Preparing your practice for sale
Pre-sale grooming is the process of identifying weak areas of your practice and proactively resolving these issues in order to attain a higher value for your business when it is sold.
Many practice owners believe that once they reach the decision to sell their practice that the next immediate step is to market the firm via either a broker or through the For Sale By Owner (FSBO) route. However, what they fail to realise is that they are missing a vital step in the sales process, one that if correctly implemented will not only improve the price they finally attain for the practice, but that will also lead to a smoother sales process with fewer complications, time delays and nasty surprises.
This process is known by those in the M&A market as pre-sale grooming.
Is pre-sale grooming a pre-requisite for a successful sale?
Much of course will depend on the motivation and ambitions of the practice owner and the timescales they are working towards, as well as the strength and marketability of their practice.
Sellers that are looking for a quick exit will have little time to fully undertake a thorough appraisal of their practice and to implement improvements to rectify weaknesses that they have identified. In an 'ideal world', once the process of pre-sale grooming has been undertaken the practice should continue for a full year in order to get a full years set of financials. You could therefore be looking at a period of 18 months from the moment the decision has been made to sell to the point where you actively market the sale of the practice (6 months to appraise and implement improvements and 12 months to obtain the impact of these changes on a full financial year).
It's worth clarifying then that pre-sale grooming is not a pre-requisite for a successful sale. In fact, rightly or wrongly, many practices are sold each year with little to no grooming. The motivation of the practice owner and what they are attempting to achieve out of the sale plays a pivotal role in determining the extent (if any) of pre-sale grooming that is undertaken. For one reason another, price may not be the overriding factor behind the sale, or they may simply not have the time or desire to drive through change and improvements in their business. Other's too may lack the necessary commercial business skills, or may be so entrenched in their working methods that they find it difficult to 'see the wood from the trees'.
I have yet to see the 'perfect practice', and I doubt very much if your practice is perfect. By undertaking pre-sale preparation sellers are not only in a position to fix inherent weaknesses in their business, but may also unlock hidden value in their practice during this process.
Naturally practice owners need to be aware that it is not an 'all or nothing' process. If time is a limiting factor consider identifying 'quick wins'. Also bear in mind that a trade off exists between fixing a weakness and the corresponding value that this adds to the business.
What are the key areas to consider when undertaking pre-sale grooming?
Practice owners should consider reviewing the following areas of their business:
1. Financial
2. Legal
3. Infrastructure
4. Client Base
5. Marketing
6. Strategic Business Plan
1. Financial
a. Clean finances
Buyers will want to ascertain the real profitability of the practice and sellers should ensure that they remove all non-recurring and non-business expenses from the practice. Buyers like clean and transparent accounts from which to base their valuations, so ensure that you provide them with this by identifying and removing personal assets and expenditure. Identify and eliminate unnecessary perks from the practice. These actions will also have the dual effect of improving profitability.
b. Taxes
Ensure that your practice's tax affairs are up to date.
c. Outstanding loans and debt
Focus on attempting to reduce liabilities in the balance sheet by paying off outstanding loans and other debt.
d. Working capital
Improve the cash position of the business by proactively focussing on the working capital process. Buyers like to see cash in the business and will be comforted by a tight and well managed working capital cycle. Set up processes to provide them with this. Identify slow payers and reduce debtor days. Pay creditors on the agreed terms and not before. This is 'bread and butter' financial management yet I'm still amazed how many practices fail to follow the advice that they preach to their clients.
e. Revenue and profit
Timing is everything when it comes to accounting and tax practice sales. I'm often asked by practitioners when the best time to sell is.
The answer is twofold.:
(i) Sell when you don't need to, and
(ii) Sell after a period of rising revenue and profits.
Selling a practice can not only be a complex process but is also one where emotions, pressure and strain can run high. Your negotiating position will be enhanced, and you will attain the maximum value for your business when you are not under pressure to sell.
Nothing puts buyers off more than a practice with declining revenue and profits. Often there are justifiable and explainable reasons for the decline. However, the fact remains that it raises a number of negative questions. Buyers become focussed on identifying what's wrong with either the practice or the market that it is operating in. There will always be buyers looking to turn around failing or declining practices, but the perceived risk associated with a purchase of this kind will be reflected in the transaction price.
Provide buyers with what they are looking for. Sell at a time of rising revenue, but also ensure costs are controlled and profit margins are improving year on year.
2. Legal
a. Legal disputes
Ensure that any legal disputes that the practice has are settled. They create uncertainty in the sale and they will always be identified by buyers during whilst undertaking due diligence.
b. Asset ownership
Ensure the ownership of assets is clear and that the necessary supporting documents are in place as they will be required during the sales process.
c. Licenses
Ensure that all licenses required by your practice are current and up to date.
d. Property and leases
Ensure buyers focus on the positives of your business. Ensure that no unfair equipment leases exist and that all landlord property lease issues have been resolved.
