Maximising Value: James Gosling on Preparing Your Accounting Practice for Sale

Are you an accountant or a lawyer and starting to think about exiting your business in the next two or three years? In this episode, I’m talking to James Gosling, who works in this area and buying and selling accounting industries in particular, and he’s sharing his insights in what’s happening in this world, what’s happening with rollups, what are the pes doing, how they’re valuing accounting practices, and what you can do to make your business more attractive and more valuable to be acquired in the short term. And it even gives us a little insight on timing in the market, which you don’t normally get. It’s a really insightful episode, especially if you’re an accountant. You want to listen to this one.

Welcome to the podcast that’s dedicated to helping business owners to prepare for exit so you can maximise value and then exit on your terms. This is the Exit Insights podcast presented by succession plus. I’m Darryl Bates-Brownsword, and today I’m joined by James Gosling. Welcome, James. Thanks for joining me today.

No, thank you for having me, Darryl. Hope you’re well.

Yeah. Hey, now, you’ve got a background in m and a specifically for the accounting and legal sectors, is that right?

That’s correct, yeah, we’ve been concentrating on that for the last good few years now.

Yeah. And we’re going to explore why I asked you to come on the show and join me is that I thought it was about time that we, we got some specific a lot of business owners out there who are starting to think about exiting their business. A lot of them are accountants and lawyers as well, and they’ve got a lot of information around what’s happening in their industry and their sector trends. But I thought it’d be really useful for those who haven’t quite kept their finger on the pulse and just want to know what’s possible and where valuations start and what they look like for their sector. So let’s dig in, shall we?

Absolutely. Absolutely.

Wait, look, I don’t know if this is a fair question or not, but I’m not always known for being totally fair, but can you start by giving us, I guess, a bit of an overview of what’s been happening in the sector the last couple of years? Where are we at?

Well, yeah, I mean, the accountancy sector is going through a wholesale change at the moment, probably sparked by Covid initially, but also with various investment houses, private equity come into the market as well. And obviously a huge evolution of the use of technology, software and AI has been driving all the things that we see at the moment. So over the last few years, the accountancy practice industry has been, as I mentioned, some more and more private equity coming to the market, which has meant there’s been some more platforms that have been set up, each with their own nuances and what they’re looking to offer and the way they go about acquiring and growing, but offering, you know, different, different service lines, different models for those that are looking to be part of the firm. So that’s been quite interesting to see that growth. But likewise, you’ve seen the much smaller firms that may be struggling for recruitment, struggling for succession, and struggling to keep up with the pace of change in terms of software and then also, you know, compliance and the old red tape is getting harder and tougher to keep up with and keep up to the pace work. So all of those pressures, different factors, are now seeing probably the largest amount of activity we’ve seen in Ecapt practice industries for some, some time.

So you mentioned there a number of roll ups and we’ve seen specifically accounting sector roll ups. Well, for as long as I’ve been around. So that’s been doing this for 20 years. We’ve seen people acquiring businesses and then ended up acquiring a whole lot of practices, putting them together under one brand and then often listing them, and then to see it disappear after a few years. Are there any changes to the.. because if it hasn’t worked to date, on paper it looks like a brilliant concept and a great idea, but we haven’t been able to make it work yet. Are the PE houses doing anything different this time around?

Yeah, absolutely. I think the approach is a lot different. Previously those roll ups, it was a case of acquiring everything and anything they could, completely different cultures, completely different service lines, compete clients, different geographical locations, and then trying to force them under one roof.

And as we know, in any m and a transaction, cultural alignment integration is absolutely key. So I think that was the previous approach. And now what we’re seeing with the new platforms of private equity come into the market is there they’re trying to work as a growth partner and I guess not have that private equity stigma attached to it where it’s come in. Look at the bottom line. We’re going to take away all the costs because it’s a people based business, the accountancy practice space.

So you need to make sure that you’ve got the accountants still at the forefront of what they’re doing. They understand the market more than anyone. So what the private equity are doing is sitting in the background saying, okay, well, you know your market best. But what we can do is enhance and add value to what you’re doing. That’s both with help around M and A.

