I recently spoke to an accounting firm owner who has been on the acquisition trail for the last couple of years. Back in 2021, they decided to go down the route of acquisition as a strategy for growth. They secured funding, identified who their ideal acquisition avatar was and started the outreach process to target firms. Over a period of 12 months, they interacted with and obtained information from over 60 firms. Out of those 60 firms they had tentative negotiations with 12 firms and acquired 3.
Why out of 60 firms did this fully funded acquirer only buy 3 firm? It is not surprising to me that the acquisition percentage was so low at 5% but when you look at the figures it is sobering.
The reason why they only had tentative negotiations with 20% of the targeted firms and the reason why they only bought 5% of them, is because the firms were not profitable enough. It just was not worthwhile acquiring the firms because they could not get a return on their investment. You must remember these weren’t 60 random accounting firms. These were 60 firms that had the external profile that met the acquirer’s avatar. If this was 60 random firms representing a cross-section of the entire population of accounting firms statistically it is probable that no firm would have been profitable enough to acquire.
For your firm to be attractive as an acquisition you would need to be achieving a minimum of 25% EBITDA after replacing partners or directors’ remuneration. Is your firm generating an adequate EBITDA? If yes congratulations. If No, what are you going to do about it.
I previously talked about the Built to Sell Model and the 7 steps to build to sell.
1. Identify the products and services with the potential to scale.
2. Identify the ideal customers to buy those products and services.
3. Create a positive cash flow cycle.
4. Build the team to deliver the products and services and serve the ideal customers.
5. Create the systems and processes to optimise delivery.
6. Develop a single-focus growth and sales process.
7. Incentivise the senior team members to stay post sale.
These 7 steps will help you become a more saleable business and a more profitable firm but here are 4 steps I would like you to take today to drive your EBITDA.
Step 1 – You must raise your prices.
I am not talking about inflation-linked price rises I am talking about raising your prices by a minimum of 20%. I seldom meet accounting firm owners who truly bill what they are worth. No matter where you are on your pricing journey you must raise your prices and in doing so will improve your EBITDA. There is no scarcity of work out there but there is a scarcity of good accountants.
Step 2 – You must charge for all the work you do
If you did nothing else only charge properly for all the work you are currently doing how much extra billing would you do? An extra 5% on turnover. Maybe an extra 10% on turnover or even more. The beauty of doing this and raising your prices is that it does not involve taking on additional clients and there is no extra cost so whatever you add to topline turnover falls to bottom-line profitability.
Step 3 – You must cut all loss-making clients
I can guarantee any firm that I work with, that I will improve their profitability by 5%. How I deliver that guarantee is by identifying the loss-making clients in your client base. There are some energy-sucking life draining vampire clients that just need to go. There are other clients that need to have the Price Rise or Termination Conversation. If you cut or repriced the loss-makers, you will either improve profitability or create space and time to serve better more profitable clients.
Step 4 – You must only take on profitable clients
Right now there is a significant opportunity for growth in the marketplace. Not all clients are equal and not all new clients are good clients. When you take on new clients from today price them for profitability and only take on the ones that are going to contribute to raising your EBITDA. There is no point in being a busy fool. Price for what you’re worth for new clients and begin to turn the tide.
These are just 4 steps you can take to drive your EBITDA. Whether you are selling your firm or not in the near future every business owner needs to increase profitability for the betterment of the business and the benefit of the team and the clients.
When I work with accounting firm owners in our ProfitPro Membership or ProfitPro Mastermind driving profitability and implementing the built-to-sell model are just some of the strategies that we work on. If you are interested in exploring how ProfitPro can help you and your firm just email Alma to set up a scoping call. [email protected]