All posts by Ken Berry

As the summer progresses, we are entering the busy season of selling accounting practices.  We have been scheduling lots of meetings between sellers and prospective buyers so thought it would be good to spend some time blogging on these meetings.

The initial meeting between buyer and seller is where many buyers either win or lose the opportunity to purchase a practice.  To a large degree, the success of this meeting will depend on the ability of the buyer to connect on a personal level with the seller.

Many factors influence the way the buyer is perceived and will affect the degree of rapport established with the seller.  The seller has invested both financially and emotionally in the practice and wants to insure that it is sold to an individual who will care about the practice and the clients.  We will explore several issues in this series of blogs.

The first, and perhaps most important thing to remember is this:  The meeting with the seller is a confidential meeting.  Do not discuss the purpose of your meeting with anyone who may be remotely connected with the sellers practice.

Selling an accounting practice involves many, many people.  Including the seller, it also includes:

•    The seller’s family
•    The seller’s staff
•    The seller’s clients

It is the seller’s responsibility/privilege to tell the story he or she needs to tell about selling the practice.  In addition, and of perhaps greater interest to the buy, if news of the potential sell leaks prematurely, it can cause the practice to lose value.

If word leaks that a Seller is contemplating a sale of the practice, it could raise anxiety among the staff.  It might cause clients to use the transition to find an alternative service provider.  It may even cause hardship in the Seller’s family if they are not fully aware of his or her intentions.  

It is always best that the Buyer respect the confidentiality of the Seller.

Comments (0) • Posted July 28th, 2010 at 12:13pm

A while back we put out some statistics comparing our practice sales results to some For Sale by Owner (FSBO) statistics we received from the AICPA.  The comparison raised a lot of questions from practice owners on both the buy side and sell side of future transactions.  Today, I want to address the questions I most often receive from those thinking of selling a practice.

The main question I receive from potential sellers revolves around how shocking the FSBO numbers are:

Why, when people sell on their own, do they settle for such high risk transactions — Like no money down, percentage of collection deals?

The answer primarily lies in the emotion tied to selling a practice to an unknown person.  One of the biggest questions looming for any practice owner is “who can run my practice?” or perhaps more accurately “who can I trust to turn my practice over to?”  In our experience, this question can have incredible importance to a degree that the answer carries higher priority than price or terms.

Often, this is where the FSBO seller starts.  Who do they know?  Who do they trust?  Who is just like them and will get along with the clients?  It might be the practitioner down the hall, the one they have spoken with for years at the chapter meetings or a friend of a colleague they have heard great things from.

Starting with this base of known practitioners immediately limits the market the FSBO will explore.  Then the FSBO, having identified their buyer, has the job of convincing the buyer to buy.  Fair Market Value of a business is defined as the value of a transaction in which “neither party is operating under compulsion”.  In transactions we develop, we see value being defined by a seller and a buyer both operating under compulsion.  In the FSBO transaction we have just outlined, the seller is typically under more compulsion than the buyer.  In many cases, the buyer may have no compulsion and in fact may believe they are doing the seller a favor.

The disparity in the statistical comparison is due to the fact that we, like most business intermediaries and unlike FSBO sellers, do not pursue a single buyer.  We work to create a market of buyers around the sale of a specific firm and let the market determine the price and terms.

Comments (0) • Posted July 22nd, 2010 at 4:40am

We present several webcasts per month and frequently poll the audience about the old industry rule of thumb that all practices are worth one times gross.  So, we thought we should take a look at this rule of thumb and let you be the judge.

For a basis of our analysis, let’s say we are looking at two practices each grossing $500,000 annually.  Under the one times gross rule of thumb, they are each worth the same amount, $500,000 or one times gross.

But wait, we delve into the practice information and find one of these practices is netting $250,000 and the other is netting $150,000.  Are they still worth the same amount?  In our webcasts, our attendees almost unanimously agree that the $250,000 net is worth more.

Now, let’s say the owner of the $250,000 net firm is personally billing 2,000 hours per year and the owner of the $150,000 net firm is personally billing only 500 hours per year.  Now which one is more valuable?  This is where it gets tricky.  Is 1,500 billable hours worth only $100,000 in additional net?  What is the line between quality of life and money made?  A very personal determination, but all our webcast attendees unanimously flipped their perception of value with this additional layer of information.  Not a single one across all of the webcasts we have held believed the $250,000 gross was more valuable if it required the owner to personally bill 1,500 additional hours.

You can draw your own conclusions, but we have just barely scratched the surface of these two example practices and already the one times gross rule of thumb is looking pretty flawed.  Our experience is that not all practices are worth one times gross.  How could they be?  A practice is far more complicated than just a gross and differences like staff, billing rates, location, length of service, types of clients and owner’s billable hours among dozens of others are critical components that need to be factored to determine value.

