How your accountancy company can negotiate the best sales price to a private equity firm
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According to Xeinadin Group founder Feisal Nahaboo, private equity companies are routinely undervaluing accountancy firms, leading to sellers receiving a “derisory” return on the businesses they and their teams have worked so hard to build up.
We speak exclusively to Nahaboo, who offers key advice to accountancy owners to ensure they enjoy the ‘golden touch’ in these negotiations.
Entrepreneur Nahaboo, is the founder of leading accountancy group Xeinadin, has warned that private equity companies are “woefully” undervaluing accountancy firms, leading owners to sell their businesses substantially below their real value.
As accountancy firms operate within the service industry, enjoying low overheads compared to other types of business, investors need to “respect and reward this unique sector”, he says.
Private equity companies should recognise that accountancy firms present an “attractive growth model” with significant potential for providing additional client services including but not limited to corporate finances, human resources, IT, and outsourcing.
This, he says, means that the purchase of an accountancy firm will typically pay for itself within a matter of years.
And as accountancy firms have a lower-than-average cost base, being able to run on average at 25 percent profitability, investors need to be “acutely aware” that owners have no incentive in selling beneath a fair valuation.
Noted as the man who has ‘awakened a sleeping profession’ by as much as trebling the values for more than 100 independent accountancy firms across the UK and Ireland, Nahaboo advises that practices should have the confidence to seek an equitable return for their business.
Respected as one of the UK’s foremost wealth creation consultants, with over 20 years’ experience in helping accountants make substantial sums of money, he displayed his famed ‘golden touch’ when he created the Xeinadin Group in 2019.
Dubbed a ‘corporate miracle’, the world-first merger of 122 British and Irish independent accountancy practices through Nabahoo’s revolutionary Overnight Multiple Merger Model (OMMM) immediately ranked as a top accountancy firm and, according to some sources, offered above 12x adjusted EBITDA values.
Nahaboo says the fact that Xeinadin was subsequently sold to leading private equity firm Exponent at an undisclosed “premium value” underlines three key points: one, that the accountancy sector is exceedingly attractive to private equity; two, that private equity will pay high sale values if negotiated well; and three, that other accountancy companies are being unfairly devalued as they don’t understand how to manage, negotiate, and deal with private equity firms.
Xeinadin is “living proof that high values can be sought”, says Nahaboo. Creating the company from his kitchen table, around 250 equity partners trusted him to deliver treble values across the board.
The consolidation process was completed in just 256 working days and within three years Xeinadin was valued in excess of £300million – a record-breaking performance.
In stark contrast to Xeinadin’s valuation, Nahaboo says that many private equity firms are only offering a value of around 8x EBITDA for larger British and Irish independent accountancy firms.
Smaller companies are coming off even worse, being offered as low as a “derisory” 5x adjusted EBITDA multiple.
At a minimum, larger independent firms should be seeking 10x adjusted EBITDA, suggests Nahaboo, adding that accountancy practices should utilise private equity as an investment rather than an exit strategy.
Since leaving Xeinadin – which according to the Irish Times posted revenues in May 2020 of £110.3million with £39million EBITDA (36% EBITDA), a figure far higher than that typically seen in the sector – in a management buyout prior to its sale, Nahaboo has assisted more than 200 businesses in managing valuations.
Channelled through his OMMG (Overnight Multiple Merger Group) network, these individual independent accountancy firms have likewise enjoyed favourable EBITDA values thanks to the entrepreneur’s skills and knowledge in negotiating the best possible deals, either for investment or exit opportunities.
Here, Nahaboo provides 12 simple steps to help accountancy practices secure their true value with private equity companies.
12 Simple Steps To Negotiating With Private Equity
Larger accountancy firm should be asking for values of at least 10x adjusted EBITDA.
Firms should use Nahaboo’s OMMG Network to determine and approve fair adjustments to EBITDA. This shouldn’t be left to investors as they may attempt to reduce adjustments for the buyer’s benefit.
At a minimum, firms should be asking for 70 percent cash upfront.
The only exception to point 3, above, is if the seller will receive roll-up value in new group shares.
Firms should strive to reduce the retained cash held back by private equity from the 70 percent upfront cash payment. While private equity will judge it a risk not to retain some of the payment, as a firm’s clients are often dependent on the company partners, it fails to understand that it is a bigger risk for firms to have their cash retained when private equity companies become the controlling interest and have contractual clauses that can prevent payments.
