Selling Your Firm in 2020 – What Makes the Cut?

Attractive firms in the top 50 U.S. cities are still able to find buyers offering a more than fair price. In those instances, the seller’s market is alive and well.

However firms with less appeal could face some difficulty. With so many sellers flooding the market, buyers are able to cherry-pick the best firms and offer prices that are often below sellers’ expectations.

What makes your firm less attractive to acquire?

• Few and/or weak staff.
• High compensation demands from sellers who can’t accept the fact that a larger firm absorbing them cannot possibly earn the same profit as the seller did as an independent. Acquiring firms have to make significant investments when merging in a smaller practice: higher staff compensation, training, technology, more support professionals, etc.
  

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  Compensating the 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.

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• 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.”
  

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CPA Firm Mergers: Your Complete Guide, addresses every step required in the process of a successful merger   ►how to assess cultural fit ►why buying a firm for one times fees is a steal ►how to negotiate a merger – from both buyer and seller view ►14 items the letter of intent should address ►data that should be reviewed►due diligence

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.