If you own the freehold on your premises, start the decision making process of identifying whether this is or isn't going to form part of the sale. Seek valuations from suitably qualified professionals.
If your premises are privately owned by the practitioner and are leased back to the practice then ensure that any agreement is at market rate and that there are no onerous lease terms that could hamper the sale of the business.
e. Employment contracts
Buyers will want to see employment contracts and terms at some stage during the sales process.
Seek professional employment advice from a qualified specialist lawyer to review existing contracts and to ensure that any new contracts or changes to existing terms are implemented in a legal manner. The emphasis here should be on ensuring employment contracts aid and not hamper a future change in ownership of the business.
Address the issue of non-compete agreements for your fee earners. Do not underestimate this issue. The major risk that a buyer faces when purchasing a practice is the real, or perceived threat of a major fee earner within the practice leaving, taking a large number of clients with them, and setting 'up shop' down the road. Buyers like to see non-compete agreements in place, preferably with a geographic exclusion zone. This is a sensitive area, and will naturally arouse suspicion amongst your staff. Nevertheless, consider starting the process of getting legally binding non-compete agreements in place, and ensure that the communication of this within the practice is managed in a planned and positive manner.
3. Infrastructure:
a. Streamline operations
Undertake an appraisal of your business processes indentifying areas that can be streamlined and improved. For example;
- Does your practice have an organisation structure and does this structure reflect the nature of the services you provide?
- Are processes in place to communicate and pro-actively manage clients in order to ensure bottlenecks at tax or accounting year ends are minimised?
- Are processes in place to identify 'client churn'? Are questionnaires (written, email or verbal) sent to clients in order to understand the reasons they no longer need the services of the practice?
- Are processes in place to ensure that responses to these questionnaires are actually acted upon and are fed back into the practice?
- Do you have a process map that shows the life cycle of a client through your practice, highlighting not only possible exit points but also opportunities and routes to cross sell other professional services to them?
- Does the practice know what it's Key Performance Indicators (KPI's) are? Are these being recorded and reported? These will form a key part of the Sales Memorandum and could include: number of new clients, client attrition rate, average fee per client, clients by revenue/hours billed, client sector, revenue by work category. If you don't currently have KPI's, start the process of identifying relevant KPI's for your practice.
b. Systems
What do the systems and software you use say about the professionalism of your practice?
- Is the software you use in your practice properly licensed?
- Are you using the outdated software that is no longer supported?
Systems and software can be an expensive area, and whilst I wouldn't suggest spending vast sums to purchase the latest 'must have' practice software, do consider how you can improve current systems and versions to ensure that they are viewed at the very least neutrally, rather than a negatively by potential purchasers.
c: HR Management and succession panning
- Are systems in place to recruit, train, retain and develop staff?
- Do you have a structured succession plan in place in order to ensure senior fee earners are replaced within the business? This not only reflects the professionalism of your practice, but also offers some security to potential purchasers concerned with staff turnover post completion and the possible effect that this could have on client retention.
4. Client Base:
The quality of the client base will have a direct impact on the price that is attained for the practice. Dedicating time pre-sale to identify weaknesses in your client base will therefore be time well spent. Buyers will naturally focus a considerable amount of their energy into assessing the client base they are acquiring with the practice. Issues to focus on include:
- Is your practice reliant on a small number of large clients?
This poses a considerable risk to the potential buyer, and every effort should be made to reduce these dependencies by diversifying the client base.
- Have your practices professional fees remained unchanged for a number of years?
Often this scenario will be accompanied by a declining gross margin as costs rise. Take the time to review the practice's fee structure and ascertain where this fits within the market place. Revenue and profit are key factors in determining the market value of a practice, so consider raising fees where they fall below market rate.
- Does your practice cross sell other services to your clients?
Focus on identifying cross selling opportunities to existing clients. Be proactive in this regard, and ensure fee earnings are in frequent contact with their client base at regular periods throughout the year and not just at year end.
5. Marketing:
Spend time to improve the presentation, professionalism and profile of the business. Press releases are a proven method of raising the profile of the business, particularly in the accounting and tax trade press.
Consider investing in your branding and corporate image if it is perceived as outdated by either clients or employees.
Also realise the importance that the web plays in today's accounting market, both in the acquisition of new leads through search engine queries as well as what your website says about your business. The days of an amateur looking site are well and truly over, and in today's' tech driven world leave your business looking like a dinosaur. Replacing such a site with a simple, yet professional looking one can easily be achieved at a reasonable cost.
6. Strategic Business Plan
Start the planning process for your business and what you expect to achieve in the pre-sale period. This plan will include action points and targets from items we have discussed in points 1 through to 5.
Determine where your business fits within the current marketplace and put in place a strategic plan to highlight where you want your practice to be and how it is to get there. Ensure that financial forecasts are in place for the next 2 years, and that plans are in place to review monthly performance to forecast so that issues and opportunities can be easily identified and addressed.
Author:
Daniel Crowley, CGMA
Founder - Accounting Practice Exchange