All posts by Ken Berry, CBI

Tips for Sellers

by Ken Berry, CBI

Once you decide you are going to sell and are ready to get that endeavor underway, put your thoughts about price and terms on hold and instead focus on:

    1. Be Honest with Yourself. This is hard for most of us to do, particularly in regard to something we have invested so much of ourselves into for such a long time.  Your practice has strengths and your practice has weaknesses. Identify each and be real about the potential value you are preparing to sell.
    2. If Selling on Your Own. Be aware that the best way to achieve fair market value is by courting a broad range of potential acquirers. So, successfully marketing your sale is important. Then you need a plan to field all inquiries and identify real interested buyers as opposed to looky lous. Hard to do while both maintaining your confidentiality and running your business. Finally, be prepared that negotiations can be challenging, particularly if you are trying to preserve a good relationship with the buyer.
    3. If Hiring a Broker. Focus on the depth of service the broker offers and find out specifically what they are going to do for you and how they are going to be involved in the sale. Any quality broker should: a) extensively market your sale; b) field all inquiries; c) identify the best potential buyers; d) negotiate on your behalf; e) be involved in all aspects of the sale and be available and responsive to you and to any potential acquirers; and, f) always work in your best interest. Ignore the platitudes about how great they are and false statements of “all cash” or other enticements used to get you to hire them… they are rarely accurate or achievable… and irrelevant if you are actually doing most of the work.
    4. Identify Your Priorities from Most Important to Least. Often our priorities are in conflict. For example, if you wish to sell to the buyer that is the best fit and you also want an all-cash sale, you have a conflict. Presenting your sale as all-cash is going to turn off many buyers, some of whom are likely a very good fit. The one undermines the other. So, identify your priorities and put them in order of importance.
    5. Fit.  We wrote an article on this topic in March (click here to read). Finding a buyer that is a good fit for you, your clients, your staff, and your business should be your top priority. This is by far the first and best step in minimizing your risk.
    6. Timing. It takes months to package a sale, promote it, develop buyers, negotiate terms, conduct due diligence, fund through bank financing, and close a sale.  And the September and October deadlines have become almost as significant as March and April. So, plan to get into the market earlier than you may think. We close sales that we put in the market by August with frequency, but each week thereafter diminishes the odds of selling.
    7. Transition. In our opinion, you owe it to your clients to not only find them a good, new "home", but to help acclimate them to the new owner and environment. This step, along with a good fit, is also going to diminish the potential impact of any risk you assume in the transaction structure. It is important to consider in advance how you would like to participate in the transition and be receptive to the buyer's needs as they may not align exactly with your thoughts.
    8. Put Yourself in the Other Party’s Shoes. Having the ability to see the transaction from the buyer’s perspective is crucial when trying to arrive at a deal that works for both parties.

      Price and terms are important, but by focusing on the above first and foremost you will have a much more successful sales experience and result.

      Comments (0) • Posted May 19th, 2017 at 12:35pm

      Tips for Buyers

      by Ken Berry, CBI

      Once you decide you are going to acquire a practice and are ready to get that endeavor underway, put your thoughts about price and terms on hold and instead focus on:

      1. Be honest with yourself. You have strengths and you have weaknesses. Identify each and be real about the size and type of practice you should acquire. Too often we hear about buyers who take on more than they can handle and really struggle to make the acquisition a success.
      2. Fit. We wrote an article on this topic in March (click here to read). Finding a practice that is a good fit for you should be your top priority. This is by far the first and best step in minimizing your risk.
      3. Review Historical Data. Working in an advisory role with a buyer last year, I was surprised to see how many practices in the market are priced on year-end projections, with little actual financial information supplied. This should be a huge red flag. Before moving too far forward with any transaction (i.e. before making any offer) you should be provided with detailed financial information (revenue and expenses) for the prior three years. We sometimes price on year-end projections late in a year, there is nothing wrong with doing so, but this is always done with an understanding of the previous three years based on the historical financial data supplied to the prospective acquirer.
      4. Economics. Be smart in evaluating the economics of any transaction. Determine the discretionary earnings of the seller and then reduce this with your income requirement, debt service, and other anticipated expenses. Be sure you have a comfortable margin of safety in this calculation prior to moving forward with any acquisition.
      5. Bank Financing. It is out there and readily available to most would-be-buyers. In a seller’s market (which the market still is) this is an important component of your offer to any seller who is entertaining more than one buyer. By taking some of the burden of financing off the seller your offer will be much more appealing. Financing will also improve your cash flow since most bank financing is amortized over 10 years and most sellers are only willing to financing three to five years. That shift in amortization is tremendous.
      6. Due Diligence. Do it. Do it thoroughly. Do not rely on the terms of your transaction to cover your sloppy review effort (in my opinion, this is part of the reason the earn-out transaction model is so appealing to buyers). Identify all that you would like to review, document it, and let the seller organize it so it is an efficient, timely, and thorough process.
      7. Transition. Combined with fit this is the most important step in retaining the clients as the business is transferred. Go into the transaction with this in mind and begin developing a plan with the seller at the outset, so by the time the transaction closes there are already steps underway and there is no abmiguity about next steps or about who is responsible for implementing them.
      8. Put Yourself in the Other Party’s Shoes. Having the ability to see the transaction from the seller’s perspective is crucial when trying to arrive at a deal that works for both parties.

