Introduction

Many practices have grown by buying, selling, merging, or admitting a new partner. Perhaps you may find a practice readily available for sale, for some accountancy firms their competitors may approach them and offer a buy out. For others, buying a practice requires negotiations. Every transaction is unique. It is therefore difficult to be definitive, in respect of each transaction. We have set out each one in turn in the help sheet and aim to provide some support in respect of area.

1. Buying a practice or block of fees

If you have the opportunity to purchase a firm or block of fees, the core question you must ask is whether in the specific situation, the net return from the acquisition represents an improvement over the strategy of organic growth. Buying a practice or a block of fees may be the quickest way to rapidly expand your practice but the capital payment may mean that it is the most expensive. There are not many small accountancy practices available for sale for a number of reasons, one of which is because many practices have a line of succession already in place, so the existing partners or employees may acquire the practice, on the retirement of the principal partner. If a small practice is for sale, in order to get the best value for your investment it is important to do your homework in advance. Firstly, you should look carefully at the composition of the practice you are thinking of purchasing and carry out a full due diligence process in respect of the business.

1. What exactly is up for sale? Acquiring another practice essentially means gaining access to its client base, staff and maybe its brand. How many clients does the practice have? What specialisms does the departing principal possess? Some accountancy firms may have clients who depend on a specialism you cannot fulfil, making it a bad fit as an acquisition.
2. What is the existing staff structure: number and mix of staff employed by the firm, what skills and training the staff possess, what is the relationship they have with clients etc.
3. What are the physical elements of the practice: does the practice have a large office space, as in the current environment with hybrid working this may not be relevant to you. Can you offer the existing staff a similar or better work environment?

It is important to focus on the fact that you are proposing to acquire the goodwill of the business (being the value represented by its client portfolio) and ensure that it is a good fit for your existing business.

Valuation

Valuing a practice is unlikely to be straightforward and is different to that of valuing shares in a commercial company. The approach requires the valuer to put a value on the goodwill and perhaps other assets of the practice, depending on the transaction. Goodwill is widely considered as the value placed on client loyalty to the practice. A practitioner should consider whether an acquisition would be cleaner if they purchased the goodwill and no other assets.

A vendor may believe their practice is more valuable than what the purchaser is willing to pay, as they are restricted by the finance available to them. A vendor can conduct a vendor due diligence in preparation for sale or a purchaser can conduct a financial due diligence of the said business prior to purchase.  A price will be struck between a willing vendor and purchaser which all parties will hope reflects fair value. Valuing a professional practice is about proving the core maintainable earnings of the business, the value of which can be computed when the vendor or financial due diligence is being conducted.

Whilst there is a range of methods to value a practice, the majority of valuations that we have seen have been based on the gross recurring fees. A valuation ratio of 1:1 based on gross recurring fees is a starting point for negotiations, with the valuation being more or less than that, based on a range of factors.

It is possible to value the practice based on a multiple of adjusted maintainable earnings. However, it can be difficult to establish or agree on which expenses should be assumed or excluded. For example, should a reasonable salary for the outgoing partner be deducted in order to arrive at the adjusted earnings figure. The lack of publicly available statistics such calculations more difficult.

The valuation should be adjusted for other assets such as WIP or debtors, which are also being taken over by the purchaser.

Payment 

For a number of reasons, although finance may be available immediately to fund the entire purchase of a practice or block of fees, a buyer may wish to spread their payment over a period of years. Firstly, because an outstanding payment is likely to encourage a seller to actively assist the buyer in ensuring that the fees transfer; and secondly, it allows the buyer a breathing space in which to carefully examine the clients represented by the goodwill that has been purchased.  Many agreements include a claw-back clause that allows the buyer to deduct from the agreed price (usually at the last payment), an amount in respect of those clients who did not transfer immediately or subsequently over a set period of time.  Whether the amount of the clawback should represent the full amount of the payment for the clients in question is a matter for negotiation between the parties. Clearly the party that benefits from the clawback is taking on less risk in the transaction. The clawback amount may be reduced where clients transfer for one or more years before leaving.

Other matters

A buyer should consider the existing staff in the target practice. In the current environment of staff shortages, the value of the practice may be represented by the combination of clients and a team of staff who are familiar with and known to the clients. However, a buyer should also consider that qualified or senior staff members may take the opportunity of the changes to set up in practice on their own account. They may be successful in drawing a substantial proportion of clients away from the new practitioner. This could turn out to be costly for the purchaser who may have paid for these clients, and a claw back arrangement may only partially compensate for this.

2. Selling all or part of your practice

There are a few situations in which a practitioner may wish to (or may have to) dispose of their practice. These include

• retirement at normal retirement age or beyond,
• enforced retirement through death or illness or, a wish to move out of practice to take up alternative employment. 

