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Buying Fees or trying to.

21st Nov 2016
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As you may recall from my earlier blogs I have looked at several fee banks over the last 18 months or so without success and I have found the whole process very disappointing.

Going back to my FD days I was involved in some reasonable size capital transactions from plots of land to full trading businesses with over 100 staff bought out of administration, probably completed about 20 deal in 10 years from £250k to £10m in value. So whilst not the scale of a big 4 corporate finance team, I like to think I know my way around a deal.

Although a little sceptical at first as thought they were glorified estate agents, I became very impressed with the business sales agents that market these deals on behalf of the sellers. They clearly know their game and also understand the numbers and EBITDA multipliers etc.  As they get a fairly chunky fee the also get deals over the line. They understand that it is not always about the highest bid, but the best bid that will complete without a last minute price chip.

The agents I have come across with accounting fees have been average to say the least.

The figure of 1 x to 1.2 x Fees as a selling price may well be an industry average based on historical fees, but needs to be adjusted to each fee bank as to where it fits in. However it seems to me that it is clear that a one price fits all approach is adopted with very little understanding of the numbers, client types, client age etc.

Also the loss of tax relief on Goodwill will affect prices going forward surely, but by using the historic pricing model of past sales achieved they don’t seem to allow for this.

The 2 practices I have looked at were very different:

  1. Was very old fashioned practice, total mixed bag of clients, hand written paper files, clients  on annual billing, very labour heavy (labour costs 60% staff to TUPE), little to no IT used in practice.
  2. Modern approach, all work outsourced, monthly fees, good IT systems, however had formed a niche of very small clients were end to end service was done for £350 per year. This would be most affected by MTD if adopted in its current form.

Both practices the seller was expecting 1.2 x fees, for me the 1st presented some potential to unlock some extra fees but would be a lot of hard work and time/cash invested in systems would expect a high client drop out, plus probably have to make staff changes. I couldn’t get up to the 1.2 as just not a commercial operation as too much work to do, unless you could double the fees from it which I would suspect was unattainable.

The second one would be easy to take over as good systems but couldn’t see what else you could do to it, as it had over 200 clients paying £300 quid each felt there would be a huge admin task in looking after them through MTD I would not be confident to get the £300 fee to £500 if you had to quarterly submissions. As everything was outsourced was little profit for principal so was just buying turnover really.

I made offers on both, the first accepted a higher offer than mine, 8 months later it still had not completed and they have come back to me to see if I would improve my offer.

I made an offer on the second again within the range guided by the agent, they asked me to amend my payment structure, which I did. After 6 weeks had not had an answer than was contacted by another agent selling same practice, so I assume 1st agent has been terminated.

Very disappointed in the whole process.

As I understand it a Niche practice with good IT and setup is worth 1.5 x fees, so why would you consider anything else?

As an aside to claw back the time wasted I through some effort into direct client acquisition through marketing.

I attend a weekly networking group, have invested in some website SEO and dabble in social media. I am currently signing up 1 client per week on average, for a spend of less than £1200 since April.

Kent Accountant told me a while ago this is a better focus of your efforts.  I also spoke with a few people at the Xero roadshow who were of the same opinion.

The appeal to buying fees is the platform they sit on as if they come with some bookkeeping staff it would allow me to scale more quickly, as opposed to just recruiting someone to support me now as I would lose time training them so would take me back 6 months or so, until I had signed up more income to offset the costs.

I notice FT bought a small fee block recently and just absorbed into his own business that maybe a better way of doing things but they don’t seem to come up locally.

I had thought of maybe merging with another sole trader so we could share resources as a way of growth but suspect that would have its own issues.

I would be keen from those that have completed successful fee bank purchases and where other people see the market currently.

From what I see there is a few old school guys on AWEB who are expecting a last minute reversal of MTD and if that doesn’t happen can see 2017 bringing a rush for the door and a drop in price on fees. For me I think I will keep my powder dry and see what happens.

