How is an accounting firm valued (and what is the value of being sold)

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how is a firm valued

David Cristello: … Past, is the multiple based off of past year or is it the forecast last adjusted?

Speaker 2: No. It would be past year. Sometimes they’ll take an average of the past three years. You know, whatever, but … Because, sometimes you’re gross revenues accounting firm will include one time special projects. So, maybe your revenues are $100,000 more this year than they were last year and if it’s a recurring project then that’s fine, but if it’s a special project then that’s all got to be averaged in and that’s what we do.

David Cristello: How do you … There’s a lot of questions around worry … It’s interesting because, for those that might be thinking about an acquisition, they’re thinking about, well how do we de-risk this acquisition if we buy and 50% of the clients just leave. I’m curious from that angle, when you’re looking at buying a firm purchasing firm, how do you build in some sort of risk analysis, risk profile, so if the client attrition is higher you’re not … You’ve kinda built that into the acquisition price, or is that kind of inherent in the multiple anyways?

Speaker 2: Well, it’s all you know … Client retention is partially a matter of packaging. Clients … There are what we call, changes in front of the door and changes behind the door. If David, you have a firm and you merge with a larger firm. If, you’re on a … Say you’re using UltraTax and the larger firm is using ProSystem fx for your tax software. See, it doesn’t matter to the client what software platform you’re on. He doesn’t see that. All he knows is he wants to get his 1040. That’s a change behind the door, but all of a sudden if one of your loyal clients whose been coming for you for 10 years and you’ve been doing his 1040 and you’ve been billing him for $600, all of a sudden after you merge, he gets a bill for $850, he’s gonna feel that. That’s a change in front of the door. You’ve got to package it correctly. Never position it … Change is a dirty word to clients. People choose accountants much the same way, I know this is gonna sound sort of non-connected, people choose their accountants much like they choose their dentists, All right. Usually referral, experience. If you’ve been going to a dentist for 20 years and all of a sudden you walk into his office and there’s somebody else in his chair, chances are you’re not gonna … You have no idea about his or her competency level. You’re not gonna let them work on you. That’s the same thing with an accounting firm. Clients don’t like change, so that’s why that all important transition handoff is so critical. For the first couple years, they see you, you send out a letter and never position it as the loss of David Cristello, position it as the gain of the successor firm. This way, if the clients get a letter saying I’ve decided to merge, they see you’re still there, they’re fees aren’t gonna go up, your location is basically the same, chances are that client is going to be retained. If you lose them, then that’s shame on you.

David Cristello: That transition period seems so critical for the retention of those clients and let’s say the pay off here is over a couple of years, at what point … You know if you introduce, hey you’re gaining … The way we’ve seen it is, hey now that we’ve merged with this firm or we’re gonna acquire this firm, you get to gain all these other resources that they might have. We’ve seen that come up a lot [inaudible 00:03:41].

Speaker 2: Right.

David Cristello: At what point does that owner or that typical contact point for that client then completely transition away? Is it after … Is it 18 months, 24, 36 months after that initial merger and they say, “Hey, I want to introduce you to Jim. Jim and I have been working together a lot on your file. He knows your case and let’s schedule a lunch, a meeting, an afternoon to connect so we can all talk together.” I mean, how does that handoff look kind of tactically or what are some examples of making that transition point happen?

Speaker 2: Usually, and that’s a great question, usually what will happen is if you go for a client visit or a client comes to see you, you always should have the successor firm’s partner with you, so the client sees both of you at the same time. Maybe that’s for the first year. Second year, you could probably … You may do that again. Third year, that’s sort of the best time to hand it off, depending on your transition, when you’re gonna transition out, you should always bring that person with you. It was a great example that if I could just … A great antidote. We had merged a firm in New York State. The owner was going out in about three years, so they had merged and then a client called. He called the former owner and he says, “Bob.” He goes, “You’re not gonna believe this, but I just got the same letter we got six years ago from the IRS.” And Bob goes … The owner’s name was Bob and he says, “Yes. I remember that. That was a nightmare for us to deal with, but you know something? There’s a lot of tax laws that have changed since then. Our new partner is an expert in this field. Two heads are better than one. I’ll discuss with him and get back to you.” So, instead of Bob getting back to him, the new partner calls the client, gives him the solution and that was so critical in that transition. Now, the client has become accustom to the new partner.

David Cristello: Yeah. Just to give context. I appreciate that the story … Because, then it really shows the concrete example of how this … As transition advisors, you focus primarily or entirely on helping accounting firm owners sell or acquire. Just as a frame of reference, so how many do you, as an organization as a company, how many do you help facilitate, manage in a given year? Even though, it might change.

Speaker 2: In our career, we’ve done, we’ve merged about 850 to 875 accounting firms, so we have some experience with this. During the year I would say we touch about 70 deals. Now, that doesn’t mean we complete all of them. People who come to us, you know for whatever reason, they may decide not to merge, they may find a firm on their own, but we touch about 70, 75 deals in any given year. We also, and I should preface this, we also have a large consulting division where we do things like partnership agreements, and that sometimes, or conduct firm retreats, and that sometimes gives us sort of entrée into a relationship with the firm, who later may down the road decide to merge. I would say a good estimate is about 70 to 80 deals a year.

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