Sellers Beware- Merger Buyers Are Getting More Picky

Is the CPA firm merger market becoming a buyer’s market?

As is so often the case, the answer is: “It depends.”

For attractive firms in the top 50 U.S. cities it’s still relatively easy to find multiple buyers offering a more than fair price. In these instances the seller’s market is alive and well. However firms with features that detract from their appeal could have some difficulty. Also, many buyers are flooded with sellers, and thus are able to cherry-pick the best firms and offer prices that are often below sellers’ expectations.

How are buyers getting pickier?  Generally, they have less tolerance for sellers with these traits:

• Few and/or weak staff.

• Extraordinarily high compensation demands from owners who can’t accept the reality that a larger firm absorbing them cannot possibly earn the same profit as when the seller was independent. This is because the acquiring firm has to make significant investments when merging in a smaller practice: higher staff compensation, training, technology, more support professionals, etc. Compensating the seller’s owners tends to be most problematic with either solos or 2-5 partner firms. This issue, when it arises, can potentially be more of a deal breaker than the actual purchase price of the firm itself.

• Revenues are so attached to the owner’s personality and presence in the firm that the buyer worries about client retention. This is especially true when (a) the seller has a narrow specialty that few buyers have and/or (b) the seller’s staff is weak.

• Retirement-minded sellers with few, if any, younger partners and staff.

• Retirement-minded sellers who want to merge with a buyer, continue to work on and control their clients with little or no transition for an undetermined number of years AND expect their purchase payments to begin immediately.

• Smaller sellers often have a client base that larger firms find unattractive. Mainly, a large volume of low level 1040s and lots of write-up work, all with accompanying low fees and relatively few “business clients.”

CPA Firm Mergers: Your Complete Guide, was written because every year, hundreds if not thousands of mergers – up, down and sideways – 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 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 things the letter of intent should address, ►data that should be reviewed, ►due diligence and other issues.

With the volume of sellers on the rise, most buyers are swimming in opportunities.  As a result, sellers have a lot of competition; it’s simply a matter of supply and demand. Successful sellers have to positively differentiate themselves from the pack.

What can sellers do about all of this?  Here are some options:

• A few years before putting the firm on the market, commit to reengineering the firm by (a) recruiting top notch staff even if you know you will be selling the firm down the road. If sellers can hand over to buyers a cadre of attractive staff (relatively young and talented) on a silver platter, they will find themselves in a much stronger negotiating position and (b) moving your client base and the services upscale.
• Invest in technology to make your firm more efficient.
• Accept the fact that you will get a lower price for your firm if you have inadequate staff and a low-level client base, and no one but the partners has the expertise needed to service clients.

Over and above these options, if sellers truly wish to merge with a great firm for a fair price, they should be reasonable about the compensation they ask for, be willing to commit to a near-term date to begin transitioning client relationships and develop staff depth so that the firm is less dependent on the owner’s expertise.