A Firm is Worth What a Buyer Will Pay
What someone wants is not always what the market will pay. If the supply of firms for sale exceeds the demand, prices, and terms work in the favor of the buyer. In addition, if a practice needs updating, the selling price may drop or become unsaleable.
Understand How a Firm is Viewed by a Buyer
How is a firm looked at? Whether you are the buyer/acquirer or seller/merger candidate it is a great exercise to understand how a firm views the other party. A top performing buyer need to understand that most firms will not meet their standards. Firms evaluating a transition or an upward merger for growth need to understand exactly what a potential or merger partner will be looking for in a firm.
What Do Firms Value Financially?
Revenue per head and rate gaps. A wide gap in financial alignment is generally only acceptable if there is a different service involved. A tax department with a $500 average 1040 cannot easily go into a $1,500 average. However, acquiring an accounting business with a blended rate of $100 can go into a firm providing tax and audit services at a $175 blended rate. The cost of the labor pools are different.
What Other Features Does a Firm Value?
There can be a diverse number of intangibles. If the incoming partner(s) are exiting are they ready to relinquish control? Are the firm cultures too different? Is the mandatory retirement age clear with all parties? Does the acquiring firm have the skillset to take over an industry or service line if the incoming partner(s) are leaving? These are just example of “soft” issues that can have a hard impact.
Let Us Conduct an Assessment
We need 30 minutes. Let us conduct our candidate assessment on your firm. Then, right on the phone we will break-down your firm as we see it, and how we would explain it to a potential buyer or merger opportunity. If you are the seller/upward merger firm, this will tell you if there are areas you may need to consider adjusting. If your firm is the buyer/acquirer, this assessment will help you understand what challenges may exist in finding a good fit based on your successful metrics.
The Myth on Payouts
Let us cash-flow a deal scenario for you. We often speak with buyers who think they cannot afford to buy because of the perceived cost or cash-flow analysis they did. And, we talk to sellers who want all cash up front. Under rare circumstances a larger, heavy cash positive may throw money into the deal to get a market or special asset, but for the most part a normal buyer is not paying cash.
- All Cash. Paying all cash up front is never a deal we would recommend. It’s a bad idea, no matter how much someone tells you that is plausible and will arrange the financing.
- Some Cash. Possibly some good faith money shown by the buyer. Maybe 10% to 20%, but only if the circumstance makes sense.
- The Norm. A normal deal is payment based on retention over a 3-5 year period once the incoming partner(s) retire.
- The Creative. If you want to barter 6 cows and an Escalade, plus stock in a gold mine for you firm we guess it can be done. The point is there may be other ideas you can offer or a hybrid of points 2 and 3 above that could work.