29th February 2016
Key Takeaway: Many MidMarket accountants are not sufficiently involved in business acquisition and sale transactions. As a result, accountants neglect significant fee income and undermine their own knowledge and ability to influence.
Background – A Challenging Situation
Much has been written on the squeeze on mid-markets accountant’s earnings. This has been a resulted in some fairly significant consolidation activity as well as accountants diversification into related fields such as corporate strategy, digital consulting, data analytics and real estate consulting.
With my broad experience with Australian and international midmarket mergers and acquisitions I’ve often noted how many accountants are prepared to take a backseat in the transaction rather than full engagement with strategy and negotiation.
To that end I propose through this article and a follow up webinar how the accounting profession can earn extra, well earned fee income providing essential strategic advice to help maximise the value of a transaction for their client who can either a business seller or acquirer.
The recent Exit Smart Survey Report (2015) by William Buck reported that 70% of responders saw their accountant as being the prime source of advice when preparing their business for exit. Yet the reality in so many cases the accountants role is limited to trying (inadequately) to answer the inevitable “How much do you think my business is worth?” question, providing historic accounts in a format unfriendly way to the M&A specialist or broker and offering vague input into the tax related issues at contract stage.
I want to forward three propositions.
- At the lower mid market level (say 20-200 employees) the extra fees that the accountants could command, would be relatively minor compared to the extra sale value of the business. This gulf is even greater when the accountant is working for the acquirer. So many acquisitions go badly, and the analytical skills that the accounting profession has would be of significant assistance in pre-deal diligence, pricing, structuring and negotiating an offer and post merger integration.
- Accountants have the opportunity to capitalise this through baby boomer business exits. These will increase in coming years as more head towards retirement
- Thirdly, our economy will further globalize and this will result in an increase cross-border business acquisitions in the 20-200 employee segment.
Demographers predicted the baby boomer bulge several years ago, but so far it has not come to fruition as a result of the overall instability in the Australian economy. Instead the average age of owners has simply grown older. As of June 2014 (the latest ABS stats) there were 51,688 Australian businesses employing between 20 and 200 workers. This is a significant market considering that most businesses have ageing owners (55 y/o was a statistic compiled in 2014) and don’t have succession plans that involves family members.
Coupled with this, our increasing globalisation means great sales values for Australian businesses that have a strategic value to an acquirer. I undertook a survey back in 2014 (see http://goo.gl/KZjRIx) that found that of nearly 150 Australian private company transactions with a value $1m-100m, 45% had either an overseas buyer or seller.
So those are the trends. How can the accounting profession capitalise on them? I’ve sketched a few ideas below, and leave the interesting case studies to a webinar to which all you Accounting professionals are (naturally) invited.
Action Ideas – Client Selling
Most apart from the simplest transactions have a 14 step process. Accountants can provide valued input throughout this process.
Going from left to right in the transaction process, accountant input should include:
PRE-SALE PREPARATION. This can start up to 2-3 years before exit and optimises company performance in the eyes of the buyer. This process can be as simple as prescriptive processes for increasing sales, margin or reducing costs, but could extend to as dying the seller with reinvention of the business in order that it is of optimal appeal to a strategic buyer. The “exit planning” profession with its roots in the USA is fast spreading in Australia and will capitalise on fee income not scooped up by the trusted accountant. In addition, the accountant is charged with advising their client on the financial implications of the sale. Most accountants are proactive in advising on issues such as Capital Gains implications, less so with tax structuring. Timing is as important as quantum in this advice.
PROVIDING GUIDANCE ON VALUE OF CLIENTS BUSINESS: At the moment many accountants use simple rules of thumb rather than seeking broader guidance. Unfortunately this oft quoted 4x profit is outdated and leads to unfulfilled expectations. Why not form relationships with firms of business brokers who have databases of precedent transaction? Link Corporate is one.
PRE DILIGENCE: Preparation of relevant financial performance data prior to sale. Most astute acquirers will investigate beyond standard format financials into KPI’s, sales and margins segmented by product group, geography, new versus existing clients etc.
PREPARATION OF FINANCIAL STATEMENTS: The single most common task requested of accountants, yet the process could be made so much simpler and informative. For example, providing data in Excel format eliminates data input errors while providing current financial years part actual, part forecast helps frame how the business is trending.
ADJUSTING EARNINGS: A major component of the sale process is the publishing of an Information Memorandum. The most thumbed section of this IM are the financial pages. The annual accounts may have been produced with the view to the ATO being the sole reader. Now an entirely different audience is looking for entirely different indicators. These include issues such as: separation of capital expenses and operating expenses, accounting malfeasance (income from unspecified sources, from asset sales or from financial transactions), accrual earnings consistently running ahead of cash earnings, large differences between tax income and reported incomes, and large changes in ratios of standard expense items.
SUPPORT THROUGHOUT THE TRANSACTION: With 70% of owners seeing the accountant as the prime source of advice, its not surprising that owner clients frequently seek emotional backing for the rollercoaster ride ahead. Transactions rarely take less than six months to complete and then once the transition period where the owner has to work through an incoming new owner is added it makes it a sizable time commitment. This could be further extended by an earn out period where the full payment is contingent on achievement of a performance goal.
MINIMISING DUE DILIGENCE PERIODS: Due diligence has a nasty way of lengthen the transaction timescales and reducing the deal price. The accountants assistance is essential in getting the accounts clean, for example ensuring that the add backs are verifiable and defensible, being responsive to the scrutiny’s of the acquirer and generally ensuring that the transaction proceeds smoothly.
Finally, for every seller there’s an acquirer. Again the accountancy professional often does not provide the kind of support it is worthy of, particularly regarding the framing of appropriate acquisition candidates and their financial evaluation. Too often, accountants over emphasise the negative risk elements rather than think like the commercial operators that their training has endowed them with. This will be the subject of a future blog post.
Mark Ostryn is Director of Strategic Transactions and Valuations (strategictransactions.com.au), a Sydney based company established to assist company owners and acquirers with significant transactions.