April 2010 Letter

April 1, 2010

As the tax season comes to an end and the accounting industry’s attention is less on deadlines and more on firm development and other things, I would like to focus this quarterly letter on addressing the state of the practice sales and acquisitions market.  Recently, I was reading a commentary on the accounting and tax profession written by Marc Rosenberg.  Rosenberg is a top rated consultant to mid-sized CPA firms.  He also conducts an annual survey to benchmark industry trends among mid-sized firms.  In his commentary, he noted that industry experts expected “that with a recession [in 2009], the intense merger market would cool off.”  And according to his survey, that did not happen.  I think his opinion is accurate when you consider his market.  He surveyed 54 mid-size firms.  In our world we consider them potential buyers or merger partners.

We found 2009 was slower than 2008, but not for the reasons people expected.  It was slower due to prospective CPA and EA sellers’ lack of confidence in their retirement portfolios and the economy in general.  Frankly, people were scared last year.  Many thought it was better to keep what they had and just defer retirement another year or two. 

The potential buyers were another story.  There was very high demand from both individual and synergistic buyers.  Some people were looking to “buy a job”, while others were looking for alternative ways to grow (i.e. buying another practice).  In short, we sold a greater percentage of the practices we listed than ever before.

So what does that mean for 2010?  We expect the number of practices for sale to increase considerably over last year and the demand for accounting and tax practices to remain very high.  The first evidence we had was a survey we conducted last fall which had over 1,000 responses.  This survey revealed that 16% of the respondents planned to sell in the next five years.  No surprise there, the demographics tell us that more people are retiring every year.  The second evidence we had was a surge in conversations in February and March of this year. 

So what should a practice owner do?  For someone that hopes to sell their firm before the 2011 tax season, less than a year from now, the time to start the process is immediately after this tax season is finished.

We have found that those practice owners that start the selling process in April, May and June are much more likely to have a successful outcome (better choice of buyers, more money upfront and better overall price) than those that wait until October or November.

Many practitioners believe that buyers and merger partners will not want to close a transaction until the fall, or even just before the next tax season, and end up starting the process too late.  Most buyers realize that in a competitive market, the time to buy or merge is when the best firm is available and that is not always on their time line.  

Another reason practice owners miss the sales window is they begin the process as a “For Sale By Owner” and work with only one or two buyers at a time.  They start talking to someone about buying or merging in May or June, and then let that process play out all summer, only to find out in the fall that the buyer or merger candidate is either not qualified or not as interested as they initially let on, leaving the seller less time to identify their successor. 

An additional factor to consider is most buyers see “For Sale By Owner” as an opportunity to get better terms from the seller and ultimately pay less.  Many of these buyers are looking for “earn-outs.”  A better way is to work through a process to identify multiple ready, willing and able buyer or merger candidates.  This aligns market forces so that you can identify the best successor for your clients (and staff) and ultimately end up with the best price and terms.

If you have any questions, or simply want to talk through possible scenarios call or email me. 

Sincerely,

John R. Ezell, CPA

President, ProHorizons Network, Inc.