By Chris Sheedy
It’s a seller’s market for accounting practices. But how many practice owners are consciously turning their businesses into valuable targets for partners or external buyers?
Pat Camm has a problem. His Melbourne-based consultancy group, PJ Camm & Associates, specialises in marketing, buying and selling accounting businesses. On his books are more than 300 accounting firms looking to buy fees. But baby boomers are simply not selling.
Why not? Many are reluctant to leave the business. They’d rather run it down gradually as their retirement edges closer. As a result, firms are “dying on the vine”, Camm says, when they could instead be adding significant reserves to their owners’ retirement funds.
Some business owners simply assume the younger partner will buy them out, but they lack specific plans and processes to make that a realistic and attractive option. Others find themselves with an ageing client base and few or no referrals. Instead of taking action to turn the situation around, they allow the business to wind down as retirement nears.
“Succession is a massive issue in the accounting profession,” Camm says. “Firms are either flying or dying.”
A seller’s market
A report entitled The Good, The Bad and the Ugly of the Australian Accounting Profession, compiled by accounting tools provider Business Fitness, offers insights into succession.
Some 60% of businesses say they are looking to acquire fees in the next 12 months, backing Camm’s claim that it is well and truly a seller’s market.
“The younger accounting professionals are just amazing,” says Camm. “They’re buying businesses. They’re digital savvy and marketing savvy. A lot of accountants have their heads in the sand when it comes to social media, but the younger generation of professionals is very active online. As a result, they’re attracting a new generation of clients as the referrals for the older, more complacent accountants dry up.”
But the Business Fitness report also suggests partners are sticking around longer: the average age of equity partners in the survey was 45 in 2007, but rose to 50 by 2017. Just 21% of firms have a documented succession plan – and of those, only 21% expect an outright sale of the business.
No wonder buyers are frustrated by the lack of quality, growth-positive businesses they can buy.
Building the out door
What can an accounting business do to put itself in buyers’ sights? Magnus Yoshikawa, director of accounting practice consultancy Jadeja Partners, says trust is a vital part of any deal. For a seller, this means ensuring all essential systems and procedures are in place, including simple necessities such as employment agreements.
“We still see businesses where people have worked together for 15 years and have become friends, so the employment agreement is never really formalised,” Yoshikawa says. “This opens up a big question for a buyer – who owns the relationship? So things like proper HR procedures are vital. Have an internal audit conducted by an external party to ensure everything is in order.”
Next, consider the people around the principal. Will all the knowledge leave when the chief walks out the door, or does the business have a ‘brains trust’ that will keep value in the organisation?
Finally, look at your client base and analyse where they sit in terms of age. “Clients tend to sit 10 to 15 years either side of the age of the principal,” Yoshikawa says. “So if the business owner is 65, and the vast majority of clients are aged 50 to 80. That may not be as attractive to a buyer as a business with a younger client list.”
Camm spells out the problems of such client lists. “The bread and butter services that accountants have offered for years – assistance with starting a business, negative gearing, superannuation et cetera – are drying up for those that have a generation of clients in their 50s… Baby boomers aren’t starting or buying businesses, they’re not starting super funds and they’re not buying negatively geared properties. So they’re not utilising what used to be the most popular services of the accounting business, and they’re also not referring.”
Yet an older client list might fit a buyer very comfortably. “Older clients are ready for specific types of financial services,” Yoshikawa says. “Plus, they have adult children who might come on board if the firm works on ensuring an excellent relationship.”
Often, Yoshikawa says, it comes down to cultural fit. Does the style and substance of the selling firm match that of the buyer? Camm agrees, saying that buyers can be in the market for very different reasons and that sellers must recognise and appreciate these reasons.
“There are people buying because they’ve got a young gun looking for partnership and they’re trying to buy a parcel of fees to keep that person locked in for the long term,” Camm says. “Then you’ve got people buying because their practice is in decline. You’ve got people buying because they’ve lost major clients or because they’re not marketing, and others buying because they realised they currently have the wrong profile of clients.”
There’s rarely a perfect match between buyer and seller, Camm says, but an appreciation of the cultures and drivers on each side can absolutely assist the process.
Boosting growth and profits
Of course, a growing business will yield the highest sale price. The Business Fitness report also outlines the main actions an accounting business can take to make itself more profitable. These include leveraging technology, streamlining workflows and processes, increasing charges, acquiring a better parcel of fees and recording time to better understand the costs of servicing a client. Other profitability drivers include regular training of the team, using fixed-fee pricing and delegating lower level work to appropriate team members.
Camm also recommends specialising in one field rather than spreading the business thinly. “We push this very hard with our clients — a focus on niche industries, because it works,” he says. “Become a specialist business for a strong local industry, whether it’s harness racing or tradespeople, etc. Then make sure your website promotes this focus and, rather than only offering your contact details, actually works hard to drive new business.”
The meaning of succession
Finally, experts say, successful succession is about understanding the meaning of ‘succession’. Many believe it is about making a quick sale, then getting out of the business, but that ignores the needs of the clients, who have no wish for such a sudden change. “Everybody thinks their clients are loyal,” Camm says, “but when it comes to the crunch, they’re not.”
Simon Madder, CEO and managing director of accounting, investment and advisory firm Prime Financial Group, addressed this issue in a 2015 white paper, The Power of Insight. “Succession is about transitioning a person out of the business over time in an orderly manner,” Madder wrote. “The partners are often the ones with the primary relationships with clients, so it’s about transitioning those client relationships, as ultimately that’s how accountants realise the value of that firm. A 65-year-old professional who says they want to retire from practice must establish how they propose to sell their equity in the firm to the next owner.”
Madder, like other firm sales experts, says practitioners often hold onto accounting businesses when they should be considering retirement and succession of their clients and fee base.
“The most relevant question in succession planning is: how do I fund my retirement? For most accounting firm partners that means selling their equity in the firm,” he says. “But up to 65% of accountants believe the proceeds from the sale of their practice or practice interest won’t be enough to fund their next business venture or desired retirement. Many baby boomer accountants don’t believe they can afford to retire.”
To boost value in a market already weighted in their favour, Madder says, accountants must proactively focus on succession planning. Only then will a firm’s owners make the changes and put in place the strategies that will bring their accounting story to a very satisfying end for themselves and their clients.
Public Practice Program
Have you identified people within your organisation who could take on the responsibility of managing your practice? Chartered Accountants Australia and New Zealand’s Public Practice Program is a prerequisite to the Certificate of Public Practice, for progressing a career in practice management. Offering a uniquely interactive and flexible learning experience, delivered via eLearning and a two-day workshop, this leading-edge program has been designed to empower practitioners for future success. Equip your successor with a mix of technical and practical skills to put their best foot forward. For more information, visit charteredaccountantsanz.com/ppp.
This article was originally published in Acuity.