Supply & Demand – The Basics Driving Practice Pricing

So we all know and appreciate the basics of supply and demand. This has been a principle that has been influential upon the transactional market, of particularly accounting firms, for many years now. Essentially, the availability of accounting practices for sale in the open marketplace in many core areas throughout Australia has been limited for some time, generally resulting in very little delineation in pricing irrespective of specific practice attributes. In the not too distant past, most firms achieved dollar for dollar, or thereabouts, as a price, although not anymore.

Interestingly, the past year or so was meant to represent the start of what was believed to be the peak exit period for accounting practice equity holders. For smaller firms, those with one, two or three partners, this exit is likely to represent a sale in the open marketplace where internal succession is not readily present. However, for larger firms, the release of equity is more likely to be internal to either current or new equity holders. NB – please please please remember that the price achieved for a whole of practice sale in the open marketplace does not equate to the value that someone should be paying for equity, often a minority, within an established firm. If you want to know why, let’s chat!

Despite the expected influx of practices for sale, there is yet to be a glut of availability in the market, thus those super keen to make an acquisition continue to face the challenges of finding an appropriate opportunity. Those practices that do come to market in prime locations are promptly chased by numerous parties, often receiving 20, 30 or 40 enquiries within the first 24 to 48 hours. So, if as a purchaser you like the look of a listing, we recommend you jump on it quickly, because progress through the transactional process will come quickly and leave you out in the cold irrespective of how good your proposed offer may be.

However, what we have been finding is that prospective purchasers are genuinely considering the acquisition of a practice that is not necessarily well suited to them and their requirements, in part because it is the only one that is currently on the market in their desired location, and may have been the only available opportunity in that specific market for some time. Just because a practice is available for sale and you, as prospective purchaser, have been given an invitation to the dance, doesn’t mean you should buy it.

Thinking about it for a moment. Are the clients the type of clients you currently service or want? Does the current practitioner service the clients in a similar manner to how you would? How do your typical fees compare across the firms? If the practice is in a different location, how are you going to successfully service it? What do the firm’s other KPIs look like compared to market? There are so many aspects to consider and if your ‘cons’ list is starting to outweigh your ‘pros’ list, it may be time to call it a day.

In our experience, proceeding with the wrong transaction is worse than progressing with no transaction, irrespective of whether you are the buyer or the seller. This is absolutely paramount to the success of the deal. We often liken it to buying a house, which a real estate friend once said to me, “if the house has 7 or 8 of your most desired characteristics, then it’s probably a pretty good fit. You will never get the full 10 out of 10 on your list”. However, if you find yourself being more and more critical about the characteristics of the opportunity, thereby justifying a discount to the purchase price in your mind, it is definitely time to walk away.

For those looking to buy, remember only around 10% of firms interested in selling list through a broker. So it is important to come up with alter approaches to how you may find, or source, these opportunities off market.

For would be sellers, do you list with an agent or go it alone? Yes, selling your own practice will save on fees, however do you have the time, market knowledge and expertise to achieve the best outcome? All too often I hear from vendors who suffer seller’s remorse. They say to me ‘if only I had spoken to you first’. Either the final outcome wasn’t what they expected, or part of the process or transaction has gone pear shaped resulting in dissatisfaction. Very few people are not, at least in part, dependent upon the dollars contributed by the sale of their firm to support their lifestyle thereafter. Thus, having someone in your corner to lead and guide you through this emotional and important process is key.

As part of our broader service offering, we work with prospective purchasers to evaluate opportunities that may be in front of them, to document the similarities between the firms, to identify the risks, to highlight additionally required information or questions they may have, to frame up an offer, to share our knowledge about current market conditions and so on. We provide similar services for vendors also. As one vendor recently put it, “I have never sold a practice before, so I really appreciated the ability to phone a friend for advice regarding the proposed transaction in front of me”.

Should you be considering the sale of your practice, call Michelle now on 0413 047 077 for a completely confidential and obligation free discussion around the specifics of your transaction. Likewise, Rob Knights Practice Broking Pty Ltd offers a range of abbreviated and comprehensive broking and advisory services. Call (02) 9233 4333, or Michelle directly on 0413 047 077, to discuss how we may be able to assist with your requirements.