There are a few brokerage firms in the nation that have been successful by telling their prospective clients what they want to hear… “we can help you sell or acquire a practice for the best price possible with zero risk.” One of these firms makes their money helping sellers sell and the other helping buyers buy. One of these firms tells sellers they should expect an all-cash sale at a multiple of 1.1, 1.2 or even 1.3 times annual gross. The other tells buyers they can pay zero to 20% cash down at closing (seller finance 80 to 100%), at a multiple of 1 times annual gross, and payments to the seller will be a percentage of collections for several years.
Factors that Affect Price and Terms:
These are two opposing presentations on price and terms that have been a real disservice to the market and have made otherwise reasonable sellers and buyers pursue unreasonable expectations.
For example, in 2018 we represented a seller of a very profitable practice… the owner’s discretionary earnings were $455,000 out of $830,000 in revenue. We entered into negotiations with a firm in the immediate vicinity who matched up on almost every aspect: types of service, types of clients, billing averages, client interaction, software. Due to proximity and redundant expenses the buying firm would have realized more than $400,000 in direct bottom line increase through the acquisition after expenses, annual debt service, and compensation to the seller for part-time support.
The acquisition would have been cash positive in the first month, and break even on the entire price would have been in roughly two and a half years on a balanced risk transaction (see our post on Risk is a Component of Every Transaction) at a 1.2 multiple of revenue with 80% of price paid at closing and a one-year price adjustment contingency against the balance. This price and these terms were based on comparable sales in the market. Bank financing would have been easy to secure and would have maximized the buyer’s cash flow. And the parties seemed to really hit it off.
It seemed like a sure thing, but it went nowhere. We made extensive effort to explain the price and terms rationale, the cash flow, return on investment, and the value behind this opportunity. Unfortunately, the buyer came to the process with a perception he had picked up from some articles written by an East Coast firm that represents the interest of buyers and tells them what they want to hear: that they can pay zero money down, one times gross, payments to seller based on a percentage of collections. He would not budge from these terms.
We do not work on the East Coast, so perhaps that is the market, particularly with the larger firms in Manhattan and New York. We do work on the West Coast and will tell you that in our markets every, single seller of a firm with annual revenue of less than two million dollars can find several buyers who are more realistic, will see the value in their practice, and, thus, will offer better price and/or terms than this buyer was offering.
Instead of this buyer seeing what a rare opportunity was in front of him, evaluating how well the practice fit his business and goals, and then aligning his price and terms to the value and fit, he dismissed those factors and came in with an offer with little thought or value behind it and killed any opportunity to extend dialog.
It was a big missed opportunity for the buyer. As for the seller, the practice sold to a firm moving into the market for full asking price and terms and now the buyer that fumbled the opportunity has a new competitor in the area who is hungry for business and growing.
As we have shared consistently over the years, price and terms are subjective and unique to every transaction. There are critical factors to understand such as fit, profitability, aspects of the selling practice, typical price and structure in your specific market, and risk among others that need to be understood and valued prior to drawing conclusions in regard to price and terms. So, we would recommend all buyers and sellers enter the process with an open mind, some flexibility, and get a feel for the opportunity prior to drawing conclusions. The most successful transactions are those where each party is able to put themselves in the other party’s shoes and really understand the value that is being exchanged.
ProHorizons is a West Coast brokerage and consulting company focused on tax and accounting practice sales and acquisition services.
If you are planning to sell your practice and would like more information about our service, please visit our Sell Your Practice page and/or Request a Sales Information Page. If you are looking to acquire a practice, please visit our Buy an Accounting Practice page, see if there is a practice of interest in our Current Listings in the Pacific Region, and/or Register with us as a Buyer.