It Only Takes a Few Words to Kill a Deal
Potential opportunities die because of the tone and stance a firm takes in the first communication.
How the Seller/Upward Merger Firm Kills a Deal
- They set an unrealistic value of their firm based on information they gathered on their own.
- Expectations of a material cash up front payment or all cash payment.
- Demanding terms about their future employment and ensuring all the staff must stay. No firm can be expected to retain underperforming staff or ones in a duplicate role; i.e. two firm administrators, two receptionists, etc.
- Some owners are 60 plus years old, but “are in great health” and want to work until they are in their 70’s or longer as an equity partner. This situation is rarely acceptable to the buying/acquiring firm.
- Note: do not sell or merge because you are not ready to go. You cannot expect another firm to provide the safety net of retirement and shift risk to them.
How a Buyer/Larger Merger Firm Kills a Deal
- Pre-judging the opportunity before talking to them. We have heard “we spoke with them 5 years ago and this will not work”, “we think they do poor work”, etc. Situations change, and a bad reputation does not mean they have bad clients.
- Related to reputation, disgruntled clients who were unreasonable or ex-employees who were unhappy can project negative and false statements about a firm.
- Undervaluing the price. Coming in with the mindset that firms sell for .7x or whatever number. Each firm is different and if the approach is preset a firm may turn away a great deal.
- Look beyond the current metrics. If the firm appears to be underperforming based on your metrics peel back the covers. They may have great clients but are just providing compliance services. Opportunities for outsourced accounting, wealth management, valuations, management consulting, specialty tax work, etc., may exist. If so, your firm does not have to pay for those opportunities in the deal terms.
- Look at an underperforming firm as a staff buy. A 20-person firm with fair financial performance may bring 15 accountants you do not have to recruit or pay recruiting fees for who can work on your more profitable clients. Slowly raise the fees on their underperforming clients.
Some Deal Killer Points
- 1040’s. No minimum fee, low averages, high volumes, and a high percentage of total revenue.
- Services. Niches that require someone with specialization; i.e. valuation or forensics.
- Fixed Fees. Those can be value-billed, premium engagements or sinkholes that mask low fees.
- Real Estate. Property is not the buyer’s problem. Bundling real estate is a mistake.
- Handshakes. Timelines, practice multiples, non-competes, etc. need to be in the contract.
- Rates. Large gaps may be too difficult to overcome. The key is examining the cost of labor.
- Industry Alignment. Are their clients outside your core competency?
- Indecision. A candidate needs to know what they want.
- Lawyers. Attorney’s inexperienced in CPA firm transactions can be a disaster.