Year in and year out, we see practices selling for 1.0 times to 1.35 times annual gross, with very strong practices selling above 1.35 and struggling practices selling for less than 1.0.  In the end, if a practice sale is well executed, the market will determine the price and it will be based on far more than just the gross.

Comments (0) • Posted July 19th, 2010 at 6:29am

I have presented several webcasts in the past month and in all of them there have been questions about the use and value of a Letter of Intent (LOI) — in our process this is typically a non-binding agreement that signifies agreement in principle on the core deal points and agreement to negotiate in earnest on all remaining items.  Some brokers advise to skip the LOI and go straight to the purchase agreement and an LOI is not typically used in the market at large. So, why do we advocate the use of an LOI when purchasing a business?

In our experience, an LOI is a critical component in structuring a win-win transaction.  We use them on virtually every deal. Here are the main benefits we see:

• More efficient use of time

• Proceeding with a clear understanding and agreement in principle

• Trigger point for taking the next steps

More efficient use of time:   Some people feel an LOI puts the cart before the horse. We find exactly the opposite to be true.  If you were to go to an unknown area, would you want a map of the area? Well that is exactly what the LOI is: a map of the major deal points. In today’s busy world it is important to be sure two parties are going down the same road and in the same direction before spending too much time working out all the details of a transaction.

Proceeding with a clear understanding and agreement in principle:  The key elements of the LOI should be negotiated beforehand and can be used as a guideline to prepare the purchase agreement. It should state that, if all information during due diligence confirms what was represented, that the buyer intends to complete the purchase under certain conditions. The key elements should include:

• All parties to the transaction
• Type of deal structure
• Price
• Payment structure
• Non-compete
• Transition plan
• Closing date
• Contingencies (i.e. due diligence, financing, etc.)
• And identify other items to be negotiated.

Trigger point for taking next steps: In addition to setting the key elements of the deal, the LOI is also a trigger point for critical milestones during process. Those trigger points are:

• For the seller to remove the practice from the market and focus on the single buyer.
• For the buyer and seller to begin conducting their due diligence.  With agreement in principle on the main terms the seller will have more comfort in opening the books and sharing client information and the buyer will have more comfort in providing financial information.
• For the buyer to pursue financing.  The financing process takes times and banks require either an LOI or purchase agreement as part of the loan package.  So an accepted LOI is a critical component to securing financing.

We have a saying in our firm that smooth transactions make successful transitions. Basically, if two parties cannot agree on the elements of the LOI, they will probably have a hard time negotiating while dealing with the minutiae of the purchase agreement. Normally, once the key points of the deal are negotiated up front, the rest of the transaction tends to work much more smoothly.

Comments (0) • Posted June 21st, 2010 at 7:23am

John Ezell wrote a blog last week on the unfortunate truth that sometimes brokers lie to get listings.  This blog has generated quite a bit of discussion and email with one of the most common questions being, “what are the ethical guidelines for business brokers?”

Before we address the ethical guidelines, let’s define what we are talking about.  We need to understand that in selling a practice (a listing) a broker is establishing an agency relationship based on a contract. This is a relationship that involves one party (the broker) acting for the benefit of another (the seller).  For this reason, when entering into a contract it is important for an agent, in this case the broker, to disclose all facts which could be considered material even if not expressly asked about.

A false statement of fact made by one party to another party, which has the effect of inducing that party into a contract, is known as a misrepresentation.  There are several bodies that have statutes, canons or codes of ethics that address misrepresentations:

• First, there is the Uniform Deceptive Trade Practices Act.  This is federal legislation and addressed in statutes in every state in the nation.  Direct reference in this Act is given to “Using deceptive representations in connection with goods and services” as constituting a deceptive trade practice.  The FTC and many states also prohibit unfair practices that include taking advantage of bargaining power of vulnerable groups.
• A handful of states regulate business brokerage through their Department of Real Estate. Most enforce the National Association of Realtors code of ethics.  Article 12 states, “Realtors shall be careful at all times to present a true picture in their advertising and representations to the public.”
• In addition, there are many state and national associations for business brokers. The International Business Brokers Association has a code of ethics and business broker standards for its members. Article 1 of their code of ethics states, “Business Brokers should avoid exaggeration, misrepresentation, or concealment of pertinent facts relating to properties and business transactions.”

So the ethical guidelines for business brokers are out there, published and readily available for all brokers to follow.  Be aware of the tricks and deceptions some use and avoid being induced into an agency relationship based on a misrepresentation.

