IN OUR OPINION, PERSPECTIVE #76 — FEBRUARY 4, 2019
(A Continuing Series for Leading CPA Firms)
THE ART OF THE DEAL
|“The worst thing you can possibly do in a deal is seem desperate to make it. That makes the other guy smell blood, and then you’re dead “. — Donald J. Trump|
The last several years have experienced a “merger frenzy” with small and mid-sized CPA firms (with annual revenues between $10M and $24M) getting acquired by larger CPA firms that have a strong brand and a track record of average to above average equity partner profitability. Further, while it cannot be characterized as a “merger frenzy”, there certainly is considerable “consolidation” among firms with annual revenues between $25M and $100+M.
In Our Opinion, the “merger frenzy” and “consolidation” have occurred and willcontinue (at least in the near future) because of some combination of the following challenges:
As a result, there is a very good chance that your CPA firm, either as an acquirer or as an acquiree, will entertain a strategic transaction or “deal” in the near future. The purpose of this newsletter is to further a reader’s understanding of two important aspects when pursuing the “art of the deal”:
The practice payment (i.e., the price paid) for CPA firms with annual revenues between $10M and $100+M is based on a multiple of annual revenues (usually ranging between 75% to 100% although there are exceptions both below and above this range). The multiple varies and depends on the bottom-line profitability percentage distributed to the equity partners. Presented below are typical illustrations:
found with firms with annual revenues below $25M. The expectation is that a firm’s bottom line profitability percentage (distributed to the equity partners) usually ranges
between 32% to 37% (although there are exceptions both below and above this range) as the partners, on average, have between 1,200 and 1,500 annual billable hours. Presented below is typically found in the marketplace:
Synopsis of the Terms and Deal Points for the Above Transactions:
The CPA firm “merger frenzy” and “consolidation” have occurred and willcontinue (at least in the near future) also because acquirers, who usually have (or are) effectively addressing the challenges facing sellers, need talent and critical mass to fund investments and compete in the marketplace.
The above “deals” or transactions are usually structured as asset purchases. Presented below are the typical terms and significant deal points:
Agreements in Supplement. The Partnership Agreement contains customary restrictive covenants as to clients and employees after a partner leaves the firm.
discretionary bonuses should revenues and/or profitability increase. Compensation would be allocated among the acquired firm partners in such
manner as acquired firm representatives determine, subject to the acquiring firm’s right of reasonable review.
purposes of determining compensation during the Guaranty Years (and whether revenue and/or profitability targets have been met).
The “art of the deal” is a sensitive negotiation between buyers and sellers. The best “deals” are cut when there is both an educated consumer as a buyer and an educated
consumer as the seller and that there is an understanding that there has to be reasonable give and take. A deep understanding of the prices paid and the important terms and deal
points will create efficiencies in the transaction process which usually is filled with starts and stops and can take months before closure is attained.
Dom Esposito, CPA, is the CEO of ESPOSITO CEO2CEO, LLC — a boutique advisory firm consulting to leading CPA and other professional services firms on strategy, succession planning and mergers, acquisitions and integration. Dom, voted as one of the most influential people in the profession for two consecutive years by Accounting Today, authored a book, published by www.CPATrendlines.com., entitled “8 Steps to Great” which is a primer for CEOs, managing partners and other senior partners. In Our Opinion, is a continuing series of perspectives for leading CPA firms where Dom shares insights, experiences and wisdom with firm leaders who want to “run with the big dogs” and develop their firms into sustainable brands. Dom welcomes questions and can be contacted at either email@example.com or 203.292.3277.