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A Decision model for Acquiring a Book of Business in Professional Services M&A

Introduction:

• Comparing the acquisition of a book of business with buying an entire accounting practice.

• Key considerations include cost, risk, and return on investment.

• A decision model can guide whether to pursue a book of business or a full practice acquisition.

Main Idea:

If you're working in M&A in the Washington, DC area, it's smart to have a strategy for investing in professional services. These services play a big role in the local economy, especially for small businesses. In Issue #3, I mentioned that professional services are among the most fragmented industries in DC. This got me thinking about whether it’s better to buy just a book of business—essentially a firm's client list and transaction history—or the entire firm.

This situation often comes up with investment advisors, accountants, lawyers, real estate brokers, and insurance agents. So, which is the better move: acquiring a book of business or the whole company? In this post, we’ll dive into a decision model to help answer that question, looking at the financial pros and cons, risks, and strategic benefits. It’s a bit like comparing customer acquisition costs (CAC) in venture capital, where figuring out efficiency and payback periods is key.

Key Data Points:

1. Cost of Acquiring a Book of Business:

   • Calculation: Purchase Price / (Annual Revenue from Book of Business).

   • Example: Buying a book of business for $1,500,000 that generates $500,000 in annual revenue results in a 3x multiple of annual revenue.

2. Cost of Buying an Entire Practice:

   • Calculation: Purchase Price / (Total Practice Revenue).

   • Example: Purchasing an entire accounting practice for $5,000,000 with $1,500,000 in annual revenue results in a 3.3x multiple of annual revenue.

3. Customer Acquisition Cost (CAC) Analogy:

   • CAC Payback Period: The typical payback period for CAC in a SaaS company is around 24 months​.

   • Applying this analogy, acquiring a book of business may offer faster payback by securing a revenue stream immediately.

Detailed Analysis:

Cost and Return on Investment:

• Book of Business:

  • Offers a targeted, lower-cost entry into specific revenue streams without the overhead of acquiring an entire firm.

  • Easier integration with existing operations, reducing the time and complexity of merging systems and cultures.

  • Example: A book of business purchased at 3x annual revenue might offer a faster return if the clients are stable and retention rates are high.

• Entire Practice:

  • Provides control over the entire operation, including staff, brand, and all revenue streams.

  • Higher upfront costs and complexity in integration, with potential risks in culture clash or loss of key personnel.

  • Example: Buying a practice at 3.3x annual revenue offers a broader, more diversified revenue base but requires a more extensive strategy for integration and retention.

Risk Assessment:

• Book of Business:

  • Lower risk as it involves acquiring a stable client base with known revenue patterns.

  • However, there is the potential risk of client attrition if the transition is not handled well.

• Entire Practice:

  • Higher risk due to the complexity of integrating entire operations, which may include managing existing staff, systems, and client relationships.

  • Offers potential for greater long-term value but requires significant upfront investment and management focus.

Decision Model Table: Comparing Book of Business vs. Entire Practice Acquisition

Conclusion:

Using a decision model to evaluate whether to acquire a book of business or buy an entire accounting practice helps align the choice with your strategic and financial objectives. Acquiring a book of business might be more suitable for firms seeking a quick return on investment with minimal integration risk. Conversely, buying an entire practice could be the right move for those looking to significantly expand their market presence and are prepared to manage the complexities of full integration.

Determining Value:

• Book of Business: Value is primarily based on the stability and profitability of the client base. Consider the retention rates and the ease of integrating these clients into existing operations.

• Entire Practice: Value is assessed through a comprehensive analysis of assets, liabilities, staff quality, client base, and growth potential. The whole practice offers a broader scope but comes with higher costs and risks.

This decision model helps to clarify the trade-offs between acquiring a book of business and buying an entire practice, ensuring that the chosen path supports long-term business goals​.