Practice M&A: The state of the market
In the first of a new three-part series of articles on buying and selling your practice, Richard Sergeant explores what’s happening in the M&A market, what makes a good transaction, and whether mergers work.
Realising the value of your practice will often involve a sale, but what’s happening in the market at the moment and how do you get the best deal?
Who are selling their practices?
Although hard data on the number of deals is hard to get hold of, a straw poll of brokers would put the figure in the low to mid hundreds per year - with Scotland perhaps seeing the smallest amount of activity overall.
The majority tend to be sole practitioners, and in particular an aging group of sellers who have found themselves working past an age they expected to, and where options have been scant.
“A lot of people got caught out with the equitable life fiasco- pensions disappeared, and low interest rates have meant they cannot afford to stop working as the capital just won’t keep them going for long enough”, reflected broker Nicola Draper of Draper Hinks.
Other than money buyers are looking for:
· Guarantee of effective handover
· Good, easily transferable record
· Vendor has good client relationships
Sellers are looking for:
· Finding a buyer who has similar approach and value
· Ensuring staff are looked after
· Reputation of the buyer
Larger and higher profile acquisitions are often driven by a similar agenda in that there is an aging segment of the partnership structure that needs to exit, and the synergies available through simplifying central costs can boost the long-term prospects for the firm.
Less frequent are younger sellers, using the capital to fund a complete change in direction, or realising that in order to grow further the limiting factors are either their own management capability or the capital to take progressive steps.
Buyer or sellers market?
WIth each vendor averaging around 15 or more enquiries, the evidence suggests an overwhelmingly sellers market; however as Ken McManus the head of practice support at ICAS put it, “It’s a sellers market in terms of opportunity, but not influence over the price.”
“Size of the fees for sale, location, viability of the long-term relationship with clients, ease of integration are all influencing factors - but simply buyers will only pay what they think it is worth” Draper added.
Deal sizes and shape
80% of deals are done in tranches, typically half up front, and two further payments 12 and 24 months later with a claw back based upon GRF lost over the deal period.
Growing in frequency is the earn out. Vendors receiving 35-40% of the value of paid invoices over three to five years, with nothing up front. For buyers it minimises the risk around churn and affordability, but can work for sellers too if client retention is good and growth possible. Some take the view that this is just being paid for out of their own money. “I have to remind a few that this maybe the case, but they won’t be doing the work” said McManus.
Typical rates for sale are on average no more than one times GRF and in Scotland 0.8 is more typical. But buyers are frequently looking at the quality of business in the round and asking for anything around 0.65 to be taken seriously.
Many deals are funded by borrowing to some degree, and banks are not lending as they should, so with few firms having the cash available funding can be an issue.
Staging payments is just as much about affordability as it is managing risk. But the fact remains that there is no shortage of interest from those wanting to buy.
Why do some deals fail?
Commonly cited is the vendor not being ready to sell, or cannot afford to sell at the price. But it’s not the only one. Assurances around what will happen to staff often weighs heavily on those with long established practices, so finding a buyer with similar values and outlook can be critical in making an emotional separation.
Issues around premises can also cause problems especially if it’s tied up in a SIPP or has a long lease still to run.
Clients, clients, clients
When it comes to success however, all the evidence suggests clients are the one thing that makes the critical difference.
“What are you selling? - accountants would say GRF, but actually it’s relationships” said Draper.
The relationship the seller has with their clients impacts retention, the quality of the fees and the likelihood of growth, all of which affects directly the buyers ability to maximise revenue, and the sellers bottom line pay out.
As Ken McManus put it: “Without retaining the clients there is nothing. There is little value and jeopardises everything.”
Part two of this series looks at the process from a buyer’s perspective, and asks what motivates a firm to take this route and what really constitutes a ‘good and viable’ deal.
Richard Sergeant is the managing director of Principle Point.