Thinking of expanding or even selling up? Lucinda Kitchin of APMA outlines the state of the market when it comes to mergers and acquisitions
We are now in full throttle, once more, steaming ahead through the first annual period of peak activity in the M&A market. Over the winter and early spring, firms have been busy working towards various annual deadlines, with many principals seriously thinking again about expanding through acquisition or perhaps selling.
As regular readers of our articles will know, this is a seasonal market. Last year saw unusual peaks and troughs in market activity in the aftermath of the pandemic. However, this year looks set to be more consistently active. The market is likely to remain buoyant from now until the summer holiday period when things may (or may not) quieten down a touch, before we head once more into the late summer, when we expect to see a reasonable level of activity right through until Christmas.
Realism is key when selling
Our view is that the going rate for goodwill lies, at the moment, within the range of 0.9x to 1.2x. Although relatively static over the years, from time to time the bottom end fluctuates depending on whatever economic climate prevails at any given time. Although we have found the top end currently lies at around 1.2x, this is a yardstick only. As a highly experienced firm, we tend to be naturally cautious in our estimations, which we use as a benchmark only. We are cautious because we prefer not to place unnecessary limitations on any deal. Realism is key.
Furthermore, we gamble our fee on achieving a minimum selling price for vendors within a maximum timeframe. As you would expect, therefore, we do not take on assignments that we do not have confidence in. In order for both buyer and seller to be satisfied, some degree of flexibility and a heavy dose of realism may be required by the vendor, which will be good news to the ears of all would-be purchasers, no doubt.
Once they have the benefit of hindsight, we find that buyers and sellers agree that being realistic tends to serve all parties, when all is said and done.
How can accountants navigate these waters?
After all, there is no point in a seller achieving a high multiple if the clients won’t be retained and losses under the clawback are likely to be significant. So the question is, how can buyers and sellers properly navigate these waters, especially if this is their maiden voyage into the marketplace? In terms of expert advice, you get what you pay for!
At APMA we prefer not to over-promise in order to win clients. Instead, we are always realistic. Nonetheless, we regularly achieve above the top end of the going rate for vending firms, preferring to exceed expectations rather than disappoint. The likelihood of this happening in your own case, of course, depends on the profile of your practice, but it is important that you are furnished with the truth based on hard-won experience before you set sail.
Note that for a profitable, well-run practice requiring little input from the principal and where the principal is willing to follow our recommendations, we would normally expect to achieve above the going rate. There is a good appetite for practices of a certain calibre. However, there are many variables which should be considered before one identifies oneself with a certain category!
The market is changing
In our opinion, the market, historically a seller’s market, is changing now – the tables are turning as more sellers coming into the marketplace and as the more traditional buyers are retreating. Some of the multiples likely to be achieved could be reduced, and sellers may not be able to be as selective as was previously the case. What’s more, after our five decades in this field, we are now seeing sales coming to the fore based on variables other than a multiple of the anticipated Gross Recurring Fees (GRF).
In terms of value, factors such as incoming legislation and the digitisation of many processes will affect the value of some practices over the next 12-48 months. This will enable opportunities for younger, more tech-minded firms coming through.
With regards to when is the right time to sell or buy, we are of the view that so long as everything else in your life is in alignment, there is no time like the present. However, it is not so much about when, but more about how you approach a sale or acquisition, as this may be key to success or to failure.
It pays to do your research first, deciding on the level of assistance you seek and where the value in the service you require lies for you. Would you like to have your hand held as you navigate your way through the process, benefiting from expert guidance and advice at every stage? Or are you comfortable forging your own way through the potentially choppy, but possibly glassy, waters ahead?