Advisers, brokers and you
Keith Underwood is managing director of Foulger Underwood and explains how an adviser can help you sell your practice, and how they differ from brokers
The market for accountancy practices has never been so vigorous – and awash with money. But that doesn’t necessarily mean untold riches for practice owners at the click of a finger.
Traversing this market often requires expert, external, support. A series of good decisions and actions must be made to maximise the value received for yourself and the firm’s other owners. Doing so ‘alone’ is easier said than done. More about the support models in a moment, but first: what’s going on in the market?
Accountancy mergers and acquisitions (M&A) have expanded in recent years. This has been driven primarily by private equity, alongside a renewed interest by independently owned practices of all sizes to increase fees and scale up their businesses.
The private equity consolidators have each taken a different approach to the types and size of practice that they have acquired. Some have acquired a ‘hub’ firm, which has then taken the lead in running a practice that becomes bigger through judicious, targeted, bolt-on acquisitions. Other models have seen smaller practices brought together.
Independent firms’ growth through mergers and acquisitions has also increased. This is fuelled by concerns over a lack of critical mass to overcome both succession planning and investment in the broadening requirements of their clients.
Some owners question the need for support when it comes to making ‘the big decision’ about the future of their practice. After all, how hard can it be?... Particularly when there are lots of cold-call solicitations flying about, offering promises in lieu of you selling (or even simply handing over) your equity.
"The first thing prospect vendors must appreciate, when evaluating whether they need external support in this process, is it falls into two camps: adviser or broker."
The role of each is distinctly different. A broker promotes the opportunity for a sale to the widest possible audience; then sends the vendor the responses from interested parties. They don’t advise the vendor, but merely bring the two parties together to try and achieve a sale transaction.
In a busy marketplace, with multiple approaches from potential buyers, the question is whether the broker has a role, or whether the vendor should respond to the solicitation letters which they receive and follow up on their own account with contacts and discussions moving towards a transaction at some stage down the line.
A broker’s fees are payable by the purchaser and therefore it is counterproductive for the broker to negotiate an increase in value for the vendor.
The role of an adviser is different. They can represent a client on the buy side or sell side, advising that party exclusively. The adviser’s fee renumeration is paid for by the party who contracts with them.
What can you expect from an adviser? Well, their role can be broken down into four main areas:
- To prepare the seller or purchaser for the transaction – this should include profiling the business.
- Issuing a detailed and attractive information memorandum (IM) or deck, highlighting the sale/buy opportunity to prospective purchasers/sellers.
- An adviser should manage the sale/buy process on behalf of their client.
- An adviser should sit in on meetings between the parties and advise their client accordingly. This should include leading them through to preparing heads of agreement and monitoring the progress of the legal documentation, once the solicitors have been appointed. This may on occasions involve management of the ‘data room’ and handling queries arising with both parties solicitors.
Vendors may feel they can DIY the process, but few are fully prepared and profiled at the outset.
Brokers have a role between serial acquirers and sellers, but deals often involve part sale and part merger, so all stakeholders need close consideration if a deal is to work.
"As no two practices are alike, nor are the circumstances of a sale, purchase or merger."
So, an adviser should customise their services to the individual client and use their experience in the market to maximise the outcome - and highlight the shortcomings - of a tabled deal. Crucially, they will also keep a close eye on managing the process; delivering a preferred list of targets or acquirers who are making offers on a flat playing field using the same data which is compiled in a suitable IM.
There should be time at the outset to discuss profiling, reasons for sale and the market positioning of a sale prospect. In some cases, profiling can be a two-year period before going to the market.
An adviser should have considerable experience (which is delivered as a service) and a wide range of contacts with buyers or sellers who might not be obvious to a practitioner or group of partners wishing to seek a transaction.
This broad range of contacts may include individuals, finance houses or indeed potential purchasers outside of the sector who may be interested in your practice. For example, wealth management consolidators have moved into the accounting sector and made some successful acquisitions to build complementary service offerings.
Other ‘lateral opportunities’ may include a party which might be in a totally different geographical area, an overseas buyer, or based on an industry specialisation.
These deals also, inevitably, bring forth a range of emotions – and on many occasions competing interests between not only the two parties, but individuals on the ‘same side’ of the table. An adviser would hopefully help to smooth out any issues through both pragmatism and diplomacy – while keeping a watching brief on the deal process.
Deals pass through stages of profiling, research, contact, meetings, offer, negotiation, heads of agreement exclusivity, and then due diligence and integration plans before reaching a completion date. The planning of these aspects of a deal often overlap, and need careful management. The feedback from meetings, early identification and then resolution of possible deal breakers is essential. We hear of deals taking 9 to 12 months to bring to fruition. Unless they are complex, many we see should have been completed in 4 to 6 months. The result is an unnecessary waste of senior management time and inflated legal costs. Delays and deferment of discussions are a deal killer.
"A sole practitioner, or even a multi-partner firm, is not going to be experienced in a trade sale, or the process required to bring a sale from initial promotion through to completion."
Even practices with their own M&A division usually engage advisers to represent their specific objectives or strategies for acquisition in the general accounting marketplace.
The old adage that ‘a doctor should never diagnose themself’ holds true. An expert third-party view should be objective and with a knowledge of the marketplace that the client cannot really appreciate or have experienced, unless they are a serial acquirer or seller.
In our view, there will continue to be a role for advisers as consolidation continues. New entrants into the marketplace, service line acquisitions, downsizing and consolidation are usually driven by good commercial reason and need a broad understanding of the opportunities in the marketplace to bring the deals through to fruition.