One of our key value propositions as a trusted advisor is to talk clients our out of making stupid moves that often come from a lack of experience or choosing to have their blinders on.

This quote resonates.

"The first principle is that you must not fool yourself—and you are the easiest person to fool.” - Feynman

One strategy to grow a firm is to buy a firm. That sends us caution flags.

Why do firms buy other firms when most firms aren’t worth buying (truth)? Here's what we see in our segment.

The main reasons firms acquire — and how they actually hold up.

• Revenue. Yuk. Most firms aren’t great at pricing. They're carrying too much transactional work — once-a-year business and individual clients, low-priced accounting work, and clients who are used to being served the old way (firm working for free, old tech, no boundaries). Buying revenue without examining the mix is often buying someone else's Insanity Zone. Use a critical eye. Better yet, use an outside perspective.
• Team.  At face value not a terrible idea. Like hiring, the key is to go slow.  It is critical to determine actual skills sets (year of experience can be deceptive), timelines and culture fit. Another red flag: many firms are dependent on one or two key people. That's not a team. That's risk. And most talent stacks today are a mix of in-office, hybrid, remote, offshore, and seasonal. Does that fit your culture or fight it?
• Niche.  Can make sense. Sometimes. If it's actually a niche and not just "we have a few of those clients."
• Geographical location.  See much less of this since most clients don’t need a “firm in town” anymore.

A Renew principle: It’s easier to buy a firm than it is to successfully integrate, profit from the firm purchase and pay for it.

We had a firm recently buy a firm without taking their time evaluating the purchase. Bummer.

They bought the firm for a fixed price (do NOT do this).  The buying firm was going too fast and didn’t think through all the variations of the fixed price.

The result: they're in a bind. They can't upgrade the client base the way they need to. Just because the SBA will loan you the money doesn’t mean you should borrow it.

Buying at a firm at a fixed price can put growth strategies back 2 to 3 years. Put another way, is the cash flow and profitability consistent to pay off the debt?

Run the Pareto before you sign  

When evaluating a purchase, do a Pareto for Profit analysis on the selling firm's client base. We can help. You need to dig into:

• Service mix
• Pricing structure
• Who serves which clients
• Demographic (age) of the clients
• Whether they price upfront or in arrears (and how that jives with how you price)
• Whether they complete timesheets (a whole other conversation)
• Whether the firm actually has signed engagement letters that define scope

Then look at the zones. Insanity, Danger, Scalable, Fragility. If you're acquiring a book that lives mostly in the Insanity and Danger Zones, you're not buying growth. You're buying a 24-month cleanup project — with debt service on top of it.  

Also, don’t forget the all-important tech stack considerations, both internal and external. Two firms running incompatible stacks is two firms running incompatible operating models.

What you're actually buying

In many cases your firm is buying “cash flow.”  Many firms spend too much time and effort on figuring out how to pay for the firm they are acquiring, and not enough time figuring out if it makes sense to buy it.

In short, don’t let FOMO, scarcity mindset, a practice broker or a selling firm rush you into acquiring their firm. It’s all fun and games until you have to integrate the firm (talent, tech, culture), upgrade the client base (easier than integrating the team) and make debt payments.

Upgrading the client base, by the way, is the easier part. Integrating people and culture is the hard part. Most firms have it backwards.

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The strategies you don't pursue

Often the strategies you don’t pursue have a greater impact than the ones you do. Subtraction is stronger than addition. That applies to clients, services, and acquisitions alike.

Make your firm the #1 client. Then decide if buying another firm actually serves that firm — or just feels like growth.

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