We are the ones that understand M and A and can help you on that journey. We can help you with integration. We can help you invest in technology and advance the technological journey that you’re on as well, as well as adding funding and other routes to exit. So I think it’s more of a growth partner approach rather than a private equity takeover as such.

Okay, so that makes sense. So it looks like what I heard at the beginning of that answer as well is historically it was kind of just a pure spreadsheet exercise. And now they’re going, well, hang on. Different companies are different. They’ve all got different cultures. For this to work, we need to line them up and get the right similar types of businesses to if we’re going to have any chance of success for them to fit and work and be similar.

Yep.

In terms of what is it that makes one practice attractive for an acquirer who’s doing a bit of a roll up? Do they need a certain, they need expertise, they need to be doing advisory. What are they looking for?

It depends on the model and it depends on the platform. But in general terms, you know, usually any of these, these types of conversations is going to be where there is a retire, retirement or retirement coming up. But they’re also going to have to have good senior leadership underneath those successes coming through, those that could be able to run that office or at least go on a journey with the private equity house or the platform for some time. And then from there it comes down to what service lines are you offering, your pricing, how good are you at keeping data, good quality data. So again, that’s where the software piece comes in, what you’re using for your practice management, have you got good profitability? Are you codifying all your processes?

I mean, all of these things, as well as making yourself quite attractive, will make the actual transaction process a lot easier as well, from a DD point of view. So yeah, that’s kind of the thing that you should be looking at to make yourself as attractive as possible.

Okay, so the reassuring thing is from my perspective, everything you just described applies to every industry. What’s our client retention look like? Is our revenue predictable? Is it consistent? What staff are in the business? What’s the culture like in the business of the staff? Loyal and we’ve got low churn. Then you start talking about what are we selling the clients blender services. Then you talk about codifying. Have we got systems and structures in the business? You didn’t specifically mention marketing, but that’s hit and miss with account the industry. But then we talked about positioning and what you, what makes one practice, what are they known for? So all the same themes, which is reassuring, hey presto.

An accounting business is just like any other business when, when we’re looking for valuation. So what about size, James? Yeah, because we every now and then I hear stories and I meet people who are looking to acquire accounting practices and they might have a business that’s doing half a mil. Is that attractive? Because it’s effectively one partner with a really good team around them, really productive, half a dozen helpers or so, a business of that sort of size. But you take the key person out, which is that attractive for these acquirers because they can just plug it into a bigger model?

Absolutely, absolutely. And this is one of the conversations I have with a lot of practitioners that half a million, maybe even sub half a million revenues, they just don’t think their business has got value or they don’t understand that it’s going to be attractive. Unfortunately a lot of them just start speaking to other local accountants and letting their clients fade away and then their staff have to find another job. When actually guys sell your businesses or value, you can retire with a nice handsome sun in your back pocket so you can enjoy yourself in retirement.

So size wise, yes, absolutely. A lot of these larger model firms, platform firms, were looking for hubs in certain geographical locations. So you need to be of a certain size for it to be practical in a new geographical location that tends to be around about the 2 million mark as a baseline. But then once you’ve got that hub set up, then by all means the add ons or the bolt ons, these other businesses for sure would be of interest, sub 1 million and beyond.

Okay. Especially if there’s a niche. Right. And what about in terms of valuation, James? Because we hear all sorts of stories and I’d love to get your perspective on how businesses are valued now if that’s changed over time. And does the valuation formula change with size of business, for example? And if so, what point does it change?

Yeah, so traditionally accountancy practices were always valued upon there, their CRF or their revenue. And that’s that still very much is the same today in the sub 1 million category. And so if you, if your firm’s sub 1 million, you’re probably looking to get anywhere between one and 1.2 times your revenue. If you’ve got a real niche, I have deemed 1.25 free times, 1.3 times, sorry, at the absolute maximum, and stealing there, there are more acquiring now starting to adopt an EBITDA model, even at that sub 1 million mark. Yeah, they’re looking at the EBITDA on some occasions, and that kind of ranges from three to five times, generally, generally speaking, above the 1 million mark, certainly in EBITDA multiple that you’ll be looking at. And most of the time, again, that’s three to five times at this point in time. And that’s obviously adjusted for salaries, et cetera, from the directors and partners going on. And then really it starts to get slightly higher.

