Pricing Issues for Midsize and Large Firm Sales: Big Deals Come with More Complexity, but Size Has Its Advantages
[ILLUSTRATION OMITTED] It's no simple task for accounting firm owners to figure out how much they should be paid when they are looking to sell. The job is especially complex for firms with at least five owners. The reasons for that are examined in this article, the second in a three-part series on calculating the price that should be paid for owners' equity in accounting firms. The first article ("Pricing Issues for Small Firm Sales," JofA, Oct. 2014, page 24) covered the factors that determine the final sale price for small accounting firms. The final article, which will be published next month, will examine the valuation issues with internal transfers of ownership. For this series, the authors use the following definitions: * The term value refers to the price to be paid for the practice--which often is expressed as a multiple of revenues. Value is not meant to be consistent with the conclusions that a CPA Accredited in Business Valuation (ABV) would reach in a formal business valuation. * Large accounting firms are those with five or more owners. That's because firms of that size are much less likely than small firms to be sold outright. With larger firms, at least part of the acquisition is likely to be structured as a merger, with some or all of the owners becoming long-term partners in the successor firm. In those cases, the value of their equity usually is determined by the successor firm's owners' agreement, though not always. One factor adding to the complexity of large firm acquisitions is the frequent need for different deals for groups of owners in the acquired firm. For instance, a six-owner firm may have four owners who will sign on as partners with the acquiring firm. The other two owners may be seeking a short-term transition of their duties and monetization of their ownership. The deal for those owners may be treated as a sale in a transaction that is mostly separate from the agreement governing the admission of the rest of the owners as equity partners in the acquiring firm. Another alternative is a two-stage deal for owners seeking transition within five years but who want to continue working full time for a while (see "A Two-Stage Solution to Succession Procrastination," JofA, Oct. 2013, page 40). In some cases, owners of the acquired firm who are not admitted for other reasons (sometimes for not meeting the acquiring firm's book of business or skill requirements for partners) may also go through a sale to deal with their equity. USE OF ACQUIRED FIRM'S OWNERS' AGREEMENT TERMS Most large firms have an existing owners' agreement. Some of those agreements contain terms for the buyout of retiring partners that are not financially viable, making the internal succession plan impractical. However, a lot more internal succession strategies fail because the firm's pool of internal successors cannot replace retiring partners. If the motivation for a firm seeking an upstream merger is finding replacements for retiring partners, it may become reasonable to use the terms of the acquired firm's buy-sell agreement for the buyout of owners leaving soon after the merger. This is because the primary concern of the owners in the selling firms is not what they will be paid but that they will be paid. [ILLUSTRATION OMITTED] For example, a firm owner might be more confident that a $20 million firm could pay for his or her buyout than a $5 million firm. Let's say the buyout in the acquired firm's owners' agreement calls for the owner to receive $100,000 for the next 10 years. The owner's stake in the acquired firm might be worth more than that on the open market, but to ensure that he or she receives payment, the owner would be happy to keep the payment structure outlined in the acquired firm's owners' agreement. DEALING WITH IMBALANCES BETWEEN AGREEMENTS A problem the authors routinely run into is differences between the method of valuing equity in an acquired firm and the firm it is merging into. …