      Price and terms are important, but by focusing on the above first and foremost you will have a much more successful acquisition experience and result.

      Comments (0) • Posted May 19th, 2017 at 12:30pm

      What is Your Greatest Risk in Selling or Buying a Practice?

      by Ken Berry, CBI

      In almost every conversation we have with a practice owner, whether seller or buyer, the owner feels their greatest risk in pursuing a sale or acquisition will be contained within the terms of the transaction (i.e. how much cash down, is there an earn-out element, etc).  While we agree that the terms of the transaction represent an area of significant potential risk, we think there is a key factor outside the terms that represents a greater risk.  A factor many sellers and buyers do not give enough thought and consideration… FIT!

      Fit, or rather a poor fit, is the greatest risk a buyer or seller can experience.  By fit we mean a buyer (if you are selling) or a practice (if you are buying) that encompasses a range of solid alignment:  technical ability, personality or culture, character, business acumen, business process, client interaction, business and personnel management, and general business philosophy (i.e. hours, attire, etc) among others.  A poor fit will almost certainly result, to some degree, in both a business and transactional failure regardless of price and terms.

      Here are two quick examples to provide our thoughts on how critical fit is:

      #1.  Buyer pays 100% cash down at closing.  Seller loves it because they have all their money and have no risk moving forward.  However, the buyer is a bad fit for the practice and within a year or two is declaring bankruptcy.  How do you think the buyer feels about the seller?  Do you think it is likely the buyer is going to consider legal action against the seller?  Would you?  We think it is pretty likely and the seller is going to be surprised to find they actually have pretty significant risk of losing a chunk of the money they were paid.

      #2.  Buyer pays 20% cash down and seller finances the balance of the sale with the amount being adjustable against the buyer’s first five years of ownership (this, by the way, is not a transaction model we would advise any seller to pursue).  This transaction structure represents tremendous risk to the seller because it depends entirely on the buyer’s performance for the next five years.  However, the buyer is a great fit and not only does the practice maintain its level of revenue from point of sale, the revenue grows and the seller is paid more than anticipated.

      The point of these two brief and simple examples is that a poor fit can undermine “risk-free” transaction terms and a good fit can overcome “high-risk” transaction terms.

      So, the top priority for any seller or buyer should be to find a good fit.  How can you define, find, and recognize a good fit?  Well, it just so happens we work with all of our clients (usually sellers) and customers (usually buyers) to do just that.  Give me a call at 408-598-3009, I would be happy to discuss this with you.

      Comments (0) • Posted March 30th, 2017 at 11:38am

      Is This Your Last Tax Season?

      by Ken Berry, CBI

      With tax season in full swing the last thing on most accounting and tax practice owners’ minds is buying, selling or merging their firms. But for owners who hope to sell their firms before the 2018 tax season, a year from now, the time to start is immediately after this tax season is finished.

      We have found that practice owners who start the selling process in April, May or 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 September, October or November.

      Many practitioners believe that buyers will not want to close a transaction until the fall, or even just before the next tax season, and end up starting of the process too late. Most buyers realize that in a competitive market, the time to buy 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 in May or June, and then let that process play out all summer, only to find out in the fall that their buyer candidate is either not qualified or not as interested as they initially let on, leaving the seller less time to identify their successor.  

      Keep in mind, most buyers see “For Sale Buy Owner” as an opportunity to get better terms from the seller and ultimately pay less. 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.

      Call me directly if you wish to discuss your thoughts on selling, 408-598-3009.

