5 Key Tips to Increase the Value of Your Accounting/Bookkeeping Business
Whether due to new prospects, other commitments or eventual retirement, most owners and entrepreneurs will move on from the businesses they create. But, if you’re an owner and you’re anything like me, you don’t want all those years of blood, sweat and tears to amount to nothing, which means that one day you may consider selling your business.
Now, I’m not an expert in mergers and acquisitions, but my goal is to build my outsourced bookkeeping services firm, Legacy Advantage, into a global brand, and the only way to do that is to grow. One of our strategies has been to make acquisitions in strategic markets to expand our presence, and in December of 2016, we completed the acquisition of an accounting firm from a lady who was retiring.
Based on that experience, I can confidently say that the key to attracting a buyer, and selling your business for a great price, is to PLAN AHEAD. Generally, an accounting firm’s value is estimated at $1 valuation/$1 revenues. But, for accounting firms, and really any service-based businesses, that revenue essentially represents clients. You are, effectively, selling your clients. As such, when you sell your business, there will likely be a three- to five-year retention clause in the contract.
This means that the final amount of money you receive for your business at the end of the retention period will depend on how many of your former clients stay with the new owner. Therefore, increasing your client base and improving your client retention will lead to a better outcome. How do you do that?
Let’s take a look at the five most important things you can do now to improve your chances of selling your business in the future.
1. Build an Attractive Company Culture
As a potential buyer, I’m looking for company cultures that fit with our own. If there’s no fit, it only leads to conflict down the road. As a seller, you can’t necessarily control what I’m looking for, but you can focus your energies on buyers that you know will be interested. In this regard, your employees will make or break it for you. Why? Because they embody the culture you’ve created.
Do you stand for anything, and do your people buy into what you stand for strongly enough to stick it out? Or, are your employees just hired to do a job and are so mercenary that they’ll leave at any sign of trouble? Which do you think is more valuable to a buyer? Consider this: If your employees don’t buy into your business, your clients may not either. This could doom your deal, or your retention.
2. Make Employees an Asset, Not a Liability
No matter how similar two businesses are in culture, they will always do things differently. Change of owners usually comes with the introduction of new processes, new software and a new way of doing things. Will your employees embrace the change, or resist it? You may think this isn’t really your problem, but it is, and let me tell you why.
When we acquired the accounting firm I mentioned, most of its employees said they were open to change. When the time came, they weren’t, and we had to let all of them go. How do you think our newly acquired clients took it when their “go-to gal” was fired? I can tell you: Many of them left.
This loss will directly translate into a lower cash payment to the previous owner at the end of the three-year retention clause. What’s more, it served as a lesson for us. Next time, we’ll conduct more thorough due diligence, and you can bet we won’t acquire a company that isn’t constantly improving, adapting, innovating and training their staff in the latest technologies and practices.
3. Make a Business That’s Independent of You
The more independent the business is from you, the more valuable your business will be. Why? Well, again, it comes down to client retention. I personally would not consider buying a firm with no employees because the risk of your clients leaving when you leave is too high. By comparison, a well-trained staff that can build relationships with clients and solve problems themselves is an asset.
At Legacy Advantage, I am usually the first point of contact because I am still in charge of sales. As soon as possible, I introduce one of my senior managers, and the associate in charge of the file, so that the client can get acquainted with more people from our team.
The more you involve other people in client relationships, the more comfortable the client becomes in dealing with, and trusting, the firm, rather than a specific individual. This level of trust and independence relies on good documentation. If a client needs to be serviced by someone other than his or her regular liaison, will this new person be able to pick up where the other person left off? Are the logins, nuances, relevant contacts and past communications related to each file recorded? If the answers to these questions are negatives, start training your employees and building independence into your processes now.
4. Value Price Your Services
We prefer businesses that value price their clients, as opposed to charging hourly rates, and we look for firms that do the same. Now, I can’t dictate how you manage your profits, but I can tell you that we came to this conclusion after acquiring a company that charged hourly. Here’s what happened.
When it came time for us to do year-end wrap-ups for our newly acquired clients, the review and familiarization required for each file resulted in additional billing hours. It’s not that we weren’t efficient; we just had to do more work to get up to speed. Did the clients understand that? No way. What they saw was a transition of owners and a higher bill. Some clients left, lowering the previous owner’s retention.
If these acquired clients had been on a flat monthly fee, they wouldn’t have noticed a difference in their billing, and the extra hours we put in would have been made up down the line. Now, let’s take it a step beyond managing client expectations. If you bill your clients on the first of each month, it’s worth more to me as a prospective buyer. Why? Because you’ve established a system that gathers the cash upfront before the work is done, which means you’re improving my cash flow. The predictability of this method also serves as proof of recurring revenue, and buyers will look for this.
The one caveat here is that your value or fixed fee pricing must ensure that each client is profitable. In other words, if you underestimate how much time it takes to perform a client’s bookkeeping or tax filing, you’re undercharging. If it’s not profitable for you, it won’t be profitable for us, and if it’s not profitable for us, we will let the client go. This will lower your retention.
5. Embrace Technology
Modern firms have modern practices. We touched on this a bit in relation to employee liability, but let’s go into a bit more detail. You want to sell your business. We’re interested in buying your business, but is your technology compatible with our firm? How much will we, or another potential buyer, need to spend in equipment and staff training if it’s not?
You can’t plan for every possible contingent here, but a watchful eye on industry developments can help you make some educated guesses. For example, if you own an accounting firm, you probably want to ensure that your staff is trained on Caseware. If you run a bookkeeping firm and you are primarily using Sage, then only other Sage firms will buy your practice. Case in point, Legacy Advantage has committed to the Intuit® environment, so we’re only looking at other QuickBooks® or Quickbooks Online users.
A few other nice-to-haves are an up-to-date CRM (if you don’t know what a CRM is, or what it does, consider it a homework assignment!) and a paperless document management system that relies on digital filing and scanned documents, rather than paper files. These make it much easier to merge company databases and help to ensure that client information is not lost during the transition of ownership. And, a smoother transition likely means … you guessed it – greater client retention.