Whatever the reasons, good preparation may result in a higher valuation and in a smoother transfer. 

If you are considering selling your practice it is recommended a year in advance of the planned sale you commence detailed planning for the proposed transaction. The following steps are recommended:

a) Decide on a method of marketing the firm. It may be most straightforward to approach a practice or practitioner known and trusted by you. Alternatively, you may want to test the market.

b) In order to maintain confidentiality, you may appoint a selling agent to make contact with firms likely to be interested in acquiring the practice – the Institute may be able to give you advice on this.

c) Create an outline timetable for the proposed sale transaction and adhere to the timetable. The time period between taking active steps to sell and closing a sale of your practice should ideally be kept to a minimum, in order to mitigate against uncertainty among your clients about your firm which could ultimately reduce the value of the asset for sale.

d) Prepare a draft confidentiality agreement that all potential purchasers will be asked to sign.

e) Prepare a draft sale agreement that will be used to form the basis of the sale agreement.

f) Even if you are selling privately, it may be beneficial to prepare an information memorandum for potential purchasers, providing comprehensive information about your practice. 

Valuation 

The value of your practice depends on many factors which were discussed above from the point of view of the purchaser. However, if you are planning on disposing of only a part of your practice then the value of the element for sale will be proportionally reduced. Practice Consulting has advised and engaged with a number of practices on numerous deals over the years. However, the truth is despite using the valuation techniques as set out above, your price is essentially what a willing purchaser and a willing seller are prepared to agree

Transitional period

By careful preparation a vendor may improve the price that may be obtained for the practice. Remember that, you do not own your clients and your clients may take the opportunity of your retiring or selling your practice to transfer their business to another accountant. You can help to ensure the ease of transfer from yourself to the purchaser by staying involved for some months. The time at which you notify your clients of the change, and the personal attention that you and the buyer give to clients at this delicate stage, can help to ensure that fewer  clients leave. The seller will be keen to get as much as possible of the consideration at the point of closure of the deal. However, a staged payment arrangement and a claw-backclause will pass some or most of the risk onto the seller. In either event it is important to maintain good relations, positivity and, therefore it is important for a smooth transition to occur.

Work in progress

In order to make the proposition more attractive for the buyer, the seller should ensure that work in progress (WIP) is reduced to a minimum and that work is brought completely up to date. The valuation of WIP can be a cause , especially if older balances are included. Likewise, debtors should be kept to a minimum and collected as much as possible. In many deals, WIP and debtors are excluded from the value of the assets transferred. The purchaser may bill and collect these on behalf of the seller in this case. In a transition, arrangement, where the seller continues to work in the practice for a period, there is an opportunity for them to be involved in this process.

Admitting a partner

Where an existing employee of the practice is admitted as a new partner, or a principal of a corporate practice the position is somewhat different. For a start, the seller will continue in the firm, so comments regarding the loss of clients are less relevant, but clients are sensitive to change, and communication is vital, in the transitional period. It is important to consider whether the new partner will purchase the goodwill/shareholding of an exiting partner or make a contribution to capital.

If a new partner acquires an exiting partner’s share as a straight replacement, the transaction will have no direct impact on the accounts of the firm other than the allocation of the capital account or shareholding. The percentage shareholding or capital accounts of the other partners will remain the same.

If a new partner is introduced to the existing structure, it will dilute the percentage shareholding of the firm. The new partner will introduce capital or purchase a new issue of share capital and it will increase the assets and capital of the balance sheet of the firm. The new partner may have to draw down a loan to fund their share of capital. There may be a limit on the amount the incoming partner may be able to raise. All parties need to be mindful that the new partner will probably need to repay the loan from the income that their share of the income of the practice. Therefore the new capital is in fact largely generated internally by the practice. Remember that the share of capital issued, or the capital contribution requested does not have to match the share of profits or salary paid to the incoming partner.

3. Practice mergers

Merging with another practice is also an option, as it provides the practice the scale to specialize in a number of areas, leads to higher staff retention, retain and win large or fast-growing clients, relieve successions issues and establish international relations.  Mergers can be classified as the following:

• Buyouts where the practice continues but the owners leave.
• The owners stay as employees and become partners in name only.
• The firms can merge together and form a new practice with the partners fully engaged.
• Full integration and the owners remain and become equal/ unequal partners or
• A global firm acquiring a percentage of the practice allowing the practice to maintain their independence.

Following on from the Covid-19 pandemic, and the challenges that were faced by many small practices, an impetus developed for practices to consider merging. Practices need to invest in technology on an ongoing basis and position themselves to provide corporate finance, cyber security and technology, sectoral specialisms, and other advisory services. They must maintain the ability to meet their client’s changing needs and adapt to new ways of working.  It may be easier to achieve this by joining forces than by trying to go it alone.

