At Draper Hinks we have been selling accountancy practices for well over a decade now and have successfully sold over 140 practices/tranches of fees. We have been asked to sell all types of accountancy practices and it is our job to find a buyer for our vendors. In theory, this sounds quite straightforward but it is often fraught with problems. As the person in charge of running Draper Hinks it is my responsibility to manage the expectations of the seller, so that they are not disappointed with any offers made to them by buyers.
For many years, the industry average for an income multiple has been once times fees ie if you are selling £100,000 of accountancy fees you could expect to be paid £100,000 (with certain conditions applying, such as client retention etc). I have often been told that to value a practice on the amount of fees being sold is a strange way to value an accountancy practice. Most businesses are valued on the basis of a multiple of profit, which makes much greater sense. I do not understand why this anomaly exists in the field of selling accountancy practices, but it does.
The marketplace this year has changed quite noticeably and there has been a significant downward pressure on income multiples being offered. I have had to let vendors know that they may not be offered the historic 1 x fees. We have had multiples being offered at 0.7, 0.75, 0.8, 0.9 and 0.95, where only last year we would have expected to be offered 1x fees or even more. However, we still have had offers from buyers at the 1x fees and above, but it is becoming the exception rather than the rule.
Many vendors believe their accountancy practice is worth more than 1 x fees. This is because they feel they offer a unique service, their practice has been growing by 10% pa or more, they have strong relationships with their clients, or they have are specialists in their marketplace etc. If the vendor feels their accountancy practice is “better” than their competitors, they will be looking for a premium to be paid for it. However, you have to go back to the old adage that anything is only worth what someone will pay for it.
As a broker – to be put in a situation where a buyer is offering lower than the amount expected or desired – it is not always possible to get the vendor to lower their expectation and accept what is being offered. The vendor gets disappointed, disillusioned and feels let down with the offers being made. This will often lead to them pulling out of negotiations, leaving all parties frustrated.
When discussing the sale of a practice, the greater the need for the vendor to sell the more likelihood that the deal will go through. If we have a vendor that is thinking about selling because they are fed up and don’t enjoy their work anymore, they are less likely to accept an offer of less than 1 x fees. However, if a vendor has to sell because they are not well and have a serious illness, then they will accept whatever is offered. As a broker I have had to deal with the sale of accountancy practices where the vendor has had terminal cancer with three months to live, been diagnosed with a brain tumour, and been admitted to a nursing home following a bad fall that has brought on dementia and Parkinson’s. In these situations, we have sold the accountancy practices based on what the business was worth, and not on the health condition of the vendor.
It is important that the vendor knows what they are going to do post-sale. One vendor told me he would not sell his accountancy practice until the list of “things to do upon retirement”, that his wife had given him, was reduced to two sheets of paper instead of three. Another vendor said he was putting off selling his accountancy fees because there were only so many times he could face going to Ikea. Other vendors can’t wait to get away from the constant grind of having to hit deadlines, take on new government initiatives and keep up to date with constantly changing legislation. We have been given many different reasons why someone wants to sell their accountancy fees. All of them are valid.
Please remember that your accountancy business is not your retirement fund. You have had an income from it while you have been working. Yes, you may get something for it when you come to sell it, but buyers may not always be there when you want to sell.
Until now, we have always been able to find buyers for our vendors. That has not been the case this year, however, the sole example being one small accountancy practice for sale on the south coast. We found a buyer who showed a keen interest but did not show up to the meeting arranged with the vendor. We confirmed the meeting on the Friday before the arranged time on the Tuesday, and he said he was keen to meet the vendor. After he did not turn up, we tried calling him, emailing him, texting him, but we got no reply to any of our attempts to contact him. Nothing. The vendor was not happy and neither were we. The practice remains unsold. We will try again to find a buyer in a few months when the marketplace may be different.
So buyers are offering lower amounts for the practices they are buying and there are fewer buyers looking to buy. I have always said that it is a seller’s market. For the first time in over a decade I have had to alter this mind-set. However, it is not a buyer’s market either. We do not have more sellers than buyers. We still have many more buyers on our books, but many of them are only thinking about buying or finding out what is on the market, rather than actually completing deals. We get a lot of interest in the practices we are looking to sell but not as many offers coming in.
I do not know why there has been this change in the marketplace. Funding is plentiful and cheap. Buyers want to expand their businesses. Sellers want to retire or follow other career paths. This year is an anomaly. Let’s hope it all changes before the end of the year, as this trend only started early on in 2016.
Brexit has not helped either. We have had a buyer pull out of a deal when it was close to completion, citing the fear of the future as the reason for not taking it further. I don’t know what effect it will have in the long term, but the clients of accountancy practices will still need to have accountants and accountants will still want to retire or do other things. There will always be a market for accountancy practices but at the moment multiples are depressed and committed buyers are no longer there in their droves. I would welcome the feedback from anyone reading this blog who may be able to comment on the contents.
If you are thinking about selling your accountancy practice, or are thinking about buying an accountancy practice and want to discuss your own situation in confidence, please email me at email@example.com quoting reference Blog 160701.