If your revenue is getting towards the 5 million mark and above, then the EBITDA multiples. We have even seen a slight increase recently, but that’s more. So a simple supply and demand dynamics in the market at the moment. At that level where you’re probably looking at six, possibly seven times, and then when you get towards the 10 million mark of revenue, seven, eight times, we’re seeing, and then beyond that, it really depends. The highest I’ve known of was a ten times multiple a few weeks ago.

And so let’s, you know, because we’re all curious and everyone wants to think that their business is in the, in the bracket where they’re going to get ten times, even though. And, and what? We’ll see, we’ll go, hey, look, I know of a practice that sold for ten times, and, you know, well, okay, well, it was ten times, but it was ten mil plus in revenue, and it had all these reasons why it was ten mil plus. But what the general market tends to hear is just ten mil. So they go, hey, I’ve got my half million pound or 1 million pound practice.

Yeehaw. Giddy up. I’m going for a ten times multiple. Are there any things that stand out, James, apart from size and scale of the business that can increase the multiple? And let’s just talk about the ones that are already being valued at an EBITDA valuation.

So they’re probably two or three mil plus. I know you said they start at one mil, but let’s do a two or 3 million pound practice. What can they do to increase their multiple and guarantee a three to five, but maybe even sneak in a cheeky six or seven?

Yeah, well, look, I think at that size, you would expect the business to at least have the client relationship with other staff members and not the actual principals and owners. But first and foremost, make sure your business can run without you in it at that level, which we hope it would be making sure your compliance checks, your ad reports are all in line as they are.

And really make sure that you’re as digitised as you can be. The more digital you are in your county practice space, the more attractive you will be to acquirers. And then likewise with your fee base fee block. So make sure you charge out rates or your monthly fees or where they should be as well. And that really makes it a lot more attractive and probably will help you get to the higher equivalents of that.

And likewise, if you are the principal of the business and make sure that you set yourself some time to stay around post transactions, because the quicker you leave, the higher the risk. The risk profile goes up to the acquiring party. So I always say to people, start having these conversations early. If you’re two or three years away, have them now and look to make sure, because you need to be around for at least two years before you, before you can actually hang up your boot if you want that top multiple.

Okay, so again, good business practices. We’ve got get the management team into the relationship so that it’s not dependent on the principles. Did you mention, what about the service provider? I’m assuming that to get the higher multiple, we need to be operating at higher or the benchmark profit levels so that we’re not just. I imagine we’re also minimising our write offs. All fees are being paid or everything’s being billed and paid.

I’m guessing we’re doing some higher value services as well as we’re doing the compliance and keeping the clients around long term. Got great client longevity and retention, but I imagine we’re upselling them as well and providing some added value services. And that makes a difference, I’m guessing.

Absolutely. That advisory piece as well. So whether that be some corporate finance work, audit work, fractional, FD, CFO type work, but equally because you will have those higher value clients, large limited companies or SME businesses, then if a platform is coming in to acquire you, they’re going to have a greater suite of services, whether that might be wealth management, for example, or something like that. So when you go into, when the client base goes in the platform already knowing that we could upsell even further from what this business is already doing. But yes, the quality of clients is absolutely key.

Okay, so what would you suggest? There’s an accounting practice out there, sort of that, that lower local city size, between half a mil and five mil in revenue. So that sort of bracket they’re starting to think about, hey look, I want to get out in two or three years. So they’ve heard that from you. You’ve said, give it plenty of time. You really need to be involved in the business. You don’t want to be running away for two years. Keep that up your sleeve. But let’s say it’s two or three years away before they want to do a, do a deal. What would you be suggesting to them that they do? Like, what nitty gritty specific stuff should they be working on now to really give themselves the best chance?

Preparation is key. It doesn’t matter if you’re an accountancy practice owner or any business owner, as you know, Darryl, that preparation is absolutely key. So really it’s just getting your house absolutely in order, you know, making sure the client relationships we’ve already picked up and moved over to members of staff so that it kind of mitigates the risk factor there. Ensure that all your internal financial reporting is as it should be, which for accountants, you’ll be surprised to hear, is often not the case. So, you know, management accounts, up to date, year end accounts filed when they need to be, breakdown of your own practice as well. So that’s client.