For me though the market has a real need for some good agents who actually fully understand what they are selling.

 

 

 

Replies (8)

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Man of Kent
By Kent accountant
21st Nov 2016 18:27

Interesting.
Met with an old colleague of mine (who is also my alternate) his view on valuing my practice (were I to walk in front of a bus next week) would be based on a multiple of net profits.
Personally i think this is a far better guide to the value of a business.
So a sole practitioner with one PT member of staff - £100k turnover and say £80k profit before tax (and his salary). Adjust for the cost of a manager to replace the seller of say £45k.
Adjusted profit of £35k - apply a multiple, ranging from say 2 to 5.
This would be far more transparent and would reward an efficiently run practice.

Thanks (2)
Man of Kent
By Kent accountant
21st Nov 2016 18:29

I've also taken the decision to actively grow my practice, 2 PT staff starting this week.
Marketing campaign about to start.
Networking to start again soon.
Lets see how it goes.

Thanks (1)
Glenn Martin
By Glenn Martin
21st Nov 2016 19:16

I agree income is not best method to value the fee bank. Too many variables for a one method fits all valuation that they are trying to pitch to people.

The only problem for sellers with your method is that some of the sole traders I have seen kitchen sink their accounts with all sorts of crap which I am amazed they get away with so the profits are quite poor.

My client sign up has gone through the roof. I got 7 new clients in October I am 6 for November so far, I have 3 new client meetings this week already the 1st has signed up tonight.

Still have not really pushed the marketing yet.

Thanks (1)
Man of Kent
By Kent accountant
21st Nov 2016 19:23

Sounds like you don't need to buy any fees then!

Where have the new clients/prospects come from?

Thanks (0)
Glenn Martin
By Glenn Martin
21st Nov 2016 19:41

Mostly website - google searches or social media I did some basic SEO work earlier in year, I think I will put a few quid into this to get it working more. I go to a weekly networking breakfast which has produced some work.

I big thing for me is taking a few jobs of bigger firms which is now starting to happen. It always seems to pick up in the Autumn I signed up quite a bit of work last year thus time also.

I am about to do some more formal marketing to try and get some work from people who are still been dealt with in a once a year basis and maybe not too happy with that, as this time of year I imagine that's when they have the once a year meeting.

Thanks (0)
Routemaster image
By tom123
21st Nov 2016 19:53

Good luck with it, Glennzy (and KA too).

I keep thinking about writing blogs again - but things are a bit dull my end - especially to inflict on others...

Thanks (0)
avatar
By dbowleracca
21st Nov 2016 23:21

I do think the brokers take some notice of the profitability and the quality of the client base/practice - through higher multiples.

I have seen a few go for 1.4 - 1.6 near us. That's expensive business for the purchaser who may have to wait 3-4 years for a return on their investment but it seems to be the norm.

I just hope it is the same when I retire in about 20 years!

I do think that marketing is a much more sure fire way to grow though, as you choose the clients, set the fee, and it can be done for very low cost. And the plus side is it's gradual, rather than a massive influx of new clients all in one go.

Thanks (1)
Jennifer Adams
By Jennifer Adams
29th Nov 2016 17:53

A very interesting blog. If you have a look at my blog I too am looking to expand via purchase and have met with a couple of prospects. But I am in Dorset so the number of clients who dont use the high street accountants are small and businesses on offer are rather thin on the ground. Some brokers are good and spend their time with you (I'm thinking Nicola at Draper Hinks here). She told me that the usual multiple at the moment is 0.95 - 1 times gross fee. You only get more if the sellers office is sited by traffic lights - clients are more likely to notice whilst sitting in their cars waiting.
But there are definitely accountants out there who are wanting to sell because of MTD. From what I can see they are waiting until after Jan and then will be putting their firms on the market. Jan being the busy month (more money coming in for those who invoice annually) and gives them a few months hand over time.

Thanks (0)