Small and medium-sized practices (SMPs) today face many issues that challenge their business and bottom line. Besides facing the challenges arising from disruptive technologies, enforcement of regulations and rising business costs, they find themselves being squeezed out of their traditional market of serving clients in small and medium-sized enterprises (SMEs) by large international audit firms. The emergence of improved audit software and new audit methodologies scaled down for SMEs has enabled international audit firms to offer competitive prices to SME clients, which was not cost-effective to do in the past. SMPs which do not embrace audit software will eventually find their profit margins further compromised by the competition, especially when they also have to contend with high labour costs and audit exemption threshold. Scaling up is one way for firms to be able to make the necessary investments and maximise efficiencies from technology deployment. Ideally, a firm with at least three to five partners, and 30 to 50 staff, is better able to take the firm to the next level.


To cope with today’s competitive and highly-regulated assurance business, SMPs are no longer shying from consolidation and are increasingly viewing mergers and acquisitions (M&As) as a strategy to scale up for sustainable growth.


There are SMPs banding together to form informal groupings to collaborate more closely and to share investment and resources. This mode of collaboration helps to retain the autonomy in each practice but at the same time, the partners can learn more about and get comfortable with one another before considering further structural consolidation. Firms can also choose to grow organically but in this talent-starved industry, it is difficult to attract the right talent and this strategy will need a longer runway to mature.


“Very little time is spent by practitioners assessing their existing business and plotting a course for where they want the practice to be in two, five and 10 years’ time,” says Tim Underwood, Managing Director of Foulger Underwood Asia. “Without a plan, and without applying the time and resource to implement the plan, practices will continue to drift, become less competitive and ultimately have reduced realisable value when the shareholders/members look to exit. It takes a long time to grow organically, therefore, most strategic plans should incorporate organic growth, supplemented with M&A, to try and achieve strategic objectives in a shorter period of time.” Foulger Underwood Asia is a boutique M&A and strategy consultancy firm based in Singapore. It has facilitated close to 50 professional service M&A deals across Asia (mainly in Singapore and Hong Kong) and the United Kingdom in the past 24 months.


There are different reasons why SMPs may want to sell their practices, a common one being retirement, especially in situations where there are no successors to take over. Practitioners may also look to sell when they are being suspended due to practice monitoring review findings. For mergers to succeed, it would be useful for both firms to be of similar size and offer complementary business service lines.


Despite growing interest from SMPs to buy or sell practices, the pace of M&A activity is not picking up as fast as it should be. The individual deal discussion process between parties is often long drawn – more than 12 months for some – and typically ends in limbo. The low volume and lack of market information on local M&A deals have also resulted in practitioners being uncertain or unrealistic on the terms of sale.


This article outlines the common practices and pitfalls whether you are merging, acquiring or selling a practice. It aims to help ease the process of consolidation among SMPs and shed more light on the more common deal structures and valuations in the market.



Many SMP business owners have been with the practice for many years and they find it challenging to detach and let the firm change hands. Sometimes, practitioners express an interest to sell without any real intent to let go, which impedes the progress of negotiation.


Going to work every morning has become a lifestyle habit, and as long as they are still fit to report for work, they are not in a hurry to sell. The longer they hold on to their firm without the drive or clear vision to grow it, the more the clientele quantity and quality will dwindle; over time, the value of the practice will also erode.


While it is understandable that practitioners are emotionally attached to the firm they have painstakingly built up over decades, they need to recognise the need to move on, and prepare themselves mentally to let go of their firm.


For practitioners who are still undecided on their exit strategy, “it is important to acknowledge that we are mortals and therefore, we will need to let go of our beloved practice,” advises Paul Tan, Managing Partner of CA Trust PAC. “Plan your exit. Sell your practice when it is still well managed and therefore valuable (rather than wait till it is too late and the value is much less).” Mr Tan is a seasoned practitioner with over 25 years of experience. In recent years, he had amalgamated two small practices with his founding firm, Tan Teo & Partners, thereafter practising under the firm name CA Trust PAC. This year, he amalgamated a third practice into CA Trust PAC.



