Maintaining your reputation while making decent profits from M&A

© Jacek Sopotnicki – 123RF.com

When it was expected that a client could stay for ten or 20 years, it made a great deal of sense to set up numerous ancillary client services. Even then, often corporate finance was set up on a defensive basis, 'Everyone else is doing it so we must as well'. However, for many accounting practices, a client selling up was a disaster.

The outcome was thousands of practices with under-resourced and under-utilised corpfin departments notionally competing with the largest of their brethren. This was visible in most Anglo-Saxon-style markets across the world. These same thousands then discovered the bind they were in. If they failed to sell their client's business, they faced the likelihood of the client leaving in disgust, anyway.

If they referred the client 'up-stream', the larger player would at the very least bring their pals to the table instead of the referring practice, but, often could gain all the business of a non-seller anyway. In either scenario, if the company sold, it was still usually 'goodbye', due to the feeding frenzy generated by a 'liquidity event'.

Third-party suppliers

Today, an accountancy practice keeps its client for an average of 6.5 years. It is, therefore, no longer feasible to attempt to be a cradle-to-grave solution. There has been a stunning growth of third-party referral-based suppliers in the mid and lower markets: some do tax treatments, others do coaching and mentoring, some are management consultants, while others do wealth management and yet other do mergers and acquisitions (M&A). All, however, are specialists in a single discipline. Consequently, it has become far more advantageous for the accountancy practice to concentrate on its core skills and not try to replicate these services in-house.

Maybe some Top 50 firms in each country will continue to develop, say, their wealth management side. However, such 'bolt-ons' have become increasingly unlikely. Consultancy has been tried and discarded - although, in a number of high profile cases, this was due to perceived conflicts of interest. Deep down, accountants know that they are neither management consultants nor business coaches. Even though it may be neither profitable nor time-effective, the last bastion is the corporate finance side, typically because one partner in the practice really loves it!

The position today is that those corpfin departments still exist in some form, even if merely on paper or the practice's web site. It is a mark of a 'pukka firm', after all, isn't it? In reality, only about 10% of the department's actual activity is to do with the sale of shares in a business. The remainder is a patchwork quilt of valuations, management buy-out advice (although rarely actual transactions), some property stuff, shareholder disputes, divorce related work, etc. The better departments do fulfil some acquisition mandates too.

My simple question is this: "Surely there must be a better way?"

Useful hints

In this stripped-down, more focused business environment, it makes sense for accounting practises to identify and ally with best-of-the-breed specialists. So, what should you look for to maintain your reputation, get the best for your client and to make decent profits from M&A activity? To really engage on this topic you can join myself and the Xigo team at a seminar on 26 June in Sandton.

In the meantime, here are six useful tips:

• Work with no more than one or two M&A firms, firms that match your own client profile in pricing and performance.
  
• Work with firms that you can measure and monitor. Many will spend months making polite noises, but who is prepared to share their internal stats on your client's progress with you?
  
• Work with M&A firms that are themselves true specialists.
  
• Work with those that share revenue from both their activity and success fees with you. If it is only one of these fees, some serious insecurity must lie beneath.
  
• Work with the ones that will refer relevant work back to you.

Most of all:

• Work with an M&A specialist whose clients go on to do other things in the business world after the sale.

Selling is not retirement

Selling a company is not about retirement any more. The average age of a seller has gone down steadily over the last decade. In the UK it was 63. Today it is 53 (source: ONS). Here at BCMS, the average age in a done deal is 46 for UK clients, and lower in many other countries, e.g., Poland and Israel.

68% of BCMS clients stay in business after the deal. Most of the remainder do not suddenly go off to their little place in Marbella. Some do, of course, but they often become bored. One client sold his main business through us several years ago and became a tax exile. Later, he bought a company through us and then, subsequently, sold it, again, through us! Why this behaviour? From our point of view, it is self-certifying.

Our clients take our statement very seriously that we will sell their company for maximum value. These are serious business people who do not suddenly stop being serious. The 32% who do not end up at the helm of a purchased or pioneering company just a few years later, have many alternative choices. Money does that for you.

Company sellers of the better sort become private equity investors, angel investors, or open a family office, or suchlike. It is important to note that all of these are potential long-term clients for your own practice. By working with the right M&A specialist, you can maintain revenue from ex-clients far longer than you are likely to purely as audit clients for the 6.5 years industry average.