Comments (2) • Posted April 27th, 2010 at 9:10am

In our Becoming a Rainmaker seminar, we remind our participants that prospective clients buy for an emotional reason.  They need an accounting service performed, of course.  But there are many ways to satisfy that need and many accountants willing to do it.  The most successful accountants take the time and have a process to uncover the client’s emotional motivation underlying the need and then cater their service to encompass this motivation.

We can apply this same principle to buying and selling accounting practices.  Buyers buy for emotional reasons and for a successful acquisition it is important for them and those they are in dialog with to understand their emotional motivation.

We all function alike.  Human behavior involves three parts – motivation, intention and action.  

• Motivation is the driving force.  It is the need, want, or desire that inspires movement.
• Intention is what we aim for.  It is what we hope to accomplish.  
• Action is what we do.

It is also the case that sellers sell for an emotional reason.  The decision to sell a practice is an emotional decision.  When a practice owner offers her practice for sale, she is offering many years of work to the world.  

• Risking investment in property, furnishing, fixtures, equipment and training.
• Slowly developing the value of the business one precious client at a time.
• Long days and nights during tax season.
• Building trust in the business community providing one careful audit after another.
• Advising clients to make strategic business decisions.

When it is time to sell a practice the seller is filled with many complex emotions, some of them will be conflicting emotions.  

• I am burned out, but I do enjoy many aspects of the job.
• I am aging and just can’t keep up with the work-load any more, but I love what I do.
• I am going through a divorce and need to sell my practice in order to divide the assets with my ex.
• My spouse is ill and needs me at home.

We have encountered all of these scenarios over the years.  When a seller meets two prospective qualified buyers, he or she will sell the practice to the one that feels right.  The wise buyer will be sensitive to the feelings and emotions of the seller and the wise seller will be sensitive to the feelings and emotions of the buyer.

Comments (0) • Posted April 5th, 2010 at 1:05pm

I coach youth soccer and have worked with a team for several years now.  They have become a very good team, ranked in the top 50 of all Northern California teams in the age group, and the games have become incredibly competitive.  Last season I implemented something that helped push them to the next level.

See as a coach, like a business manager, you are striving to get the best from all your players all the time.  What a lot of us do is focus on the technical stuff, in soccer this is touch and control, vision, moving the ball, moving off the ball, passing and finishing among dozens of other skills and techniques.  In an accounting firm, this might be answering the phone, greeting visitors, running client meetings, processing returns, balancing ledgers, filing, reviewing, auditing and dozens of other critical functions.

Last season my boys were in the championship game of a tournament.  They had dominated their bracket winning all three games and outscoring the opponents 15-0.  They were playing in top form when we went into the final game.  In this final game they came out flat, were out of sync, were not moving well, were not passing well and were not creating chances.  They gave up two great chances to the opponent, one resulting in an opposition goal.  It was 97 degrees on a Sunday afternoon in September when they came off the field at halftime down 0-1.

As a coach, like a business manager, you have all sorts of choices of how to respond and give direction when your team is not performing the way you desire.  My boys know how to play the game, they know each position, its role and how to execute their jobs in those roles.  They did not need me telling them how to do this again.  I needed to tell them they could do this and put them in a good frame of thought to go get it done.

At halftime we discussed three corrections to make in the play of the game and then… I told the boys two jokes.  After the second joke, they were all laughing and commenting on the jokes to each other.  We huddled up then and, in this new frame of mind, focused on the second half.  The boys went out and scored 5 goals and won the championship game 5-1.

Right now in your office it is likely 97% stress on a Tuesday morning.  Your team is in the final stretch of tax season and they might need you to help them reframe their thinking.  Check in with them regularly, let them all know you are in it together and then have a good laugh.  I suspect the end of the season might go more smoothly, be more enjoyable and everyone will perform a bit better.

Comments (0) • Posted March 23rd, 2010 at 9:17am

Edi Osborne wrote a great article, Interesting vs. interested – advice from a prospect, on AccountingWEB. This letter from a potential prospect describes the frustration in dealing with CPAs who are interesting people but wonders if they are interested in the prospect and the business. Reading this, I’m reminded of the Theodore Roosevelt quote, “People don’t care how much you know until they know how much you care.”

I wrote about caring in my earlier blog Building Rapport is a Key to Creating Client Loyalty. That posting covered using tax appointments to communicate how much you care. Here are some guidelines to use for meetings with potential business clients.

1. Prior to the meeting, do your homework. Find out what you can about the prospect and the company. There are many sources of intelligence regarding businesses and individuals.

