According to Xeinadin Group founder Feisal Nahaboo, private equity firms routinely undervalue accounting firms, resulting in sellers receiving a “ridiculous” return on the companies they and their teams have worked so hard to build.

We speak exclusively to Nahaboo, who offers important advice to accountants to ensure they get the ‘golden touch’ in these negotiations.

Entrepreneur Nahaboo, the founder of leading accounting firm Xeinadin, has warned that private equity firms are “woefully undervaluing” accounting firms, leading owners to sell their companies well below their real value.

Because accounting firms operate in the service industry and enjoy low overheads compared to other types of business, investors “need to respect and reward this unique sector,” he says.

Private equity firms should recognize that accounting firms represent an “attractive growth model” with significant potential to provide additional client services, including but not limited to corporate finance, human resources, IT and outsourcing.

This means that the purchase of an accounting firm usually pays for itself within a few years.

And since accounting firms have a below-average cost base and can operate with an average profitability of 25 percent, investors need to be “very aware” that owners have no incentive to sell below a fair valuation.

Known as the man who “woke a sleeping profession” by tripling values ​​for more than 100 independent accounting firms in the UK and Ireland, Nahaboo advises practices should have the confidence to generate a reasonable return on their business.

Regarded as one of the UK’s leading wealth creation advisors, with over 20 years’ experience helping accountants make substantial sums of money, he showed his famous ‘golden touch’ when he founded the Xeinadin Group in 2019.

Dubbed a “corporate miracle”, the world’s first merger of 122 independent UK and Irish accounting firms through Nabahoo’s revolutionary Overnight Multiple Merger Model (OMMM) was immediately ranked as a top accounting firm, offering over 12x Adjusted EBITDA, according to some sources.

According to Nahaboo, the fact that Xeinadin was subsequently sold to leading private equity firm Exponent at an undisclosed “premium value” underscores three important points: first, that the auditing sector is extremely attractive to private equity; second, that if negotiated well, private equity will pay high sales values; and third, that other accounting firms are unfairly discounted for not understanding how to manage, negotiate and deal with private equity firms.

Xeinadin is “living proof that high values ​​can be aimed for,” says Nahaboo. When the company was founded, around 250 equity partners trusted him from his kitchen table to deliver triple values ​​across the board.

The consolidation process was completed in just 256 working days and within three years Xeinadin was valued at over £300m – a record-breaking achievement.

In stark contrast to Xeinadin’s valuation, Nahaboo says many private equity firms only offer value at around eight times the EBITDA for larger UK and Irish independent accounting firms.

Smaller companies fare even worse, being offered a “ridiculous” 5x Adjusted EBITDA multiple.

Larger independent companies should aim for at least 10x adjusted EBITDA, Nahaboo suggests, adding that accounting practices should use private equity as an investment rather than an exit strategy.

Since Xeinadin – which reported sales of £110.3m in May 2020 according to the Irish Times, Nahaboo has helped more than 200 businesses manage reviews.

Channeled through his OMMG (Overnight Multiple Merger Group) network, these individual independent accounting firms have also achieved favorable EBITDA thanks to the entrepreneur’s skills and knowledge in negotiating the best possible deals, either for investment or exit opportunities .

Here, Nahaboo offers 12 simple steps to help accounting practices secure their true value with private equity firms.

