Buy a parcel of fees? Why should you? And even if you wanted to, how would you?
How To Buy A Parcel of Fees
It is a sellers market out there. Medium and large accounting practices are out there hunting for baby boomer accountants ready to sell. But why this frenzy? Why is there so much interest from medium and large firms but no newcomers to be seen?
And if you do want to join the party, how do you do it? How do you actually buy a parcel of fees?
Ed Chan, co-founder of WIZE Mentoring and founder and non-executive chairman of Chan & Naylor, kindly agreed to give us an answer. Chan & Naylor was nominated as Australia’s fastest growing accounting practice in 2013, when its revenue grew by 43% to almost $19m, mainly through acquisitions. And Chan & Naylor hasn’t stopped since then. It is constantly on the lookout for more accounting practices to acquire. So acquisitions clearly work for them.
Here is what we learned but please listen in as Ed explains all this much better than we ever could.
To listen while you drive, walk or work, just access the episode through a free podcast app on your mobile phone.
How to Grow
To grow your accounting, tax and/or advice practice, you have three options. You go for organic growth. You merge with another practice. Or you acquire other practices, ie buy a parcel of fees.
Each of these three options have advantages and disadvantages. Organic growth is slow but gives you time to adjust. Mergers are rarely between equals, but save egos. And acquisitions are fast, but highly disruptive and fraud with danger.
So in this episode we focus on acquisitions – how to buy a parcel of fees.
How to Buy
You can buy the entire practice – client lists, staff, rental contract, brand name, the whole lot – that is one extreme. Or you can go for the other extreme and buy just the client lists, but nothing else.
But most buyers go for the middle. They acquire the majority of clients and take over the majority of staff. But transition out of the old brand name and location. And this approach makes sense when you consider that that the main (some might say the only) assets of an accounting firm are its clients and its staff.
Word of mouth is very slow. Advertising comes without any guarantees. You can throw $10,000 at something, but you might not get $10,000 back. In fact you might not get anything back.
But when you buy a parcel of fees you get a dollar back for every dollar you spend. It is guaranteed. Well guaranteed with some margin of error.
If you go and buy $400k of fees at 1:1, you pay $400k. But then you get $400k in revenue straight back. It is instant. You do not have to wait years and years to grow this client base.
And it is very cost effective. The cost to service this client base should be about 40% of fees with local staff. There is no additional fixed overhead – assuming that you got the office space – so your profit is 60%. And these numbers still improve when you consider offshoring. Your costs should go down to 20% if you offshore.
It has always been a sellers market. For every seller you get a hundred buyers. But buyer and seller still need to match, and that is where the difficulty lies.
Most sellers want their life’s work to survive and so are very keen to have brand and location to stay as they are. Mr Smith wants to live on in Smith & Partners forever. But most buyers are not interested in continuing somebody’s legacy. They want to move the seller’s practice into their practice. That is the first hurdle.
Then there is the inevitable, “Yes, I want to sell but I don’t like you and neither will my clients.” That is the second hurdle. And this is why you often need business brokers to manage everybody’s egos.
Once you get above $1m in fees, the numbers of buyers thin out since there are only a few who have $1m to spend. Young accountants have mortgages to pay. And banks tend to not lend at these lofty height, so the small firms are definitely out of the market from $1m upwards.
Acquisition v Organic Growth
If you try to grow organically through marketing and advertising, the clients you get are a hit and miss. They changed accountants for one of two reasons; either their old accountant was really bad or they as clients are really bad.
So with new clients through organic growth, you don’t know whether they are a good client or a toxic client. And you don’t know that for about a year or two. A year into your relationship you find out that they are a toxic client. And then it takes another year to move them out. Very time consuming and frustrating.
But if you buy a parcel of fees, they are all usually really good clients. They know that nobody is perfect and so if you make a mistake and let them down, they give you another chance and often become your most loyal clients. Ed Chan calls these clients “rubber cup clients” as in not breaking but bouncing back. And toxic clients are “crystal glass clients” who break at the first hiccup.
This is the bird’s eye overview of what Ed Chan shares in this episode. But please listen in as Ed explains all this in much more detail.
To hear more of Ed’s business growth strategies for accounting firm owners, please visit www.wizementoring.com/taxtalks where you can download a copy of WIZE Mentoring’s free eBook – The Accountants 20 Hour Workweek.
Disclaimer: Tax Talks does not provide financial or tax advice. All information on Tax Talks is of a general nature only and might no longer be up to date or correct. You should seek professional accredited tax and financial advice when considering whether the information is suitable to your or your client’s circumstances.
Last Updated on 29 April 2020