1. History Background
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| Fully describe the business's activities |
This firm focuses on the drafting of annual financial statements in Caseware.
Performing consolidations (using Caseware most of the time)
Conversion of AFS into XBRL format
Statutory Audits
Independent Reviews and Compilations
Taxation Compliance
Bookkeeping services (minimal) |
| How long has the business been established? |
The company traces its roots back to July 2005 |
| How long has the owner had the business? |
Since inception, the seller started the business. |
2. Present Market
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| How does the business operate daily? |
The firm has a strong well-established staff base. Most of the staff have been with the business for an extended period of time. Most of the work is performed by the staff. From there the work is reviewed by either one of the 3x CA’s. Some of the work is performed directly by one of the 3x CA’s. Two CA’s are exiting and one is the key person that can exit in a structured manner if needed for continuity. |
| How are the clients attracted to the business? |
Word of mouth, long-standing reputation in the market, especially the drafting side of the business. |
| What Advertising/Marketing is carried out? |
Very minimal. Mostly word of mouth. |
| Does the business have any contract work? |
Most contracts are per engagement. |
| What competition exists |
There are other ‘drafting only’ firms around but they feel that they are probably the largest independent firm which provides this service. On the audit side, the competition is other similar-sized audit firms. |
| What are the seasonal trends |
No real trends. February to April is the busiest period. Business activity tapers off from mid-December to early January. |
3. Financial
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| Is the business VAT Registered |
Yes |
| Are there up to date management accounts? |
Yes Available
It will be provided if needed |
| What annual financials are available, income statement and or balance sheets? |
Feb 2022 |
| What percentage of the business is cash/credit? |
Almost 100% is credit. |
| What is the age analysis of the debtor’s book? |
+/- 30 days. The engagement letter with the client states that fees are payable on the presentation of the invoice. On engagements which take a period to finalise they do interim billings. |
| How could the profitability of the business be improved? |
Overall the business is very profitable as a result of low overheads. Appoint capable managers who can perform some of the 3x CA’s work at a reduced charge-out rate. This would free up time for the 3x CA’s which can be billed to the appropriate client. Obtaining more larger profitable clients and giving notice to clients on which fees are not recovered and who are slow payers. Increase billable hours. |
| Is Seller finance available and for what amount? |
Yes, a structured deal will be considered on the following basis:-
- Finding an approved Buyer.
- The seller will expect an upfront cash payment, of 50% of the purchase price, on the Effective Date.
- The Seller will warrant turnover for 12 months, subject to acceptable terms and conditions being established for the owner’s continued involvement in the business.
- The balance is payable in monthly payments over 24 months.
- The terms and conditions regarding the warranty and ongoing involvement will be clearly defined, as well as how the price will be adjusted, either upwards or downwards at the end of the warranty period.
- The seller will continue to bring new clients to the business and will be rewarded accordingly.
This will depend on the future involvement of the current owner(s) and whether a merger or an outright sale is done. A Cash deposit will be required even with a merger.
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4. Staffing
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| What is the total staff complement? |
8 Full-time staff (including the current owners) and 1 former staff member which assists the business during busy periods. |
| Staff Breakdown |
Details will be provided and discussed. |
| Do any receive special perks, bonuses or incentives? |
Staff members receive an annual bonus. The total amount for the annual bonus is calculated by management and then split evenly between most staff members (so for some it is more than a 13th cheque and for some higher earners it would equate to less than a 13th cheque). In certain instances, some members would receive a higher amount compared to others for exceptional performance during the year and vice versa.
The owners take a profit share.
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| Are they on contract? |
All are full-time except one part-time CA (SA) as noted above. |
| Do any have management potential? |
Limited potential. |
| How involved is the Owner in running the business? |
Involved on a day-to-day basis. Involved with the practice management (including time checking, planning, debtors management, and capturing). Involved with most engagements but not always directly with the clients. |
5. Premises
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| When Does the Current Lease ends? |
The premises are owned by an entity which belongs to one of the sellers. |
| Is there an option for renewal & what period |
Yes, flexible |
| What is the annual escalation %? |
In excess of 10% |
| What are the Trading Hours? |
Monday to Friday 8:00 to 17:00 |
| What is the square meterage of the business? |
160 square meters |
| Is a copy of the lease available? |
No Lease – see above |
| Do You require a license? |
Yes appropriate accounting body, SAICA. IRBA |
6. Assets
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| Is a full asset list on file? |
Computer Hardware, 2x Servers, Screens and laptops. VOIP telephone system.
Office furniture and equipment. |
| Are any items not included in the sale? |
No |
| What is their overall condition? |
Good but certain laptops would have to be replaced within the next 2 years |
| Do any require repairing? |
Laptops are being kept up to date |
| How have they been valued? |
Replacement Value for Sale purposes |
| Which assets are on lease/HP and with whom |
None |
| What are their settlement amounts? |
N/A |
| Will the Seller settle or Buyer take over? |
N/A |
| Are copies of agreements available? |
N/A |
| Are they presently insured? |
Yes
Insured through Broker |
7. S.W.O.T. Analysis
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| Strengths |
Good client mix across various sectors of the economy.
Strong staff complement and strong client base.
Flexibility to accommodate clients’ needs.
The business has various revenue streams.
Overheads are low. |
| Weaknesses |
Middle management.
Lack of dedicated back office staff.
Owner very involved in time-consuming non-billable activities of the practice. |
| Opportunities |
They get regular requests from potential new drafting clients.
The audit, bookkeeping and statutory business can be expanded (This could be achieved if the Owner(s) has more billable time available).
XBRL conversions. Broadening the service offering of the firm to current clients |
| Threats |
Competitors entering the market. A disregard by other audit firms regarding the requirements of Section 90(2) of the Companies Act. Audit partner rotation. Certain audit clients might become too large for the firm. (Some clients require an established well known name). Clients wanting to perform drafting, consolidations, taxation and XBRL services in-house. Clients deregistering companies or divisionalise. When a drafting client changes auditors they could lose the drafting engagement. |
8. Reason For Sale
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| What is the reason for the sale? |
Owner 2 and Senior Manager are looking to explore other opportunities outside of the audit/drafting practice.
Owner 1 could also explore other opportunities but might merge with a larger firm in order to get better economies of scale and to counter audit partner rotation.
If Owner 1 decides to merge with another firm it would be in order to grow the businesses and broaden the learning opportunities for the staff members
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9. Conclusion
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| Why is this a good business to buy? |
The business is well established with very good loyal staff (towards owners and clients). The business is very profitable. The client base is stable and strong. There is a good mix between a traditional audit firm and the drafting business. |