Choosing the RIGHT Buyer
Choosing the wrong buyer can be extremely costly, both in client loss and lower firm value. However, some sellers have misconceptions about the type of buyer to choose. Others have no idea what to look for in a buyer.
The following buyer selection criteria are helpful to consider when selling your accounting practice to an outside buyer. Failure to heed the following selection criteria can result in professional embarrassment and significant financial loss to the seller. Sellers mindful of these issues will be better prepared to minimize client attrition and maximize the transformation of accounting practice value into dollars.
Desired Deal Structure and Due Diligence
Sellers often do not achieve their desired purchase price and terms because the wrong buyers were at the table from the beginning. It is common for a seller to call a couple of respected local competitors to see if they would like to purchase the firm. Assuming these competitors respond favorably to the inquiry, the seller often has no idea what some buyers are willing to pay until near the end of the process … after the buyer’s due diligence is complete.
Allowing the buyer to perform due diligence before an offer is entirely backward and subjects the seller to potential problems. Many buyers who utilize this approach impose significant delays in making an offer until just before the seller’s busy season. Too late, the seller finds that the buyer is willing to offer nothing more than a low-priced deal with a zero-cash-down “earnout” that is 100 percent contingent on collections from the clients of the firm. Due to the timing of the offer coming late in the year, such a seller often has two choices – accept the atrocious deal or go through another busy season and attempt to sell the firm again next year.
A better process is to determine which buyers should be at the table. First, multiple buyers should be identified – not just one or two. Multiple buyers provide a seller with crucial negotiating leverage throughout the process. This is one significant advantage of inserting an experienced broker into the process. Most sellers do not have sufficient time to manage their practice while concurrently performing an adequate and confidential promotion of the firm to find enough buyers to negotiate leverage.
Next, buyers should complete a confidentiality agreement before being provided detailed information. Assuming the right kind of information is shared with potential buyers, the buyers will have adequate information to determine what they will be willing to pay for the practice and the terms they are willing to offer.
The seller should conduct meetings only with the best candidates. Sellers should eliminate candidates indicating that the deal would likely include a low cash payment and many contingencies. All buyers who are unwilling to issue a letter of intent before performing due diligence should also be removed from the process. The letter of intent should state the buyer’s price and terms.
When letters of intent are received from more than one qualified buyer, the seller will be in the ultimate position of negotiating an excellent deal for the firm’s sale.
Selling a practice to a buyer who is not professionally qualified is a recipe for disaster. Optimally, the buyer of a practice should have significant experience in the type of work the seller performs. The purchaser should possess the professional gravitas to elicit the clients’ immediate respect and rise to the challenge of all technical aspects of the firm being sold.
If a buyer has significant professional qualifications but lacks direct experience in certain highly specialized areas of the seller’s practice, then a more extended transition with the seller may be necessary. This allows the buyer to gain the specific knowledge to retain the clients of the seller’s practice while providing the same high level of service.
Most successful firms believe that the people side of the business is just as important as the technical side. Selling to a person who does not have good people skills can negatively affect employee and client retention. Fortunately, technical skills and people skills are not mutually exclusive.
When evaluating potential buyers, a seller should consider whether each buyer has the people skills to elicit feelings of confidence and trust from the clients and employees. The ultimate buyer should mesh well with the existing culture.
Capacity to Perform the Client Work Required
It is pretty common for a seller retiring to work part-time for the buyer and be paid by the buyer for billable work performed. Although such an arrangement is not required in many transitions, it can often help the transition process go smoothly.
The seller performing billable work after the sale without compensation is highly unusual. In addition, the seller of an accounting firm should not consider a deal that would require the seller to achieve the same level of work as before the sale – even when the seller is to be paid for billable work by the buyer. This type of deal almost always results in the seller making less money working for the buyer than the seller would have on their own.
In many situations, the buyer can reduce the redundant overhead between the two firms. Despite this fact, overhead elimination is rarely large enough for the buyer to profit from the transaction while paying the seller 100 percent of the seller’s compensation before the sale.
Occasionally, some deals falter because the buyer and seller overestimated the capacity of the buyer to complete the workload demanded by the seller’s former clients. However, carefully selecting a buyer with adequate excess capacity will provide greater assurance that the sale and transition will be profitable for both the buyer and seller.
One absolute truth is that some sellers learn the hard way; The seller cannot receive significant cash at closing from a seemingly willing buyer if that buyer does not have the actual ability to pay substantial cash at closing.
A seller should not tie up time with someone who says that they are willing to pay the seller’s price and terms but has not proven the ability to do so. Such buyers often irrationally hope for a miracle during the lending process. Others disingenuously intend to convince the seller to accept a lower percentage of cash later in the process.
The buyer should prove the ability to pay significant cash at closing early in the process before the seller accepting that buyer’s letter of intent. Alternatively, the buyer should have the financial qualifications to obtain a bank loan to purchase the practice. Indicators of adequate financial qualifications for a bank loan include the bank-required down payment, sufficient working capital, and qualifying credit score.
Despite a buyer’s verbal and even written affirmations of willingness to pay the seller’s price and terms, a buyer who is undercapitalized, or does not provide the seller proof of the wherewithal to obtain a bank loan, should be avoided.
All Criteria are Crucial
Whether the buyer is an excellent fit for the seller’s practice will significantly impact client retention. As a result, the most crucial aspect of choosing any buyer is whether that buyer is adequately qualified to perform all technical aspects of the client work while us ing people skills that will build the interpersonal relationships of the seller’s firm.
Regardless of such qualifications, a buyer who has little to no skin in the game often lacks the necessary “incentive to perform” when the going gets tough – resulting in the buyer potentially “cherry-picking” the top clients while dismissing the remainder of the client list.
The key to choosing the right buyer should include determining whether that buyer meets all criteria identified above. When the ideal buyer and deal structure has been identified and negotiated, the seller can maximize client retention and profit derived from the sale.
Accounting Firm Sold has been matching Buyers and Sellers of accounting firms since 1990. With 35 years of combined experience in the USA, we are highly qualified to perform valuations and identify, screen, and connect accounting professionals looking to either expand or sell their firm. We’ll make it easy for you.