M&A activity among Asia Pacific’s small to medium-sized practice (SMPs) market is heating up, driven by firms seeking to scale up to remain competitive, the lure of private equity, succession planning issues, growing SME client lists, technological advances and a desire to expand service offerings.
Strictly speaking, activity is centred on acquisitions, as mergers in their truest sense are rare among accounting firms in Asia Pacific, says Singapore-based Tim Underwood, a managing director at M&A consultants Foulger Underwood: ‘It’s usually always a larger firm buying a smaller one, even if the press release calls it a merger,’ he says.
‘Having to decide whether or not to throw in with another firm is tough’
Soft issues
Before entering into the process of a sale, there are some potentially tough conversations to be had and perhaps even a little soul searching.
Are you emotionally prepared to sell? Do you really want to do it? Can you convince a suitor of this? Would you be happy effectively becoming an employee at the acquiring firm to ensure your earnout? Or will you just decide to set up on your own again in a few years’ time? ‘These are the softer issues that are probably even more important than the numbers,’ says Underwood.
Be prepared to stay for 18 to 24 months to maximise the consideration, ensuring a smooth transition for the firm, a soft landing for your clients and de-risking the sale for the purchaser.
This can mean a loss of autonomy, which is easier said than done if you’re in your 40s or beyond. ‘Being your own boss is aspirational, so hitting a glass ceiling and having to decide whether or not to throw in with another firm is tough,’ says Underwood. ‘You’re probably going to see it as an exit, albeit perhaps a gradual one.’
‘Firstly, define your objectives by clearly outlining what you aim to achieve’
Furthermore, you’re potentially breaking up a partnership, so you need to clearly identify the aspirations of those in the firm – not just the salaried or equity partners, but those who may have joined with partnership aspirations.
Younger staff and the newest partners will likely be able to continue their career trajectories, and it may even be a better deal for them. But you need the senior management team and partners aligned and backing the deal; you don’t want them splintering off and taking their client books with them. All being well, they’ll effectively move to an enhanced profit share, if they have the right type of clients.
Structured process
Assuming that’s all been dealt with and everyone’s on the same page, a good place to start is with a clear process roadmap.
‘Firstly, define your objectives by clearly outlining what you aim to achieve, such as expanding service offerings, entering new markets or enhancing technological capabilities. Secondly, determine the key criteria for potential targets, including financial health, client base, service offerings and cultural fit,’ says Siong Yoong FCCA, founder and CEO of Vallaris Deal Advisory in Singapore.
‘A real deal killer is when a firm says they want to sell but then there’s a hiatus period’
‘Thirdly, identify and evaluate potential suitors based on your criteria, which involves thorough due diligence to assess the financial and operational health of both firms. And, lastly, engage in negotiations to agree on terms and develop a detailed integration plan to ensure a smooth transition.’
Deal ready
You then need to ask yourself: are you deal ready? Have you done the basic due diligence?
This consists of gathering information all parties will want to see, such as anonymous client lists, financial accounts and reports, accounts receivable records showing a good collections history, where your new business comes from, the client lifecycle, how you upsell, and so on.
‘This all needs to be at hand before you launch a process,’ Underwood emphasises. ‘A real deal killer is when a firm says they want to sell, they meet prospective buyers, the chemistry is good with one of them, the buyer requests the information necessary to put an offer together, but then there’s a hiatus period of six to eight weeks in which the seller is preparing the information, only for the interested party to lose interest or confidence, or find something else.’
Tight process
This is an inward-looking process and accountants, who may even advise clients on such transactions, might believe they’re best placed to evaluate their own business and decide how deal ready they are.
‘Don’t leave anything that is going to be found during a diligence process until the 11th hour’
But hiring an objective third party may be a better option, given that owners and partners simply don’t have time to devote to preparing the deal, focused as they are on delivering services and being hands-on across the business.
‘You must keep a tight process,’ says Underwood. ‘Time is the biggest killer in such deals, which comes back to my point about being deal ready, so you can hit the ground running. Don’t leave anything that is going to be found during a diligence process until the 11th hour.’
More information
Visit ACCA’s Practice connect hub.
Read our article on the merger market in Asia.