      Comments (0) • Posted March 30th, 2017 at 8:35am

      What Should You Expect from a Broker?

      by Ken Berry, CBI

      Let’s be clear that if you are a practitioner considering the sale of your practice and you call all the brokers in the market, some brokers will state platitudes, false promises, and you will be set up for an “over promise/under deliver” level of service.  This is because most would-be-sellers do not know the right questions to ask and are more concerned about risk than they are about service…and the brokers know it.

      So, what should you be asking?  Risk is a huge concern and not knowing who the eventual buyer is creates anxiety.  The simple answer: get all cash because this takes care of all concerns.  So, some brokers tell everyone they can sell for all cash…literally EVERYONE.  But does “all cash” minimize risk?  No, not really.  What it does is minimize the pool of would-be-buyers and as caveat emptor (buyer beware) has faded in legitimacy over the years it opens you up to a future lawsuit if things do not go well for the buyer.  The best way to minimize your risk is to find the buyer that is the best fit for you, your staff, and your clients.  A quality fit is going to improve retention, buyer success, and everyone’s post sale comfort.  To do this you need a broker that is diligent in finding, developing, and presenting quality candidates.

      The questions you should be asking a broker are how do they find buyers, do they have a process for evaluating buyers, how do they evaluate buyers, are they the main point of contact for buyers (or do they just send buyers to you for you to qualify), and how involved are they with you and the buyer throughout the process?

      Which leads me to the second, and most important, thing to understand about brokers.  Many of the firms in the market that present themselves as brokers do not actually function as brokers.  Several are simply marketing companies that convince you to hire them (often with statements of all-cash), market the sale of your practice, send every single buyer lead to you (whether the buyer is qualified or not)… oh, there goes your confidential sale by the way…, and then disappear from the process only to reappear and collect their fee after you have done all the qualifying, negotiating, disclosures, documenting, due diligence, and on and on.

      A true broker is an intermediary, a go between, who works with both the seller and buyer to package the sale, develop buyers, evaluate buyers, maintain your confidentiality, inform, educate, verify disclosures, negotiate, advise you on offers and next steps, document, assist with due diligence, assist with financing, draft counter offers, draft purchase agreements, provide transition advice, and guide the parties to closing.  It is a lot of work and requires a lot of time to provide this level of service, but it is the value you should be receiving for the fee you will be paying. (Note: a broker can only provide this level of service to about 20 clients at a time before it gets watered down.  Brokers with 30, 40, or more listings are likely just marketing companies).

      So what should you be asking to uncover whether you are talking to a true broker or a marketing company?  Ask about their process and how they market your sale, in response they should mention developing and sending out a report on your practice to buyers.  When they do, ask one question:  In the report whose contact information is provided for buyers to follow up with?  If they put your contact information in the report, you are talking with a marketing company.  A true broker will be the point of contact, field all the follow-up to the report from buyers, maintain your confidentiality, and remain front and center with the buyers as they work for you.

      Sadly, these questions are not the focus.  Instead many would-be-sellers continue to engage "brokers" who offer platitudes, false promises, and provide a level of service that is over promised and under delivered.  Do not fall into this same trap by being baited with statements of “all cash,” “simple to sell,” “you don’t need to be involved with transition.”  Selling is a big step and you owe it to yourself to ask the important questions and find out what level of service the broker is going to provide to earn the fee you will be paying.

      ProHorizons is a full-service broker with a sole focus on the sale and acquisition of practices in the tax and accounting industry.  We take pride in providing a high level of intermediary service in the market, which we have continued to hone and perfect over the 20 years since our firm was founded.  Call Ken Berry, CBI (Certified Business Intermediary) at 408-598-3009 to find out more.  If you are not ready to talk yet, you can simply request our Standards of Service document which outlines the service we provide and compares it with some of our competitors.

      Comments (0) • Posted August 27th, 2014 at 10:28am

      Evaluating Fit Should be Your Priority

      by Ken Berry, CBI

      It is easy when looking to acquire an accounting practice to get hung up on the numbers of your target acquisition: annual gross, billing rates, average fees for different tax returns, price and terms, etc.  However, the most important element of an acquisition is only partially related to all this analysis.

