How to Scale An Accounting Firm to Sell: Know the Growth Facts
Boutiques are attractive to potential acquirers when they are growing. And your growth rate is determined based on growth in revenue and profits. Also, growth is relative. It is relative to the other boutiques in your space and the growth rates of an existing practice inside of a market leader. You are attractive if your accounting firm is growing more and faster relative to the alternatives.
Most professional services firms are private. Therefore, data on growth rates are hard to come by. Accounting firms often think they are growing and scaling nicely, only to learn later that this isn’t the case. And finding this out during due diligence is embarrassing.
If you are devising a scalable plan for your accounting firm so that you can sell your business, remember that growth is relative. Scaling a business takes time. A year or two of great results does not mean you have a sellable boutique.
Case Study: When a Scalable Plan Leads to an Unsellable Firm
I was recently involved in an auction of an IT services company. This company had a strategic relationship with the software provider Tableau. They helped clients use their data to make better decisions through data visualization. The investment bank running the auction touted the boutique as a high-growth firm.
When I met with the management team, they were proud of their accomplishments. I was presented with slide after slide of steep revenue and profit growth. And this growth was accelerating. I had looked at a few firms in this space and had an unfair information advantage. This boutique grew revenue at 22 percent per year and had done so for about three years. The problem was that their boutique competitors were growing their top lines at twice that rate.
You see, the data visualization space was hot. A rising tide was raising all ships. When I dropped out of the bidding process, they were insulted. I explained my rationale and provided my evidence. They claimed that my comparisons were not apples to apples, that the firms I compared them to were not “pure plays.”
This firm was not able to find an acquirer. It appears that I was not the only one with a command of the facts. And the story gets worse. The data visualization space cooled off. Tableau, the golden goose, stopped laying eggs. As their growth rate and scaling slowed, so did the growth rate of its service partners.
What is the moral of the story? Know your facts. Growth is relative. When creating a scalable plan for your accounting firm, you have to look at your business from all sides. Don’t take your revenue or profit growth at face value. Compare it against competing professional services firms and determine where you truly stand in the market.
Seven Growth Benchmarks to Consider When Scaling a Business
Here are a few growth benchmarks for you to consider if you are wondering how to scale an accounting firm to sell at a later date. These are specific to NAICS 54—the professional services industry. And they are specific to the segment—that is, boutiques with between 5 and 250 employees in the United States.
Proceed with caution. These numbers can change a lot based on the submarkets. For example, law firms are different from marketing agencies and so on.
- A five-to ten-year track record of consistent growth;
- Greater than 30 percent top-line revenue growth;
- More than 75 percent gross margins;
- Forty percent EBITDA margins;
- More than twelve months of forward visibility;
- One year of payroll in cash on the balance sheet;
- No debt.
A boutique under five years old will have a tough time selling. One without five to ten years of solid growth in revenue and profits is unsellable. Unfortunately, many boutiques have remarkable top-line growth but no profit growth. This is a deal killer for most. These firms have not decoupled revenue growth from head-count growth. Until they do, they should not try to sell an accounting firm.
When they do, gross margins and EBITDA margins will jump. That is the time to sell. This is when they have a proven, scalable plan and business model. Lastly, forward visibility must be at least a year out. Investors are not going to take your word for it. Performance relative to your scalable plan will be a much-scrutinized item.
Wondering If Your Scalable Plan is Working? Ask Yourself These Questions
When scaling and growing an accounting firm, you need to make sure your scalable plan will hit the growth benchmarks required to sell the firm. Ask yourself these questions to determine if your scalable plan is working for your business:
- Are you growing revenue at a faster pace than competing accounting firms? Have you been doing this for years?
- Are you growing your profits faster than your competitors? Have you been doing this for several years?
- Are you growing your revenue faster than the practice inside the large market leaders?
- Are you growing your profits faster than the practice inside the large market leaders?
- Are you increasing your cash balance to cover payroll for twelve months?
- Do you have at least twelve months of forward visibility?
If you answered no to more than half of these questions, your scalable plan and growth story needs more work.
Developing a Successful Scalable Plan: Remember Growth is Relative
Growth matters when scaling a business to sell it later. A lot. And relative growth matters even more. A decade of market-beating growth will command an excellent price and excellent terms.
And profit growth is as important as revenue growth. This indicates that you have cracked the code. You are one of the few who broke the link between revenue and head-count growth. Be sure to run a tight ship. Be prepared to demonstrate reliable forward visibility and plenty of working capital as part of a scalable plan.
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