timing is critical.
by ed mendlowitz
101 questions and answers: managing an accounting practice, the complete 2-volume set
q: i am getting older and want to continue working at least five more years. should i merge now to anticipate and facilitate a buyout?
a: selling means retiring. is that something you want to do?
more: 10 reasons clients don’t pay
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i’ve written many times about being clear about your goals and what you really want. that being said, here is a general discussion about the reality of the value of your practice.
13 things you need to know today
- when we sell our practices, we will be taxed at near the highest rates we will probably ever be in, making our yield much less than what we were making. because of this, many accountants hold on until just after the last minute – when it becomes our heirs’ problem.
- we are in a service business with no tangible product. our reputation is our major asset. one large lawsuit can put us out of business, e.g., arthur andersen and laventhol & horwath. so, too, can a series of large client losses, e.g., oppenheim appel & dixon and clarence raines. a serious illness, such as a stroke or heart disease, or a tragic car accident, could also put an end to business. additionally, a debilitating illness of a spouse can slow us up. i used examples of large firms that were well documented in the newspapers. however, there are many smaller firms that had the same unfortunate fates. our sister profession – law – had a major bankruptcy – dewey leboeuf. another high-profile legal bankruptcy was former baseball commissioner bowie kuhn’s firm, finley kumble wagner underberg manley myerson & casey. values are illusory until payment is received in full.
- and we get old. we may not feel old and may have more energy than those half our age, but the perception of younger clients is that we are not for them. the longer you live, the longer your practice’s value will dwindle. in general, clients want accountants who are contemporaries, or slightly older – not a generation older.
- the asset value of the practice looks good on a personal financial statement, but only the cash flow from the sale will have any meaning to you. even those amounts have shrunk – from 1½ to 2 times gross to 1 (or less) times gross. many cpas do not have a basic understanding of what a buyer would want and why they buy and do not position their practice for sale properly.
- many professionals assume they will retire some day in some way. whether or not it is recognized and a timetable vaguely established, there is a value to the practice. if retirement is contemplated, then maximizing the value needs to be considered, and that also needs proper timing.
- one way of quantifying that value is to consider what someone would pay for it and under what terms if you suddenly decided to leave it completely.
- add a transition period for which you might want to remain, and at what compensation.
- now, consider that it is not today when you are leaving, but sometime in the future, and that you will realize the practice’s value at that time. what amount will that be?
- unless you then become like merlin (who lived backwards), the practice would probably be less valuable at that time to an acquirer.
- measure the differences and add the excess of your earnings while you continue with the practice over what you would have earned on the net proceeds if you sold your practice.
- how are you richer? that is your optimum financial alternative.
- keep in mind that buyers mainly want predictability of cash flow and, secondarily, a “ticket” into business.
- you should have a practice continuation agreement in event of an untimely death or disability.