Firms must have dated exit sale timelines stipulated into agreements; otherwise, they may struggle releasing further equity.
Firms should negotiate to keep their company’s existing brand name for a minimum of three years – because clients want less disruption.
Firms should sell their businesses to a private equity management team that is similarly cultured so that clients feel comfortable. A smaller firm selling should seek investment from a team with significant experience in working in a smaller accountancy firm as well as experience in managing SME and smaller owner-manager businesses.
Growth targets should currently be in the region of five percent p.a. Some private equity companies will demand at least double, which can be unrealistic for some smaller firms focused on offering a great service to clients at a fair value. Clients do not want to feel ripped off with soaring prices following new ownership.
Clawback provisions can be negotiated at 100 percent. A ‘clawback provision’ means that if the seller doesn’t hit growth targets then they lose the same value of the cash retained. Some private equity companies state over 200 percent clawback. This seems grossly unfair.
The lock-in work period for accountants following private equity investment can be negotiated to two rather than three to four years in several circumstances.
Firms should ensure that any investor offers next-generation staff at least an inflated salary and growth shares. Investors need to invest in key people who will drive the succession.
Feisal Nahaboo – The Entrepreneur With The Golden Touch
Entrepreneur Feisal Nahaboo’s name is synonymous with ‘wealth creation’ within the accountancy industry.
He is recognised as the pioneer of the ‘multi-service accountancy firm’ concept, enabling firms to double values and treble profits over a three-to-five-year period by integrating up to 42 new service lines into their offering.
This innovative process saw him disrupt the accountancy sector between 2001 and 2013, driving up industry standards and profits, and setting a new industry benchmark. What once was Nahaboo’s radical solution is now considered the norm.
Likewise, Xeinadin – his first Overnight Multiple Merger – has seen tremendous results.
All independent accountancy firms which joined the merger are set to receive substantial premium values from private investment firm Exponent, taking their valuation to a forecasted £320-340million – the type of growth which typically takes 50-100 years to achieve.
Having helped more than 100 British and Irish accountancy practices cash in on up to treble values in 2022 alone, Nahaboo is now enabling individual independent accountancy firms to do the same with his OMMG network.
Through the network, he can help a standalone small or large accountancy practice receive ‘super premium values’ through his triple valuation process.
A firm with £3million annual turnover, for example, can expect to receive a valuation of £6-9million.
A £1million turnover firm, meanwhile, is likely to receive up to £2million cash and a balance of shares (valued at hundreds of thousands of pounds) in their own practice to incentivise them to continue running it successfully.
Nahaboo also has the ear of over 40 independent private equity investors interested in investing 50-80 percent in individual accountancy firms “overnight”’.
Explaining his process, Nahaboo said: “Firstly, I study the firm’s P&L account and balance sheets, and make various recommendations regarding investors.
“I then undertake an analysis of their service mix and advise accordingly. This is followed by a Pareto analysis where I scrutinise the structure of the organisation and offer advice as to different specialisms which can be offered.
“Finally, I pair a private investor with the accountancy practice.”
The benefit goes beyond far beyond financial remuneration – it also enables accountants to achieve an investment without having to exit. Alongside the strong valuation, salaries and dividends are likely to exceed six figures.
Upon signing, owners and partners receive a huge lump sum worth more than their business so that, as Nahaboo puts it, “They can enjoy life now while still having equity and a high, six-figure sum annual reward for running the business.
“This incentivises those within the accountancy firm with the expertise and experience to continue running the business at a high profit level, which in turns raises standards across the industry as a whole.”
Nahaboo says his triple valuation process has been “honed over many years” and is in high demand.
He said: “As a trusted advisor to accountants over the last 20 years, I’ve contracted to over 1,000 accountancy practices that have depended on my services.
“Some of those are now using me under the OMMG network to negotiate a fair and strong valuation for their firm’s partners and shareholders.
“Under my other business regimes, Xeinadin and Alitam, I have built very strong relationships with investors and brokers including David Mortlock, MD of Berenberg Bank – one of the highest-paid and most successful city bankers.
“I’m receiving many enquiries from those keen to join the OMMG network, and I make myself available to all interested parties.”
To enquire for a valuation through OMMG, visit www.ommg.co.uk. For more information on Feisal Nahaboo, visit www.feisal.co.uk or follow him on LinkedIn.