Some sellers are expecting above-market firm valuations based on a significant multiple of the firm’s fee income, for their practice. While there are rare occasions where practices have succeeded in selling at a premium, this could be due to the nature and composition of the client portfolio, such as a client portfolio with larger engagements or a proven record of growth, which could differ from firm to firm. Hence, it is important to sell while the house is in order.


Practitioners who genuinely want to put up their firm for sale should manage their expectations before the value of the firm erodes over time and they stand to lose more in the long run.


To benchmark against market practices, it is useful to turn to fellow practitioners who have successfully sold practices so you can learn the pitfalls to avoid, bearing in mind that the conditions will vary from firm to firm.


Practitioners should also engage a lawyer to draw up the legal contract and term sheet to avoid unnecessary complications in the event of disputes.


“There is generally a lack of internal succession options in Singapore public accounting firms, and we see this as a ‘ticking time bomb’. First-generation partners have one route to exit and, rightly or wrongly, it is quickly becoming a buyers’ market in the public accounting firm sector,” comments Mr Underwood.



When you plan to acquire or merge with another firm, be prepared that there will be some degree of attrition of clients and staff. As both firms have different cultures, the staff and clients who are unable to ease into the culture will eventually leave. To facilitate a successful deal, it is important for existing employees to immerse in the new culture and be aligned with the new management’s directions. To mitigate the risk of client attrition in acquisition deals, the buyer would typically require the seller to stay on for two to three years after the deal is concluded, to help in the transition of the employees and clients to the buyer’s firm. The buyer will typically institute a clawback clause in the M&A agreement for those clients that are lost/churned due to different management styles, and the eventual proceeds paid out will take into consideration the clawback amount.


Mr Tan shared his experiences on the challenges he faced during the amalgamation of practices and how he overcame them. He related that the majority of clients of the practices that CA Trust PAC acquired or merged with, were not comfortable with the firm’s methodologies, especially in audit services. His firm did lose some clients due to disagreements in audit approach but with a lot of effort put into explanation and persuasion, they managed to retain approximately 70% of the clientele acquired.


Another common challenge faced was the personnel that the firm inherited from these practices, who might face work culture integration difficulties. “The employees who decided to stay till today with the amalgamated entity, approximately a fifth of them, were able to adapt to new work methodologies and human resource policies including training and development; our methodologies and policies are generally more structured, compared to smaller practices which were more laissez faire,” explains Mr Tan.


In early 2016, Edwin Hooi, who founded EMPAC, merged his firm with Ardent Associates LLP because of some commonalities in values which he believed the two firms shared at that point in time. “I had initially founded EMPAC based on a vision to operate a firm focusing on the values of teamwork, quality, professionalism, and self-actualisation (at both the personal and organisational level). My objective for considering the merger was to bring my team to a desired destination based on the said founding values, and I believed that by embarking on that journey with Ardent, the chances for success would be higher and perhaps at a faster pace. Today, most of my team members who were formerly from EMPAC are thriving at Ardent and on that basis alone, I believe my decision to merge was the correct one,” says Mr Hooi.


“It is also important to remember that a successful merger/acquisition is a multi-year affair and its success should not be judged or measured at a single point in time when the deal is completed,” advises Edwin Hooi, Partner, Ardent Associates LLP.


With no prior intention to merge or be acquired, Mr Hooi shared that the merger took place due to serendipitous circumstances and honest discussions that culminated in the merger. It also helped that Mr Hooi had known Terence Ng, one of Ardent’s founding partners, for the past few years as part of the OneSMP working group. Both of them were also part of the 2014 ISCA SMP Business Study Mission to Myanmar.