12 easy steps to negotiating with private equity

1. Larger accounting firms should request figures of at least 10 times Adjusted EBITDA.
2. Businesses should leverage Nahaboo’s OMMG network to determine and approve fair adjustments to EBITDA. This should not be left to investors as they may try to scale back the adjustments in favor of the buyer.
3. Businesses should ask for at least 70 percent cash up front.
4. The only exception to point 3 above is when the seller receives roll-up value in new shares of the group.
5. Companies should strive to reduce private equity’s retained cash from the 70 percent upfront payment. While private equity will see it as a risk not to withhold part of the payment as a company’s customers are often dependent on the company’s partners, it is not understood that there is a greater risk for companies to withhold their cash when private equity Companies will be formed that will have majority ownership and have contractual clauses that can prevent payments.
6. Firms must have dated exit sales schedules set out in agreements; Otherwise, they might struggle to release more equity.
7. Firms should negotiate to keep their company’s existing brand name for at least three years – because customers want less disruption.
8. Companies should sell their businesses to a private equity management team that is similarly cultured to keep clients comfortable. A smaller firm selling should seek investments from a team that has extensive experience working in a smaller accounting firm and experience managing SMEs and smaller owner-managed businesses.
9. The growth targets should currently be in the range of five percent pa. Some private equity firms will charge at least twice that, which may be unrealistic for some smaller firms focused on providing great service to their clients at a fair price. Customers don’t want to feel ripped off with rising prices after a new property.
10. Clawback provisions are 100 percent negotiable. A clawback clause means that the seller loses an equal value of the retained cash if it fails to meet growth targets. Some private equity firms report recoveries in excess of 200 percent. That seems grossly unfair.
11. The ban on auditors following a private equity investment can be negotiated to two years instead of three to four years in various circumstances.
12. Companies should ensure that every investor is offering next-generation employees at least inflated salary and growth stock. Investors need to invest in key individuals driving succession.

Feisal Nahaboo – The entrepreneur with the golden touch

Entrepreneur Feisal Nahaboo’s name is synonymous with “wealth creation” in the accounting industry.

He is credited with pioneering the concept of the “multi-service accounting firm,” which enables firms to double value and triple profits over a period of three to five years by adding up to 42 new lines of service to their offering.

With this innovative process, he revolutionized the accounting sector between 2001 and 2013, raising industry standards and profits and setting a new industry benchmark. What was once Nahaboo’s radical solution is now considered the norm.

Likewise, Xeinadin – its first overnight multiple merger – has delivered tremendous results.

All of the independent accounting firms that have joined the merger will receive significant premium values ​​from private investment firm Exponent, taking their valuation to a projected £320m-340m – the kind of growth that typically takes 50-100 years.

Nahaboo has helped more than 100 UK and Irish accounting firms score up to triple in 2022 alone and is now enabling individual independent accounting firms to do the same with its OMMG network.

Through the network, he can help an independent small or large auditing practice to achieve “super premium values” through his triple evaluation process.

For example, a company with annual sales of £3m can expect a valuation of £6m to £9m.

A company with a turnover of £1million, meanwhile, is likely to receive up to £2million in cash and a share of shares (worth hundreds of thousands of pounds) in its own practice to incentivize it to continue running successfully.

Nahaboo also has the ear of over 40 independent private equity investors interested in investing 50 to 80 percent in individual accounting firms “overnight.”

Nahaboo explained his process as follows: “First, I study the company’s income statement and balance sheets and make various recommendations regarding investors.

“Then I carry out an analysis of the service mix and advise accordingly. This is followed by a Pareto analysis in which I examine the structure of the organization and offer advice on different specializations that can be offered.

“Finally, I bring a private investor together with the auditing practice.”

The benefits go well beyond monetary rewards — it also allows accountants to make an investment without having to step out. In addition to the strong valuation, salaries and dividends should be in the six-figure range.

Upon signing, owners and partners receive a huge lump sum, worth more than their business, so, as Nahaboo puts it, “they can enjoy life now while still having equity and a hefty, six-figure annual reward for the… management of the company.

“This is an incentive for those within the accounting firm who have the expertise and experience to continue the business at high profit levels, which in turn raises standards across the industry.”

Nahaboo says its triple grading process has been “refined over many years” and is in high demand.

He said: “As a trusted advisor to accountants, over the past 20 years I have signed contracts with over 1,000 accounting firms who have relied on my services.

“Some of them are now using me as part of 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 developed very strong relationships with investors and brokers including David Mortlock, MD of Berenberg Bank – one of the highest paid and most successful bankers in town.

“I get a lot of inquiries from people interested in joining the OMMG network and I’m available to anyone interested.”

To request a review about OMMG, visit www.ommg.co.uk. For more information on Faisal Nahaboo, visit www.feisal.co.uk or keep following him LinkedIn.