There has been a surge in deal making in Ireland over the last 2 years, the nature of which ranges from a network affiliation to a full equity buyout, and other local consolidations have taken place.  A number of international firms have created relationships with local firms, the nature of which ranges from a network affiliation to a full equity buyout, and other local consolidations have taken place. A notable example of this trend was in December 2022 when ETL Global, the German-based accounting group entered the Irish market purchasing 51% of the Noone Casey practice in Dublin, before following up in September 2023 purchasing another accountancy practice in Waterford. Whilst there has been several deals over the last 2 years this article discusses as a case in point the deal between Noone Casey and ETL in December 2022.

What is driving the surge in the recent deal making? Practitioners are all too aware that recent years have brought unprecedented changes in our profession. The Covid-19 pandemic was a major catalyst for change and the pace of change will continue to gather speed as new technologies such as Artificial Intelligence impact on our professional lives. Practices find themselves operating in an environment where client and employee expectations are shifting. Many clients require a ‘one stop shop’ for advice on a broad range of business issues including technology, cyber security, HR, international business, and wealth management. Employees expectations have also changed in respect of career development and working arrangements.

Firms wishing to grow and capitalise on these changes often see opportunities in moving to an advisory model, investing in technology, positioning themselves to provide corporate finance, cyber security, technology and wealth management services. This challenging environment provides an impetus for practices to consider consolidating or merging. Is it easier to achieve your firm’s goals by joining forces than by trying to go it alone? What are the advantages and disadvantages of consolidation?The advantages of becoming something bigger is set out below.

Benefits of becoming something bigger:

1. Scale to specialise: we all cannot be an expert in everything. A larger pool of partners/directors facilitates specialism in services and sectors.
2. Fixed cost allocation across a larger business leaves more capital for investment in areas such as people, technology and digital marketing. 
3. Staff retention is higher as larger practices makes it easier to meet the expectations of staff for career development and working arrangements.
4. It is much easier to win and retain growing clients because a larger practice has the capabilities to provide them with the “one stop shop” they require
5. Client retention is better in larger practices as growing businesses like to be associated with accounting firms which can embrace and perhaps even lead change.
6. Succession planning can be easier to manage. Plans can be put in place for retiring partners without impacting client service or the continuity of the practice. 

Advantages of staying independent

1. Freedom to make professional and lifestyle choices- the decisions to take a risk, to develop a new service, or indeed to scale back the business, or drop a particular service line or client may be easier to make when a practice is small and independent. Within limits, principals can decide for themselves the level of effort, modes of working and financial commitments. In a larger organisation, these freedoms may be nominally still in place but corporate goals and targets may become key drivers.
2.  As a smaller independent practice, principals typically work closely with entrepreneurs and business   owners, maintaining peer-to-peer relationships. Some staff may feel more comfortable in a smaller        practice environment.
3. Change can be difficult. The process of consolidation can be stressful and dislocating. Some staff and clients may decide that the larger entity is not for them. In extreme cases, the process can fail entirely and have to be abandoned.
4. The regulatory and structural processes that are necessary for organisational change to occur can be time consuming.
5. Flexible retirement process: A corporate entity may have more rigid policies regarding retirement. In small or medium practices, principals often have the freedom to retire at a time that suits them or step back and combine the role with other interests.

 Essential steps to merge:

1. Take advice: it is important to have an advisor on board who can assist with negotiations. Whether you are an experienced practitioner or not, and regardless of whether you are on the buy or sell side, you should not attempt to carry out the transaction yourself. You are emotionally involved in the transaction, you will want it to happen, and this can lead you to make decisions that you would not ordinarily take. 
2. Due diligence: it is important to focus resources on determining the compatibility of the client bases from the perspective of fee expectations, sectors, future trends in the client’s sector and risk. Team compatibility also needs to be considered.
3. Communication: watch your timing when communicating, clients need to hear it from you and hear a positive message from all your team. Ensure you manage the internal communications first with your team to ensure clients are receiving a common message. The message to clients should be “Don’t worry, same people only now access to wider expertise inhouse”.
4. Timing: do not leave it too late. Many practitioners only start thinking of a merger nearer to retirement. To maximise the value of what you have built, and indeed to share in the potentially greater profits of a larger business, it is essential to start the process well in advance of when you want to retire.

For further information on consolidations see link to the article in the February 2024 edition of Practice Matters What next for Small to Medium Practices in Ireland? Is consolidation the right move for you?

Conclusion

So therefore, whether you are buying or selling or merging an accountancy practice be prepared to spend some time considering your options and what you want out of this fundamental change. Practitioners are advised to take legal advice if they are considering buying, selling, or merging their practice. In turn a formal legal agreement in respect of the transaction should be drafted by the legal practitioner.

For more information, contact the Practice Consulting department on (01) 6377300

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