Managing Director Transition Advisors
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Firm M&As and the Case of the Great Declining Multiples

Oct 18th 2016
Managing Director Transition Advisors
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Ah, the 1990s! Back then if you were a CPA firm considering a sale as part of your succession plan, you could simply sit back and command multiples that ranged from 1.5 to occasionally as high as 2 times revenue. And more often than not, you would get it.

Accounting firm consolidators, such as American Express Tax & Business Services, Centerprise, H&R Block, and Century Business Services, were simply opening up their collective checkbooks and rolling up as many willing firms as they could conceivably digest. But that was then and this is now.

Like Seinfeld, Netscape, Boyz II Men, Members Only jackets, and mobile phones the size of rugby balls, those halcyon days are like scrapbook memories: fondly remembered but doubtful as to ever making a comeback.

While firms were sometimes receiving multiples as high as 1.5 as recently as seven years ago, today, depending on what part of the country you’re located, the most you can ever hope to see is in the vicinity of 0.8 to 1.2 – and that’s predicated on the fact your firm is sited in primary markets, such as New York, Chicago, or Los Angeles.

Firms with a great client base and billings, or those offering unique client niches that are in demand, could also command a higher multiple. However, should your firm be sited in a less densely populated area of the country, the harsh reality is you’re probably looking at valuations ranging from 0.5 to 0.75 at most.

For those whose succession solution lies internally, it’s not looking any more promising, as partners are consistently being bought out at lower valuations. Another bit of cold reality is that this declining trend promises to continue unabated for at least the next five years. And the reason is threefold.

With the millions of baby boomers exiting the profession, the stunning number of firms without a succession plan – formal or otherwise – and compounding that with the dearth of partner-level talent in the pipeline, the accounting profession has become a bona-fide buyer’s market.

According to the AICPA’s Private Companies Practice Section unit, nearly 80 percent of multiowner firms participating in their 2016 succession survey indicated they expect succession planning challenges within the next five years, while 70 percent revealed that one or more partners would be exiting within that five year span.

So, according to the often-intractable laws of supply and demand, that means there’s likely to be a glut of firms looking toward M&A as their succession solution.

As I’ve stated in previous columns, the three most frequently asked questions when a firm is entertaining a sale are: “What’s the multiple? What’s the multiple, and what’s the multiple?” Unfortunately, the answer isn’t as smile-inducing as the above line.

What we tell our clients is that the multiple is the effect; what they need to do is understand the cause. And the cause is predicated on a number of factors – cash upfront if any, the length of the client retention period, the profitability of the transaction, and the duration of the payout period.

So, think of it in these terms: the less money received upfront, the longer the payout and retention periods, and the more profitable the deal is structured for the buyer, the higher the multiple.

But if you’re holding out a “For Sale by Owner” sign, you’d better be prepared for today’s valuations instead of expecting a multiple that you’ll never see anytime soon. Otherwise, you’ll find yourself binge watching a lot of Seinfeld reruns wearing a Members Only jacket before the certainty of today’s marketplace eventually sinks in. Odds are it won’t be nearly as funny.

So, what do you think your firm is worth?

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