Is this a good time to sell your firm?
In spite of the economic outlook, if you are looking at selling your accountancy business, now it is a good time to act, writes accountancy firm broker Jeremy Kitchin.
There has been a lot of doom-mongering on AccountingWEB.co.uk in recent months about the generational timebomb that is going to engulf Baby Boomer accountants. Those accountants planning their exits have been warned that they will face an increasingly difficult time trying to realise the amounts they expect from the practices they have built up over the years.
Yet first-hand evidence counteracts some of these claims. Rather than seeing buyers shy away, there is significant demand out there in the market place for good quality accountancy firms. It's clear that people have been holding back from selling since around 2007. But the economy is slowly beginning to improve in certain market sectors, and accountancy practice is one of those.
The practices that have asked my firm to help with their sale are attracting a very healthy level of response. Even in difficult times, good accountancy businesses do not stay on the market for long.
Clear signs of renewed confidence in the sector began to emerge towards the end of last year. There have been more buyers than sellers in this specialised field. Four or five years ago there was a lot of activity, but it dropped off in September 2007 for a couple of years.
But there was a significant increase in the number of sale instructions received in the final quarter of 2010 compared with the previous year. Since February 2011 we have had a gratifying number of enquiries.
Two years ago, we took on a general practice and found 106 would-be purchasers, while other new sales generated serious interest from 20-30 firms, with many attracting well over 30 initial applicants.
As with the housing market, the economic downturn has seen a reduction in the number of first-time buyers because banks and financiers are being more careful about who they lend money to.
But these first-timers may currently be at a senior level in accounting, or may have gone into industry for a while and now want to run their own accountancy firms.
They have all the right credentials, but they are not seen as a good risk because they have no track record. However, the loss of the first-time buyer is being off-set by established firms who need to make up for clients they have lost or whose businesses have gone under.
Is the price right?
You might think that in a seller’s market, the vendor will be able to dictate a premium price. But this remains an unrealistic expectation. Accountancy practices differ from other sectors in that there is an accepted going rate above which buyers are not prepared to pay.
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The current going rate is between 1 and 1.2 times a firm’s annual recurring fee income. The multiple dropped for a while to 0.9 times in 2007, but has remained relatively stable for some time and is likely to do so in the foreseeable future. The last time it was higher was in the late 1980s and early 1990s, when the multiple sometimes reached an astronomical 2.5x.
Good quality practices with a turnover of less than £350,000 are currently attracting multiples of between 1 and 1.15 and some above that. However, at the moment 1.1 is typically top whack for most deals.
With his daughter Lucinda, Jeremy Kitchin runs Jeremy Kitchin Practice M&A, a specialst broker that trades as APMA.