Look for the evaluation warning signs.

The number of financial planning and accounting firms being bought and sold continues to grow, yet many practices fail to understand the process of valuation. Kate Kachor examines.

It could be described as the trend of the past two to three years. However the buying and selling of financial and accounting firms has seemed to be more a past time than a trend for some financial planning groups.

"At present I am looking for 83 firms, and in the last month we have purchased 10 accounting firms," says Harts Australasian group acquisitions manager Robert Nixon.

Harts has been on a six-month buying spree, and now has a sizeable list of acquisitions completed. The group has acquired Canberra-based accounting firm Wilson, Watt Papandrea and Townsville accounting firm, Coast to Coast Accounting.

In January last year, Harts purchased Reeves Moses Hudig, a New Zealand-based financial planning and funds management group. It also purchased Mobile Accounting Professionals.

Last August, it also purchased mortgage securitisation business First Mortgage Corporation and leading trustee and portfolio management group Cardinal Financial Securities.

In a similar mode of operation to Harts, accounting and financial planning group Stockford is also on a practice buying spree. At present Stockford has bought 45 accounting, financial planning and business advisory firms.

"We know the industry, and we know what to look for in practices," says Stockford general manager for financial services Mark Rantall.

However, unlike Nixon and Rantall, many financial planning and accounting principals do not have the knowledge to purchase a financial planning or accounting firm.

Accounting firm, Rob Knights and Co principal Rob Knight says he has seen many principals struggle to understand business evaluation processes.

"The mistake many make is paying too much and then they can go broke or can't get any money back," says Knights.

Knights, who began as a chartered accountant has almost 30 years experience in the evaluation of practices. During those years he has evaluated 800 accounting, legal and financial planning businesses.

Knight says people are unfortunately under the impression that if you've got the right amount of capital anyone can buy an accounting or financial planning business.

He says what people don't understand is that it is quite a complicated and complex procedure.

"What usually catches most people is simply in the name. A financial practice or financial business are two separate entities," Knight says.

"What people need to ask themselves is; is it a business through a dealer group, and if so is that transferable to me. Or is it a business not connected to a dealer group?"

One of the main traps Nixion believes principals and parties interested in purchasing a business fall into is on price.

"Many end up paying too much, because they don't understand the business," he says.

Nixion says principals need not rush into the purchasing of businesses. He says it should be a very thorough process so you don't buy a "dud group".

Rantall says that not integrating the practice is a major mistake often made in first time evaluations.

"Acquisitions shouldn't be taken lightly, but just as crucial is how to integrate the purchase into an existing operation," he says.

"Interested parties should be ready to devote capital and resources to make sure the purchase adds value and fits in any business strategy."

Rantall says to avoid mistakes such as lack of integration, principals need to be stringent in their business criteria when looking at firms.

He says the criteria needs to include the age profile of the principals; the financial standing of the practice; their net profit; salary levels; lease commitments; credit levels; funds under administration/advice and where money is located.

"Its important to also ascertain whether practice might be involved in tax effective investments, their asset exposure of the funds and the number of clients," he says.

"You also need to find out whether the practice has a 'we' mentality rather than an 'I' mentality."

Nixion says at present the standard of accounting firms is "archaic" and it is necessary for principals to be wary of that fact.

He says criteria for principals should include the quality of partners; the types of clients the group has and the potential of the business. Nixon says areas of operation, in terms of what it is doing, are also important in evaluating a business.

"Take a good hard look at the clients and the history of the group, particularly the numbers on the books right now. Only pay on blue sky performance. The more profitable they are the more you should get after purchase," Nixon says.

Nixon says the main drivers of profitability include the ratio of clients to partner, the productivity of full time staff, and income generated per hour.

Despite having made a list of criteria and noting what benefits a business may have for another firm, many principals still find it difficult to actually locate an available business.

However a web based service has been launched to assist in planners and accountants finding a practice to buy or listing their own for sale.

The site, Practice4Sale.com.au is an Internet database that confidentially lists and matches the criteria of those looking at buying or selling financial planning and accountancy practices.

Chief executive Ted de Kok says the site enables practitioners to market their practice Australia wide for a single fee.

"The site is particularly useful for smaller and rural practices that are looking for wide exposure. It also has the ability to assist with the partial sale of a practice through equity or partnership sales," de Kok says.

In a bid to ensure that those using the service are genuine De Kok says the site is based on a subscription model only, and caters for those seriously interested in purchasing practices.

He says confidentiality is assured as all the leads or queries are forwarded back to an agent or broker.

Prospective buyers can use the site's search engine to search for suitable practices using appropriate criteria including information on the size of the practice, its turnover and location.

Practices listed on the site have a 90-day open-ended posting and also have the option of using photos of the practice in the listings.

De Kok says the development of the site has taken six months until its launch late last month and in a bid to generate business the site will offer free access until March.