealth management. Buyers with their own wealth management practice are attracted by sellers that do the same because it builds their critical mass. Others don’t want a seller who provides wealth management because (a) the buyer has a policy of not doing wealth management, or (b) the buyer sees tremendous potential selling wealth management to a seller’s clients for the first time.
9. Productivity of the partners.
10. Ages of the partners:
- Some firms are okay with retirement-minded sellers. Their near-term retirement will eventually create a profit windfall because the buyer will no longer have to compensate the seller.
- Other firms do not want retirement-minded sellers; they only want growth-minded partners with talents that increase the buyer’s skill level.
11. Extent that some of the seller’s partners want to work well past the buyer’s mandatory retirement age. When do they want to retire?
12. Productivity of the professional staff regarding billable hours and realization.
13. Growth potential of the seller’s clients.
14. A billing rates and fee structure reasonably close to the buyer’s rates.
15. Extent that the seller indicates a requirement for above-market deal terms:
- Sales multiple
- Down payment
- Payout term
- Tax treatment of the payments
16. Willingness of the seller’s partners to accept a salary “haircut” if this is necessary to make the buyer’s cash flow work.
17. Overall state of the seller’s technology. If the seller’s technology is too rudimentary and the seller’s partners’ knowledge of technology is alarmingly weak, the buyer may feel that the seller’s learning curve may be too great.
18. Overall state of the seller’s work processes, workpaper techniques and quality control. If the seller’s quality is far below that of the buyer, the additional work required to perform client work that meets the buyer’s standards will render the seller’s profits undesirable.
By considering what you want in a merger partner and doing the due diligence necessary to validate whether they meet your criteria and standards, you’re on your way to a more successful combination of firms.
New Second Edition! The merger market is in frenzy, yet few firms have experience with mergers. Our step-by-step guide provides the keys to implementing successful mergers: assessing cultural fit, critical negotiating terms, pricing strategies, due diligence and legal issues.Learn More