To fellow practitioners seeking to merge or be acquired, Mr Hooi suggested to adopt some simple risk management principles. These are:


  1. Know your or your organisation’s objectives for the M&A;
  2. Get to know the potential acquiring/merging party as well as possible;
  3. Identify the risks (that will prevent you from meeting your objectives) in the M&A;
  4. Assess the identified risks;
  5. Respond to the identified risks (either by treating the risk or by avoiding the risk altogether), and
  6. Review and monitor the risks up to the deal completion as well as the post-merger/acquisition period (to ensure that your objectives are being met).

“It is also important to remember that a successful merger/acquisition is a multi-year affair, and its success should not be judged or measured at a single point in time when the deal is completed,” advises Mr Hooi.



According to Mr Underwood, public accounting firms’ transactions are still being structured over two to three years. Sellers tend to pocket a consideration amount based on an agreed multiple of their firms’ average fee income generated over this two-to-three-year period. Typically, between 20% and 35% is payable upon signing the deal. In most cases, the consideration achieved for the business, which is paid out over two to three years, is equal or comparable to the exiting partner’s salary/drawings over the same period, especially when inflation is factored in. Therefore, there isn’t a huge incentive to the would-be seller, especially if the upfront amount payable on deal signing falls below 25%


Specialist firms, which do not have any assurance service revenue, will have a larger number of potential acquirers and this remains a sellers’ market. Acquirers of specialist firms, or units of business from public accounting firms, are valuing target firms on multiples of profit. They are paying 65% to 80% of the consideration on completion of the transaction, with the balance payable in 12 to 18 months.


The degree to which firms service individual clients in an array of service lines from tax to book-keeping, company secretarial and payroll, significantly impacts the valuation of the firm. Similarly, firms servicing international clients can also command a higher value. Quite often the valuations of the whole public accounting firm is not equal to the sum of the different business units and service lines.



Based on his firm’s experience, Mr Tan shared that market valuation is usually close to 100% of sustainable turnover. The common payment terms for acquisitions are an upfront payment about a third of the total, with maybe two other instalments payable at each 12-month anniversary. Usually, the final consideration will take into account the attrition/retention rate of the clients.


“The success rate of acquisitions is higher, in my opinion, than mergers because of the common challenges mentioned earlier,” he adds.


Here are some valuation figures in the Singapore and the United Kingdom markets (Figure 1), based on Foulger Underwood’s past transactions in both countries.


For sale of audit firms which were transacted in the past 24 months in Singapore, the multiple ranged between 0.62 to 1.5 times of recurring fee income, with most deals occurring at 0.97 times. In comparison, in the UK market, the range is wider and has a higher median multiple of 1.02 times.


Specific elements or business units command higher valuations, and non-PA firm acquirers buying these units of business out of PA firms, offer higher valuations in Singapore, compared to the UK. Normally, based on EBITDA or PBT, the multiple of 6.34 is seen in Singapore, versus 5.95 in the UK.


As explained by Mr Underwood, “Valuations of specialist firms and non-audit practices have risen over the last five years. Generally speaking, especially SMPs with more than 60% of their revenue being derived from audit services, are seeing valuations fall significantly. Five years ago, these practices could have secured 110% to 125% in fees, but they are now transacting below 100%. The same is experienced in the UK market for the same reasons, but added to this are pressures that have been brought about due to the withdrawal of tax relief on amortising goodwill.”


Based on his firm’s experience, Paul Tan, Managing Partner, CA Trust PAC, shared that market valuation is usually close to 100% of sustainable turnover. The common payment terms for acquisitions are about a third of total payment upfront, with maybe two other instalments payable at each 12-month anniversary.



The clock is ticking away, so do give deeper thought on your strategy for succession planning. Plan ahead and make sure that your house is in good order to preserve the value of your firm. Keep an open mind, catch the golden opportunities and be realistic.



If you are keen to buy/sell/merge your practice, ISCA can support SMPs in matching interested practitioners to prospective buyers and sellers, and also link you up to professional service providers who support deal facilitation. Do email ISCA Industry Support – SMP Development if you require further assistance.



Joelle Loy is Manager, Industry Support – SMP Development, ISCA.