by Judy Peterson
We all know that in order to grow our practices we need to add new clients. And, in order to sustain our practices, we must do good work and take care of the clients we have.
Taking care of existing clients and mining our base has been our strategy for the past couple of years. When new business is hard to find and we have successfully mined our existing clients, how else can we grow our practices?
I came to the conclusion that the best way was to acquire a base of clients, preferably within our existing geographical region of Minneapolis/St. Paul. So, how does a value-added reseller go about looking for a client base to purchase, and if that base is found, how should it be valued and purchased?
My first inclination was to reach out to people I knew in the industry. After talking to a variety of contacts at Best Software, whose products I handle, I was given the names of a few organizations that were interested in talking about selling or merging their practices.
Since publishers have toughened up their certification programs, many VARs are deciding whether to maintain these certifications or move into other areas of service. After meeting with a handful of prospects, we narrowed our focus to St. Paul, Minn.-based Business Application Software.
They seemed to be a good fit. They were located in the same city, had a large client base (about 200 active), and wanted to get out of the business completely.
The most difficult part of the transaction was determining the value of the business. Looking for input, I turned to the same advisors who helped me locate firms that were interested in selling.
Two parts of the transaction needed to be determined. The first was the price or value of the firm and the second was how the amount would be paid. There are a variety of options for both. After considering several options, we were able to come to an agreement with which both the buyer and seller were comfortable.
Valuing a business is difficult, and not surprisingly, the seller usually wants more than the buyer is willing to spend.
We considered three methods. The first method was to project future revenues based on the historical spending patterns of the existing client base. Assuming there will be some amount of attrition as a result of the acquisition, it is important to calculate a percentage of this figure as the basis for future payments.
In addition to protecting your financial interest in the acquired client base, this also can provide some compensation to the acquiring firm for immediate and on-going marketing activities to these new clients.
The second method was to calculate the projected amount of revenue that will be generated from future software maintenance renewals. If you plan to make one payment for the purchase of the firm or client base, be sure to allow for attrition.
The final method was to base the purchase on actual revenue generated from the acquired client base. The selling firm would receive a percentage of the revenue generated from their clients for a defined period. On average, this time frame would be two years and the percentage can vary between 10 percent and 30 percent.
We also considered a variety of payment options. The first and easiest option was to pay a lump sum. I believe that this is the best option if the buyer and seller are in agreement on a purchase price. The benefit of this option is that once the transaction is complete, it is truly complete.
The second option was to combine both an initial fixed sum with an on-going residual for a set period of time. The residual could be either a fixed or variable amount.
A variable amount would consist of future product sales and services to the clients that are being purchased. To provide some protection to the acquiring firm, these payments should be based on collected receivables.
In addition to protecting you from the standard collection challenges, this can also protect against billing adjustments required based on prior arrangements made with the selling firm. The decision that needs to be made with this option is whether you will be basing the payment on product sales, service revenues or both.
The final option of payment was to base the entire purchase price on future revenues from the acquired client base for a specified period of time. The challenge here is to come up with a percentage that is reasonable to the buyer and equally attractive to the selling firm.
This option has some immediate appeal. There is no requirement to pay cash up front and it ensures that if the selling firm is committed to a smooth transition, they will reap the financial benefits. However, if they are not committed you will only pay for the actual business that you generate.
Based on the specifics of my acquisition I chose to make a small payment up front based on projected revenues, as well as ongoing payments for two years based on actual revenue generated from the client base.
There are two components to the ongoing payments. The first is a percentage of software maintenance renewals, and the second is a percentage of future service revenue. We placed a cap on the percentage generated from ongoing service revenues. This ensured that we would not be paying for revenues that our marketing efforts generated.
If you are considering a purchase or merger with another firm, there are some recommendations I have.
First and foremost, do your due diligence. Spend as much time as you can reviewing client contract agreements, outstanding blocks of pre-sold time, outstanding orders and accounts receivable. This will help determine the anticipated future revenue, as well as the quality of the client base. It is important to know the breakdown of A-level versus D-level clients.
Second, have a clear understanding of the number of clients. You should also contact software publishers to see if there are any unresolved client issues that they have become involved with.
Third, talk to primary vendors, former partners and clients under a non-disclosure agreement regarding the practices of the firm. This can give you a heads-up on future issues that may arise relating to vendor relationships or credit issues.
Fourth, most firms, when selling their practice, will have employees who were servicing those customers. As part of the arrangement, the seller may want to have some sort of guaranteed employment for those people. The upside is that the employees you bring on will know their clients’ businesses -- and hopefully the clients will feel comfortable working with them.
While on the surface this may seem a good thing, always look closer. Potential new employees joining your firm should go through the same interview process you use for hiring.
Be sure that they fit your firm’s culture. As I’m sure many of us have experienced, bringing the wrong person into your firm can be a disaster.
Fifth, in order to protect your investment, be sure to have a non-solicitation agreement in place with all the principles of the selling firm, your existing employees and any newly acquired employees.
My final advice is to reach out to others. There are many people who helped with my purchase decision -- everything from financial advice to how to communicate with the clients being bought. The more opinions I asked for, the better basis I had for making decisions.
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