2. Prior to the meeting, get mentally prepared for the meeting. Work on emotional detachment, as well as making others okay. You are here to serve their needs not your own, so be sure to put your agenda aside and focus on how you are going to learn as much as you can about the prospect and their business.

3. As a first step in your meeting, use your approach to bond and establish rapport with the prospect.  This is a chance to begin breaking down barriers and establishing some trust.

4. As a second step in your meeting, qualify the opportunity.  Take some time to discover the prospect’s needs, emotional motivation for doing business, the economics of that motivation and the decision making process.

5. Now that you have gathered a fair bit of information about the prospect, you are prepared to discuss how you can provide solutions that address the needs mentioned.  These may be services you have, consulting, value billing or other solutions you have developed. 

6. Finally, end every meeting with clarity about whether there are next steps or not, what they are and who is responsible for them. 

How much you care about the prospect and their business will be apparent if you are thorough in your preparation, your meeting and your follow-up.  Following these guidelines will turn prospects into clients and you into their trusted advisor.

Comments (0) • Posted March 19th, 2010 at 9:00am

We were recently talking with a CPA who expressed excitement over a couple new accounts. Naturally we were curious to find what the CPA thought was the reason for picking up these two new accounts.

Both new clients found him while they were searching the Internet for someone to solve their complex problems.  Based on their search results, they contacted him to discuss their problems. We looked at his website and it did a good job of expressing his competency and personality.  Obviously, it was successful in engaging these prospects and differentiating him from his competition.

So, how well do you differentiate yourself and your practice from your competition?  Addressing the following questions about your site will get you started on generating leads that will be a good fit for your practice:

1. Who are your ideal clients?  What niches do you serve?  Be sure your site identifies and welcomes these individuals and industries through text and use of imagery.
2. What are your specialties and areas of expertise?  Can you present them in terms of clients needs (benefits) rather than just services (features)?
3. Can you present yourself and your staff through the site?  Think of this as the “online dating” portion of lead generation.  Pictures, stories, backgrounds, articles, a blog—all provide the prospect an opportunity to get to know you early in their decision making process.  Work hard to get your personality engrained in the site.
4. What value adds can you build into your site?  Obviously, you can post one of the syndicated newsletters on the latest tax code changes or something similar, but so can your competitor.  So again, think blog or a specific area of knowledge you can share.  There is a level of transparency where you can provide enough to inform prospects without giving away your advantage to your competitors.

Your web site provides you with a great opportunity to make a strong first impression and you cannot beat the price when it comes to direct marketing.  So, take some time to think about what a prospective client will experience when they go to your site.  Most importantly identify your key differentiators and be sure to present them in terms that will resonate with your prospects and your clients.

Comments (2) • Posted February 23rd, 2010 at 2:51pm

Years ago, I was in a brand development meeting and we were discussing whether or not a company could come right out and say “we care.” After more than a decade in business development roles, I struggled with this presentation. My problem is, unless you work in specific care-related industries, this statement is not believable. Unfortunately, segments of corporate America have demonstrated prominently over the years that they do not care.

The flip side of the coin is nothing builds client loyalty better than letting them know you care. Therefore, it is important you continually demonstrate to your clients that you care about them and their needs. This time of year provides a great opportunity to use your tax appointments to communicate how much you care. Here are some simple guidelines to get you started:

1) Make sure you have ample time between your appointments. Although this may seem to be poor utilization of your time, stacking your meetings can be a critical mistake on two levels: it does not account for a meeting running over; and it does not allow you time to prepare for your next meeting.

2) Give yourself ample time to prepare for a meeting. Reframe your thoughts from an earlier meeting, clear your desk, review and prepare for the meeting with the next client.  Nothing says “I don’t care” or at least “I don’t know you” more than flipping through a file to find a piece of personal information about a client during a meeting.

3) Respect your clients’ time by being punctual. We wait in lines and traffic throughout the day, make sure you are an exception to this experience.

4) Have a simple agenda for the meeting. Something that outlines the key phases of the meeting is all that is needed. Perhaps as simple as (1) agenda review (2) catch up (3) review financials and tax return (4) discuss business development - referrals and (5) next steps.

5) Be sure you focus on building rapport in all of your client interactions. This may not be a natural process for you, but it is critical in the “catch up” phase that you ask open ended questions to provide your clients an opportunity to tell you about their lives. Asking appropriate follow up questions will affirm that you are listening and care about what they are sharing.

These steps are simple, straightforward and will pay huge dividends over the years. If you are not already using them, I recommend you test one or two by implementing them this season with half of your appointments. After the season, survey your clients about their satisfaction and see how the results vary based on the two types of appointments.

Comments (2) • Posted February 18th, 2010 at 9:04am