Client breakdowns into charge out rates, types of clients, age profile, clients, type of services you’re delivering, etcetera, etcetera, to make sure that’s all easily attainable. Organisational start as well. Just kind of the basic documentation that you need. So, you know, even codifying your processes, making sure that all your employee or service provider handbooks and contracts all up to date or where they should be. Not signing yourself into any long term commitments, like a long lease, for example, or a long contract with one of the software providers.

You need to keep yourself a little bit flexible there because any acquirer might already have an office in the local area already and not want to be tied into a lease. And that could make you less attractive as a proposition or bring up its own, but then also start working to improve your profitability. As we know, when you’re building the business, you might, and new clients are coming in, you might actually overcompensate in terms of hiring and have good capacity within your staff and your team. You need to get that balance a little bit better as you’re heading towards Sal because you want to maximise your valuation, which means maximising your profitability. To keep looking at all of that as well.

You might want to cut back on certain costs, not to the detriment of the service level, but just certain costs that maybe you probably wouldn’t do in the normal course of business, but because you’ve been running the business for some time, you put something through the business that you wouldn’t usually.

Okay. And all these things you’re talking about, I’m guessing, because they’re the things that you see on a regular basis that need addressing.

Yes. Yeah, absolutely. The real key part that especially smaller accountants, is probably because they haven’t got the time on their hands and they’re so busy. It’s just that internal reporting side, both on their financials, but also their client books and that information to be able to show the real guts of their business. Yeah.

And I guess it’s one of the byproducts of having what’s primarily a time based business model where you’re selling your time every hour, every minute, therefore, is precious and going, if it’s available for selling to a client. Well, that always tends to take priority over keeping your own house in order.

Yeah.

Which ironically, if you spent time keeping your own house in order, you might be able to work on getting a three or five or depending on the size, ten times, multiply a kicker to your hourly rate type of conversation. So get your house on order. You can really have a big difference to the valuation. Okay.

Now you’ve talked about there’s been a bit of growth in the industry at the moment and the accounting services, and yet we’re just going through a bit of a boom at the moment. Got any thoughts on how long that might last?

Activity a wise within the market, certainly for the next twelve to 18 months. I can see it still continue to be very, very high. It’s going to be interesting over the next two years in terms of what happens with the private equity backed models and platforms, because they’re going to have to do their flip for their capital event at some point. I’m lucky enough to speak to some of the managing partners with some of those consolidations or platforms. I don’t know at what point there’s going to be like crabs in a bucket scenario where a large platform is going to start looking at the other large platform that’s been building up and looking to acquire them. That I’m sure will happen in the next two years or three years at the very most. But likewise, underneath, what we’re seeing is those maybe younger individuals that are not happy being part of a larger firm are spinning out and setting up their own businesses. But because of the smaller firms, as I said earlier on, about all the struggles and presses they’re going through, a lot of the smaller independent reason, they really poor independence like one to 2 million kind of firms, or even less, they’re going to be able to pick up a lot of sole practitioner or two partner firms and be able to grow themselves. So all excellence and levels of the market is going to be really interesting over the next few years.

Okay, so I guess what I’m hearing, what I think you’re suggesting is that if you’re running an accounting practice at the moment and you’re in pretty good shape and you’re thinking maybe five years is your exit, it might be worth having a look now if you’ve got your house in order, because things have run and pretty hot at the moment, and timing in the market’s not always the best advice, but it might be worth exploring and have a bit of a sniff around at the moment.

I could not agree with you more, and this is a conversation I have with a lot of individuals that may be thinking five, six years ahead, and then it becomes a work life balance point of view because a lot of the platforms have centralised services. So a lot of the heavy lifting of running the business, like the compliance, HR, marketing, all gets taken off of you. So then you can really just concentrate on what accountants love to do best, which is look after their clients and probably help develop some of their team.

