May 1999 Issue


By Nicholas J. Mastracchio Jr., PhD, CPA

Reviewed by Edward Selig, CPA, and Richard Glickman, CPA, LCS&Z Glickman Lutz LLP

Mergers and Acquisitions of CPA Firms: A Guide to Practice Valuation is must for firms or practitioners interested in learning about mergers and acquisitions and for experienced business valuators planning to value accounting practices. The advantages gained by using this book as a tool in planning, executing, and evaluating a merger or acquisition are well worth the price. The author enunciates in detail potential accounting practice valuation problems and solutions and explains the process of normalizing earnings to arrive at a fair market value for an accounting practice. Students of the valuation process can find a methodology to use in practice.

Having been involved in many negotiations and mergers, we appreciated the author's thoughts on every possible aspect of a potential deal. It opened our horizons. We learned as the author analyzed some typical situations to overcome the problems inherent in any given merger or acquisition. His creative suggestions were quite insightful.

The technical analytic discussions of capitalization rates, multiples, and valuation concepts were instructive, even though our grasp of his equations left us feeling a little inadequate. As a bonus, the author points out what should be done after the merger or acquisition.

The book is arranged into eight chapters supplemented by a group of case studies. Chapter one discusses advantages and disadvantages of mergers or acquisitions. Chapter two helps identify potential candidates. Chapter three explains how to begin to develop a firm profile. All of the possible issues are analyzed in detail in chapter four, as well as how to practice "due diligence."

Chapter five, we believe, is the essence of this book in its analysis of methods of valuing a practice. It begins with four approaches to determine present value using earnings and cash flow. Then it examines three asset valuation approaches. Finally, the chapter closes by looking at a practice example that has "a value to the buyer, and technically not a value to the seller." A zero-value practice (to the seller) should have a real value to a buyer who has no practice.

Chapter six explains how to structure an agreement and complete the deal, along with a detailed review of valuations based on multiples of gross fees. It also shows how to reconcile multiples with earnings capitalized. The author provides valuable insights into why a multiple such as "one times gross fees" needs to be analyzed. For example, a five percent decline in productivity correlates to a 26% drop in value. Chapter seven discusses adjustments that need to be made to the firm's financial statements. Chapter eight discusses the relationship between risk and return as well as capitalization rates to be used for valuations.

The author talks about intangibles such as when to negotiate a firm name: It should happen early in the negotiating process. Once the two parties see the potential in a merger to make more money on a combined basis, the firms tend to become more flexible in deciding on a name for the merged firm.

To sum up, this book is a blueprint or road map on how to carry out a merger or acquisition with checklists, report cards, and more. We expect to use this book in our own future mergers and acquisitions. *

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