Q&A: John Ezell on M&A Trends for CPA Firms

john-ezell-picture.jpgMerger-and-acquisition activity appears to be quickening for smaller firms.

But the credit meltdown and a looming recession are clouding the long-term picture, according to one of the profession’s leading brokers.

John R. Ezell (pictured), CPA, is the president of ProHorizons, a national brokerage and consulting firm specializing in the acquisition, sale, and merger of accounting and tax practices. John has advised hundreds of clients in the merger and acquisition of accounting and tax firms since founding successful-practice-sales-by-john-ezell-cover-photo-small.jpgthe company in 1995. He is the principal author of the book, “Successful Practice Sales: The Complete Guide to Buying, Selling or Merging Your Accounting, Consulting or Tax Practice.”

Q: How’s the market for firm mergers today?

EZELL: The market is as strong as ever. There seems to be a larger supply of firm owners thinking of selling for many of the same reasons they have done so in the past — retirement, burnout, other business opportunities, etc. We obviously do not know how the tightening of the credit markets will affect these particular transactions in the next few years, but sales and merger activity among small firms appears today to be every bit as active as it has the past few years.

I do see some acceleration in sales and merger activity for the small firms. With the average age of small firm owners continuing to push up, the merger and acquisition activity should continue to increase as well.

Q: Is there the usual slack-off for busy season, or is there more or less activity and interest than usual?

There is the usual slack-off due to busy season, but activity never completely stops. In fact I have a buyer and seller doing final due diligence today for a closing March 1, 2008. Because most small firms have a substantial portion of tax work in their practice, activity will always slow down this time of year.

Q: How is the staffing shortage affecting M&A strategies?

EZELL: I don’t think most firms considering an acquisition or merger are looking exclusively at picking up staff. But, at the same time, the larger firms, over $750,000 in revenue, are often as interested in the staff as they are the clients they are acquiring.

Staff shortages are certainly a significant issue in the market. The buyer’s goal remains growth and there is no doubt that staffing shortages have become an increasing barrier to growth. However, this issue still remains a secondary or even tertiary priority to the traditional goals of client acquisition, expanding the service offering or geographic expansion of the acquiring firm. Typically, we see the staffing question being raised increasingly as a buyer evaluates the strength of an acquisition opportunity we present, rather than an up-front criterion that needs to be met.

Q: How are prices trending?

EZELL: True market value for small accounting firms has not seemed to change much in the past few years. This could change if the credit markets tighten and limit the amount cash buyers are able to put down on practice acquisitions. But for the moment we have not seen much of a change in most lenders’ appetites for these particular deals. And of course, due to supply and demand of buyers, practices in major metro areas continue to sell for higher multiples than similar practices in more rural areas.

This is always a difficult question to answer because our pricing structures are closely tied to our deal structures, which vary between fixed-price transactions and transactions with revenue guarantees, depending on the needs, priorities and goals of the two parties. So, there is a bit of an apples to oranges challenge in drawing a straight comparison from transaction to transaction over the years.

Q: What are the top three things someone should do if they’re looking to buy?

EZELL: For buyers…

1. Be flexible and receptive to looking at a range of acquisition opportunities. Every acquisition requires some give and take. Waiting for the ideal opportunity, the perfect fit, can be an endless endeavor. Do not let a $1,000 issue squash a $300,000 transaction. Excessive pride and fear tend to limit flexibility and have destroyed a lot of good acquisitions. In the end, a “leap of faith” will probably be required because it is unlikely all the ducks will line up perfectly for your comfort. Prepare yourself for that sort of decision making.

2. Move quickly when you find a practice of interest. Time truly can kill a deal. We see it happen more often that it should.

3. Utilize the experience of industry experts appropriately. Your lawyer has a clear role and value Any intermediary has a role and should provide value And your lender has a role and value. Keep them all focused on their roles and value. Your lawyer should be involved to protect you legally and limit their opinions regarding the transaction appropriately A broker should be involved to create a successful transaction for all parties and should not provide legal advice. And a lender should have extensive experience with funding cash flow acquisitions with limited collateral. Unfortunately, we have seen all three of these types of experts either overstep or under commit to their roles and kill very solid acquisition opportunities.

A few other things to add to the mix: The first thing a buyer who has never owned a practice before should do when thinking of buying a practice is take a hard look at themselves and make sure they know how to bring in new clients. All accounting firms have constant attrition of clients and it is imperative that the owner has the skills to grow the firm. Additionally, if a buyer or firm has not purchased a practice before they should seek competent help in analyzing, negotiating, structuring a deal, putting financing together, performing due diligence on the firm and finalizing all the contracts. We certainly provide this service, but if they do not want to hire a professional they should at least look to a colleague who has acquired multiple firms to assist them. First time buyers should be careful not to let their ego get in front of their wallet. Experience is the difference between putting a solid deal together or possible personal financial catastrophe.

Q: How about some tips for sellers?

EZELL: For sellers…

1. Consider hiring an expert at selling accounting firms to assist you. Statistically, firms that sell without an intermediary have a tougher time getting to the closing table. I’m not saying it cannot be done. But it is a very emotional process for most sellers and an intermediary who is actively involved throughout the process typically provides value way beyond the fee they earn.

2. Ultimately, the market will dictate the price of your firm and you may find your price and terms are more flexible if you find the ideal buyer. It is important to manage your expectations and keep your goals real and in line with the market. Otherwise, you may sell for too little or never sell.

3. When you do sell your firm, be honest with the intermediary you have hired and/or the buyer. Hiding the fact that a large client fired you last month to get a little extra on the practice sale is bad business and will often come back to haunt you. Treating a buyer with the Golden Rule will always pay off. Not disclosing all pertinent information will possibly land you in court.

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Posted at March 5, 2008
Filed Under BSG [CPA TRENDLINES] | Leave a Comment

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