So if you are in that midterm thought process, I can’t tell you that the valuations are going to be as high as they are in a few years time. So if you are there and thinking this is getting tougher and tougher, you can really realise the value you built today. Still earn some nice money, probably have some incentivised bonuses as well along the way with a salary, but a lot less strain and hard to dip on your shoulders.

Yeah. And just because you’ve transferred the ownership doesn’t mean you can’t work for another couple of years if you so desire.

No, absolutely not. Absolutely not.

Brilliant. Hey, look, I guess this one’s not relevant to the accounting practices selling their businesses, but the PE, what’s their exit plan? Do you think? They’re not doing it just because they’re nice guys and they want to create succession strategies for all the accountants out there? What’s their big goal? Do you know?

So, yeah, speaking to them, it’s quite interesting actually, because it differs from PE House to PE house that you speak with. A lot of them still think there’s two or three cycles left. Yeah. The interesting part, I guess within the accounting practice basis, we’re yet to see that that full cycle. You’ve seen investment go in. But we haven’t seen a private equity flip. You know, I won’t mention their names, but there’s one particular quite large to the data in the market that has tried a couple of times and it’s a not happen for them.

So it will be interesting. There’s a few firms and platforms that are buying very, very quickly and I know they’re probably looking to flip to another private equity next year. There are a lot of people that believe the big American firms that have always liked the idea of UK and Europe will go well. That’s a lovely 80 million pound block that makes it worthwhile for us. We’ll go over and acquire.

So I think there’ll be a mixture of private equity to private equity. I do wonder how many cycles. I personally think one or two. Absolutely Max. And then it will be a case of the big American firms, I believe, coming over because the big American firms are now taking on private equity as well.

James, look, I’ve really enjoyed this and I think we could keep going, but there’s. I’m just trying to think for the accountants and the business owners out there who are going, okay, James knows his stuff and he’s doing deals all the time. Is there a key message that you really want people to go, okay, so here’s what James has been sharing with us today. It’s tapping into your experience over the last few years. What’s the one, the most important thing that you really want people to take away from what you’ve shared so that they can look after themselves in the best way possible? I guess.

Yeah. My answer in a different way to what you’ve put there. But I guess when I’m speaking to, when I’m speaking to clients or people that just approach me, events, etcetera, before you sell in, and if you are thinking about selling, think about, you know, think about your number. What, what is your number you want to achieve out of anything that’s going to serve you very, very well in your decision making. Be clear on your objective, both financially and non financially.

What is it you want out? One out of life. Get obviously, I know it sounds strange for accountants, but they will want to do this, get, you know, get real tax planning advice in place, which will probably help number one and two a certain way. Speak with someone like myself, because we can see the whole industry understand all the different models that are out there and often can help tailor a deal to suit your needs and requirements. Because these are not fixed in stone models that everyone has, they do tinker and tweak for each individual eventuality.

So there might be certain things that someone doesn’t realise can be achieved through a sale of this kind as well. And then ensure you concentrate on preparing ready to sell. I know it’s very hard when people first set up their business, but really you should be. The minute you set up your business, you’re thinking about, what is my exit like? And then every decision that you make along that way will help you get to the end goal that you’re looking for. But obviously when you’re in that startup mode, you’re excited. You just think, right, clients, team and you’re just looking forward. But actually you should really think about these things ahead of time.

Begin with the end in mind.

Yeah, absolutely. Absolutely.

I love your sharing and some really great insights there. If people do want to follow up and have a chat with you and get some advice and steering from you, what’s the best way they can do that?

Find me on LinkedIn, James Gosling Chambers or you can drop me an email which is James.Gosling, which is Gosling at AJ Chambers.com. love to have a chat with you. Even if you’re only thinking about selling or just purely curious about what’s going on in the industry. I’m happy to have a chat and yeah, happy to have a chat and help.

And we’ll include all those details in the show notes on the website so that if they want to get in touch with you, they can clearly do it. I have a follower of James on LinkedIn as well, so you can tap into me as well and find James. James, thank you.

Really appreciate you sharing your exit insights with us today, specifically for accounting and also legal practices.

Darryl, thank you very much. Good to see you. Take care.

About James Gosling