      Most prospective acquirers would agree that client retention is the greatest concern in an acquisition.  While the financials of a practice describe its overall health and profitability, they say little about your ability to retain clients.  To determine ability to retain clients, the most important point of analysis should be how do you, as a buyer, fit with the practitioner who is selling and how does your existing business fit with the business it would be acquiring.  Ask questions like:

      •    Are you and the seller similar in personality and business philosophy?
      •    Do you and the seller have similar interactions with clients (i.e. use of organizers, interviews with clients, etc.)?
      •    Does the selling practice have similar processes and procedures to your office?
      •    Are you in the immediate vicinity of the seller or are you willing to operate from the seller’s location for a period of time?
      •    Are your fee averages similar or can you accommodate the seller’s fee averages for an extended period?
      •    Does the seller think you are a good fit with the clients?

      Analysis of personalities, procedures, processes, types of clients, client interface and related questions of fit are all critical factors in predicting client retention.

      The same is true on the selling side of the transaction as most practitioners are concerned about the care of their staff and quality of service provided to their clients after the point of sale.  I have worked with many sellers that decline an offer with the highest price and best terms and accept a lesser offer from a buyer that was a better fit for their staff and clients.

      Without a doubt the financials and profitability of a target acquisition are very important to determining whether it makes sense to move forward with the purchase.  But the acquisition will be problematic despite strong financials if you and/or your existing business are not a good fit with the seller, clients, and staff of the acquired practice.

      Comments (0) • Posted August 21st, 2014 at 11:00am

      Two-Stage Deal Structures: What is Wrong with Them?

      by Ken Berry, CBI

      Two-stage deal structures can work in certain circumstances.  Basically, a two-stage deal structure is when you have an initial period (stage one) where the firm’s cohabitate together, typically into the buyer’s existing office, and then close the transaction and the have the seller retire at some future date (stage two).  

      There seem to be some initial advantages.  It allows for a longer transition period.  It also allows for the buyer to not start paying the seller for the ownership of the practice right away because the seller will continue to earn the same amount of money that he has been earning.

      But there are some problems in two-stage deal structures.  First, there’s no money upfront and therefore there is not enough commitment by the buyer.  The seller is taking a big risk when they move in with the buyer.  The seller will lose his business identity when he merges in with another firm.  The identity that is developed over the next year or two will be the buyer’s business identity.  So if it doesn’t work out and the seller has to withdraw, he has to start his business identity all over again.  

      Goodwill can diminish over time and sometimes it does not take for the value to decrease, especially when things are not going well.  In addition, while the seller may be the accountant of record for the client, there will be other staff and other partners involved with that client.  Let’s say the buyer decides they don’t want to execute on the second stage.  Or the buyer and the seller decide they no longer like each other.  The seller will need to leave and recreate an entirely new office.  When that happens he may lose some of his clients and his staff to the buying firm.  

      Some of this can be settled in contract issues, but it can get complicated real fast.  So beware of the two stage deal and make sure you do it right.

      Comments (1) • Posted September 30th, 2011 at 2:16pm

      How is WIP Handled in an Accounting Practice Sale?

      by Ken Berry, CBI

      Last week, Ali the Accountant sent in a question, “When buying or selling a practice, can you please advise how you split up the work in progress (WIP)?  I would presume it is done based on time spent and not billed before the sales and how much time is spent on the file after the sale can you please confirm?”

      My response:

      It is going to depend greatly on the timing of the sale, the amount of WIP, the nature of the WIP and the two parties in the transaction.

      • For timing example, if the selling practice has high quantity of individual tax extension work, closing a sale on October 1 vs October 20 would result in a very significant difference in WIP.
      • For amount of WIP example, are we talking about hundreds of hours of WIP or less than a hundred hours?  If the amount is not too significant and will not take to long to complete it might make the most sense to let the seller finish the WIP and collect the fees.
      • As to the nature of the work, is it a short term project or a long term project that is 80% complete.  If the seller has completed a significant portion of the work, they are going to have strength of collection for the entire job, plus they will be more efficient in completing it.
      • The key is for the two parties to identify the WIP on a case by case basis, evaluate the type of work and nature of the project, and then determine the best way to finish the work and collect any outstanding and new fees due. It has to be a discussion point and agreed upon.

      I have worked on transactions where the seller stays on to transition and complete and collect on the WIP and I have worked on transactions where the seller let’s the buyer collect on the portion of the WIP the seller completed prior to the sale.  It all just depends on the situation and other factors of the transaction.  I would recommend you attend our Buying webinar or our Selling webinar to learn more.

      Let us know what other questions you have.

      Comments (0) • Posted August 18th, 2011 at 10:20am

      Is it Possible to Buy Part of an Accounting Practice?

      by Ken Berry, CBI

      Last week, David the CPA sent me a great question that I thought would be relevant to the market at large.  He asked, “Is it possible to buy part of a practice or must we be willing to purchase all of it?”

