Lucinda and Jeremy Kitchin have some sage advice for readers thinking of buying into an accountancy practice.
If you spend any time looking at listings of accountancy practices for sale in the accountancy press, or on M&A brokers’ websites, you’ll notice that there is a significant difference between opportunities to acquire the largest and smallest gross fees, but almost all of them fall into the category of ‘small firms’.
This is because of the very flat size-profile of accounting firms in the UK. Around 65%–70% of all UK practices (both qualified and non-CCAB firms) are either sole practitioners or have two partners/directors. In this context ‘small’ equates to turnovers of below £700k. At the other end of the scale, the top 100 firms by size in 2016 start with turnovers of £4.3m rising exponentially, with the largest of the Big 4 having gross fees of circa £3.4 billion.
Owing to the flat profile of accounting firms, most purchasers are themselves the owners of small firms seeking to acquire either small firms or blocks of fees. The bad news is, therefore, that almost all practices for sale attract a fair amount of interest. At APMA, we oversaw the sale of a £40,000 block of small fees in the London area just a few years ago that attracted no less than 106 would-be buyers!
Last year, a block of fees generating £86,000 in the Hastings area attracted applications from 45 would-be purchasers – still a significant amount of interest. As you would expect, blocks of fees without any overheads attached to them represent an excellent potential investment to firms looking to increase profitability by maximising use of their existing resources, without necessarily adding to their costs.
The good news about this sector is that, historically, purchasers have been reluctant to pay more than the ‘going rate’ (currently a multiple of 1.0–1.2 times the annual recurring turnover). Consequently, the chances of a purchaser being gazumped by another buyer are remote. However, this also means that a seller can usually be very selective when deciding to whom they will sell – they will often select a short-list of who to meet by giving consideration to factors such as geography, turnover, professional qualifications, charge out rates, etc. – but almost without exception prior relevant experience is a must!
- It may be more difficult to obtain external funding in this segment of the profession than in others because there are usually very few ‘hard assets’, such as machinery and equipment that third-party lenders normally like to see.
- As a CCAB accountant you must have a practising certificate, but surprisingly not everyone does! A potential buyer contacted our office only recently to retain us to carry out our Active Role service for him. It was only upon exploring his requirement further that it came to light that although he had been qualified for 20 years during which he had been working in industry, he had been servicing a handful of clients and signing off their accounts without being in possession of a practising certificate. As you would expect, we are unable to assist him until he rectifies the omission.
- You should be comfortable offering a personal service to clients where little is tangible and where everything is dependent on the level of service you can offer.
- Good interpersonal skills are required so as to be able to grow the fee base and to achieve a position where staff can be taken on and retained. Many service-businesses were started by accountants who came out of industry or commerce, under cut the fees charged by the local competition to attract a nucleus of clients, building their business with a limited client base who were undercharged for the service offered.
A practice that has been started in this way often makes insufficient profit to enable it to invest in junior fee-earning staff. This then results in the principal doing the low level work at a very low charge rate himself as well as the higher-level work. To earn a ‘living wage’ the principal then has to work excessive hours with no hope of a solution. This can lead to a very pressurised and isolated work-life experience.
- You must ensure the client relationship will continue after you buy. The seller of the practice may himself be ‘the business’. If the current owner has built long-term relationships with the clients and they see him as the face of the business, will the business transfer successfully across to you? How will you ensure that happens? Experience has taught us that if the sale is handled properly, the stronger the clients’ relationship with the departing incumbent is, the more likely those clients are to transfer across to the new owner.
- In buying a practice or block of fees you will need some protection in case the purchased clients don’t transfer across to you where it is through no fault of your own. This is done via a suitable ‘claw back’ clause being included in the Sale and Purchase Agreement that your broker can advise on. More specific details may be found on APMA’s website (www.apma.co.uk). Remember that the purchaser will always be at risk if the seller intends to continue locally as a practising accountant.
- What are you really buying? Remember that there is no contractual ‘ownership’ of a client – he can ‘walk’ at any time – thus the principle asset for purchase tends to be the goodwill.
- Will the seller give you a reasonable handover period so as to give you the best chance of retaining the transferring clients? Will you simply expect some handholding (and to what degree) or will the seller work for you for a time on a consultancy basis? Could you offer flexibility in this respect so that you can both ‘suck it and see’?
- Does the seller currently visit the clients at their place of work or do they bring their books into his offices and how does that fit in with how you usually operate?
- Is the seller proposing you buy the individual fee income attributable to each client or is he selling the aggregate sum of those fees? If you are unsure of the relevance of these two methods, contact your broker or visit APMA’s website.
- Is the practice limited to operating from its current offices or are the fees portable to another area? If they can be moved, how far could they be moved without risk of losing any clients, and how would this affect retention of any staff?
- How easily can any senior employees quit and become your competitor? Are there suitable restrictive covenants in their employment contracts?
- During the due diligence phase be certain to investigate the client files alongside the time records to ensure they are being serviced profitably. Check that money laundering regulations are in force and up-to-date and that the other necessary due diligence has been carried out on the clients to be transferred. If this needs bringing up to date you will need to factor this in as an additional cost/task.
- Decide whether to employ a solicitor or whether to buy a standard Sale and Purchase Agreement, which APMA, as your broker, will usually provide free of charge as part of the service.
- What can you do to build the business up further? Could you offer additional services to the existing client base, could you service those clients more profitably, and could you incentivise them to refer their own associates to you?
- If each partner/director (or sole practitioner) has a client base valued at £200k or more and if his share of the gross payroll cost of staff is no more than one third of turnover, the practice should be able to make 50% net profit. Working capital is usually no more than three–four months of turnover.
- An accountancy practice can usually make higher than average profit margins compared to other businesses and can provide an excellent platform from which to grow. As it grows, the value increases and a good income stream can be provided to the owner(s).
- Lucinda and Jeremy Kitchin, Jeremy Kitchin Practice M & A (APMA). Call 01623 883300 up to 9pm seven days a week. See www.apma.co.uk
Accounting Practice Online is part of the ICPA, which is an organisation designed to provide support and guidance for accountants in practice. With 35+ practice specific benefits there has never been a better time to join. Take a look at the routes to membership today.