Why Are There So Many Firms Looking to Buy Accounting Fees?
The demand for accounting fees is at peak levels. In Melbourne alone we have more than 250 firms registered looking to buy fees of between $100k and $5 million. From all reports, this demand is mirrored across the other states but unfortunately, the baby boomer practitioners aren’t selling in the numbers we all expected. As a consequence, we have a long queue of frustrated buyers.
Let’s explore who the buyers are and the many and varied reasons why they are in the market for accounting fees.
WHO ARE THE BUYERS?
We have identified six distinct types of buyers including:
- Start Ups - these are generally younger accountants in their late twenties and early thirties looking to build on the small parcel of fees they have accumulated during their time as employees. In a number of cases they present as a partnership and apply for fees up to $1 Million.
- Tuck-Ins - these are the most common category of buyer and are existing firms with fees of around $500k to $1 Million looking to acquire another firm with fees of between $300k and $500k. They have excess capacity and usually want to relocate their ‘takeover target’ to their premises which will create economies of scale and eliminate costs including office rent, a second receptionist plus potentially cut software costs. These buyers might also be looking to expand their financial planning base with a new batch of clients.
- Consolidators - these larger firms are always active in the market and have similar reasons to buy to the ‘tuck in’ category of buyers. However, they are much clearer about the type of firm they want to buy including the mix between businesses, SMSF’s and individual clients. They are focused on cloud solutions and usually the financial planning opportunities are a key motivation in the purchase. They also target larger parcels upwards of $750k and they are more inclined to retain the vendor for several years beyond the settlement date.
- Top Ups - these are an interesting group because they are generally firms with principals in their early to mid-fifties and they have hit a flat spot. They have lost clients due to retirement, business sales and natural attrition but have ten years left in them and want to replenish their client base. Their primary motivation is expanding their compliance base.
- Financial Planners are an emerging buying group and growing in numbers. They obviously target firms that don’t have an existing financial planning division or referral relationship. Unfortunately, this group are the least popular with vendors as they often don’t have someone to run the accounting practice.
- Others including mortgage brokers and bookkeepers but they have no realistic chance of buying fees ahead of the other groups.
WHY SO MANY BUYERS?
Having identified the type of buyers out there, why are there so many?
There’s a combination of reasons and let’s start with the ‘outsourcing’ effect. While most firms won’t openly admit to outsourcing compliance work to India, the Philippines and Vietnam, it’s massive. Compliance work has been somewhat commoditised and there is fee pressure on low level work which has fuelled the growth of outsourcing. Cheaper labour equates to an improved bottom line and the advancement of cloud technology and software like Xero has created more efficiencies which in turn has created capacity at the local level. Buying fees will soak up that capacity.
Firms obviously buy fees to get a return on their investment and the buyers think they can squeeze more profit out of the compliance work being done locally. The firms that have not gone down the outsourcing path are prime ‘takeover targets’ and firms that outsource are looking to develop a ‘firm of the future’ model. They outsource the basic compliance work while their local staff focus on adding value to their clients and delivering additional services beyond compliance.
The next reason for the heavy demand is simply ‘need’. If you read the article, How GST Disguised the Need for Marketing, you’ll understand why the majority of firms in this country are flat lining or in decline. After the introduction of GST in 2000 most accounting firms enjoyed a decade of boom times. The demand for compliance services was high and the firm’s referral engines were purring. However, around 2010 the landscape commenced to change. The GFC was hurting some clients, the internet revolution had started, mobile technology and the cloud had emerged plus marketing was changing with referrals moving from word of mouth to online social media channels.
On the back of the boom years a lot of firms were busy but they also took their foot off the marketing pedal. Dare I say, they also got complacent. What they overlooked was their ageing client base. They didn’t read the symptoms including clients starting to retire, sell their businesses and die. In addition, their referral engines started to seize up as their client base of 55 to 65 year-olds don’t refer like their 25 to 35 year-old counterparts. They ignored social media and if they invested in a website it was simply an ‘electronic brochure’.
While demand for fees is at peak levels, supply remains scarce. The baby boomer generation of accountants are working beyond the conventional retirement age of 65 and some sole practitioners are taking their practice back to their home office. Others are happy to drift along and get diminishing returns as their ageing client base takes hold. Unfortunately, in the process they are starving the hungry buyers of opportunities and prices remain strong due to the economics of supply and demand.
Every buyer brings their own agenda to the table. Some firms want to accelerate their growth, others want a fresh list of prospects to mine for their other services like financial planning and others need a parcel of fees to lock in a potential ‘young gun’ partner. Whatever your motivation you need to understand, there is no quick fix. There is a long queue of buyers so you need to be patient but most importantly, you can’t afford to take your foot off the marketing pedal. Even if you’re buying fees you need to also focus on your organic growth strategies.
The under supply of fees is frustrating but if you’re in the market for fees we urge you to register your interest by completing the buyer’s registration form and confidentiality agreement that you can download from our website at http://www.pjcamm.com.au/practices-for-sale/
Of course, if you’re looking to rejuvenate your ageing client base with Gen X and Y clients or build a sustainable organic marketing program you can’t afford to miss our Accountants Accelerator Seminar on November 14 in Sydney.