      My response:

      First, let’s separate the market between the single owner practices and the multiple partner practices. In the later, buy-ins occur particularly when the practice has a gross over $2 million and several partners of varying ages.  It is not uncommon in a firm of this nature for an outside practitioner to buy in to replace a retiring partner.

      However, for a majority of the market, which grosses less than $1 million in annual gross the situation is quite different.

      Partial buy-ins, buy-outs and carve outs are possible.  It obviously depends on the goals and plans of both the seller and buyer.  For example, if the seller has health issues, plans to relocate or wants to retire immediately or even in the next year or two, then a partial buy probably would not work.  It might be possible if their plans are a year or two out to structure a two phased purchase*, buy a portion today and buy the rest in a year or two.

      From the buyer’s perspective, most acquire with the goal of gaining control and autonomy, which probably will not be the case in a partial buy. It takes a lot for most sellers to let go in the best scenarios, but it is certainly not a realistic expectation if they are still a working owner in the business.

      Another concern for a buyer, if they separate some of the clients into a separate business (a carve out) should be retention.  The strongest point of retention is going to be the combination of an endorsement of the buyer by the seller and the fact that the seller is no longer available to the clients.  If the seller is still practicing, some clients may try to return to the seller instead of transferring to the buyer.

      A partial buy also depends on the economic needs of the seller and the buying ability of the buyer.  Unlike a full purchase, a bank will not get involved with a partial buy, so any down payment will rely entirely on a buyer’s cash and terms will rely on how much of a note the seller is willing to carry.  This is usually the largest stumbling block in a partial buy.

      So, yes buy-ins, buy-outs and carve outs occur and can be successful.  The key to a successful outcome, as in any endeavor of this nature, is being aware of what you are getting into and what the acceptable and unacceptable risks may be.

      Let us know if you have any additional questions.

      * A note on two-phased purchases: even with an "airtight" agreement, we have seen buyers change their mind and decide to not buy the rest of the practice at the appointed time.  This is particularly true when the buyer “acquired” the first portion with zero or little money down.  The result of this failed second half of the acquisition is huge mess for both parties.

      Comments (0) • Posted August 10th, 2011 at 11:57am

      Lead Generation, Part 1: Your Foundation

      by Ken Berry, CBI

      It’s time I developed the next portion of a blog I posted back on January 21st.  The blog, Three Keys to Successful Accounting Practice Development, outlined that three key elements of any successful practice development plan are: client experience; lead generation; and lead conversion.  In February and March, I posted blogs on client experience and now would like to revisit this series with thoughts on lead generation.

      Lead Generation.  How will you find new prospective clients?  Develop a strong referral network, telemarketing, direct mail, advertising, etc?  What are the avenues and components you use or need to develop to generate leads?

      For the sake of digestible, short blogs, I will break my thoughts into four blogs:

      • Your lead generation foundation (today’s blog)
      • Passive Marketing
      • Active Marketing
      • Referrals

      Let’s talk about your lead generation foundation.  What are the basic underlying components to support all of your lead generation efforts?

      Understand the Value You Provide.  If you do not, the customer never will.  You need to able to communicate it effectively and concisely.  I will give you a hint, if you compete on price and are always trying to stay below the competition’s price, you do not understand your value.  What do you do for clients better than anyone else in your market?  Why should they come to you instead of a competitor?  Get away from price and try to express your value in the eyes of the prospective client.  If you don’t do anything better, start today and communicate it.

      Communicate What You Stand For.  This is both the personal “you” as a practitioner and the collective “you” of your practice.  Can you make any guarantees to your clients?  What pledges or promises can you make?  For reference, you may look at the Our Commitment to You page on our website.

      Remember, Benefits Instead of Features.  Okay, welcome to marketing 101.  Can you communicate your value from the client’s perspective? The difference is often platitudes, “We’re #1”, versus resonating with the client, “We understand what you are struggling with and can solve your problem.”  Instead of talking about whom you are or what you do, can you speak of the benefits a client will receive by working with you.

      For example, “Our clients come to us because they are frustrated with monthly, quarterly and annual tax filings.  We take their headache away by…”

      As you define these components, can you document them? Again, try to write these from a perspective of how the client will experience them rather than how you deliver them.  If you can document your value to clients and what you stand for, then developing your lead generation initiatives is going to be a piece of cake.

      Comments (1) • Posted August 3rd, 2011 at 10:36am