A Course in Remedial M&A

With the onset of a new year I know I can be sure of two things. The first is that I will spend an inordinate time on the treadmill attempting to shed the caloric remnants of another holiday season.

And two, we at our company will make an 11^th hour M&A push before busy season kicks in before our phone calls and emails will be treated with all the warmth and cordiality of a door-to-door vacuum cleaner salesman.

So, along those lines I want to launch my first blog of 2020 laying the foundation for the new year by clarifying some frequently misunderstood concepts about CPA firm M&A.

So, for simplicity’s sake let’s refer to it as Remedial M&A.

First up let’s discuss upfront payments. I can’t tell you how many times I get asked how much can a mergee expect to get upfront? The problem of expecting a briefcase of cash is exacerbated by reams of misinformation constantly put out there by what I refer to as “folding table” brokers who promise sellers as much as 30 percent upfront. First, the basic premise of a merger is an exchange of equity – from the seller’s firm into the successor practice. Not a cash payment. A direct sale is another matter and far less common since you have the problem of client retention. But that’s fodder for another blog. We’ve facilitated nearly 900 mergers and the most we’ve ever seen is perhaps a 10-percent down payment and many times that’s an advance on the seller’s eventual buyout.

Second, the multiple. Again, in terms of FAQs, this would rank either number one or two. The hard truth is that values have been dropping for years. The days of receiving multiples of 1.5 or even close to 2X revenue have long gone the way of parachute pants and Member’s Only jackets.

In larger markets such as New York or Chicago, the values often hover in the 1X or 1.2X range, but rarely if ever higher than that. In less populated areas, .6 -.8 is the norm as opposed to the exception. You want to reminisce about the good old days of high multiples, then go on eBay and purchase copies of accounting magazines circa 1998-2000.

Leases. Clearly among the biggest obstacles in any merger. Unless the successor firm has no footprint in the market, a long-term lease is not an inducement for a merger because they either have to assume the cost or sublet the space. So, if you’re contemplating a merger for whatever reason, never sign a long-term lease.

I realize that’s sort of the Cliff Notes version but I’m sure as we get deeper into 2020, I’ll surely have more to say. With M&A education it’s always rinse and repeat.