many considerations factor into the best time to retire.
by ed mendlowitz
202 questions and answers: managing an accounting practice
question: i am 76 and am starting to think about slowing down and selling my practice. i am a sole practitioner with three bookkeepers and a secretary/admin person working for me. i have a nice spacious office in a small building i own.
more: who to hire when it’s time to grow | hourly billing doesn’t cover the value; now what? | should you merge? here’s how to chart your path | when selling a firm to staffers is tricky | want to merge? six steps to take | courting a client? don’t give too much away for free | every accounting firm needs quality control | measure knowledge gaps (then close them) | should you offer financial services? | thirteen things to consider before you sell your practice | how much is your tax practice worth? | ready to retire? selling your practice is no strategy
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i have been approached by a larger firm that wants to buy my practice, but they want a guarantee of retention, and i was thinking of working with them for two years to ease the transition, and then sell. how do i set up the work arrangement?
also, they want me to move into their office, but then i will have to sell my office and the real estate market is soft. also, we will negotiate the price now (a percentage of gross) but how do i know they won’t change their mind, or what happens if the transition period is not good and i have to pull out? what do you suggest i do or how should i proceed?
i do 1,500 1040s and have 75 monthly “write-up” clients. at least once every quarter i go to each business client’s office to pick up their information; the other months they send it in. i can manage it because geographically the business clients are split between close proximity to my office in new jersey and manhattan and i spread it out over three months. that has been my routine for at least the last 20 years. i feel seeing the clients and talking to them, for the 10 minutes i see them, is the key to my high client retention. i get my check when i pick up the work, or they send a check in with their work – no a/r. tax season i work around the clock. most of the returns i can do while i am with the client and they have it before they leave.
answer: this is not a question, it is a topic for a book and the reply would certainly comprise a small book. but here are some comments. your concerns are not atypical – i get many calls with these concerns. i’ll start with the easier parts. i have addressed some of these issues previously, so i will try not to repeat myself but offer new material.
many accountants own their offices. in most cases it was a good investment and after a few years became cost-effective. like any investment, there is a cost of sale. with stocks it is a modest brokerage commission. for art, it is the auctioneer’s commission and uncertainty of the knockdown price. with real estate the costs include the time it takes to market the property, and this means a period when no rent is coming in. no one – well, virtually no one – gets the top dollar the moment they decide to sell. there are also vagaries of the market and a soft market will yield a much lower price. those are the facts of life. get over it.
the problem comes when the owner decides he wants to retire and he faces having to sell the property, which is usually a chore no one likes to deal with. on some level the property “ownership” can delay retiring or retard making a decision. an alternative to selling is to keep working until you drop and let your family deal with it – you don’t know what you would be doing anyway if you stopped working.
renting space also factors into many retirement decisions. many decisions to retire are made around lease renewal time, forcing many premature retirement actions.
conclusion: ownership delays retirement. renting speeds it up.
oops, i did not tell you what you do. you decide! the common denominator is money. leases can always be broken, for a cost; real estate can always be sold, if priced right into the market. using the property or lease as an excuse is a copout.
retiring comes – either voluntarily, sometimes forced by market conditions or health, or death! i know many people who retire at a relatively young age for cpas, before age 70, and many who are still working into their 90s. most of the people i know don’t keep working because they “need” the money. some do, and they have no choice because of many bad choices they made running their practice over many years. that is their fault and they made their choice with low fees, bad collections or inappropriate clients, or by not packing it in and getting a job paying a higher salary. they also never considered the settlement date of stopping work.
in terms of your practice, a good thing you do is interact regularly with your business clients. the bad thing is you think you are indispensible, and because of this you are misappropriating your time by making trips to pick up the data. things change and many personal visits can be replaced with frequent “keeping in touch” and “i’m always available for you” phone calls. also, you have not introduced any of your staff to the clients. if you let a bookkeeper do the pickups half of the time, there would be another person from your firm the client is comfortable with and that will 1) make your firm a little more valuable by better use of leverage, 2) free up some of your time and 3) allow you to not always have to be available because you now have some backup that can put out a fire. you mentioned to me that you used to pick up the work every month and slowly reduced it to once every three months – good move! now stretch it to once every six months and have a bookkeeper also do it once every six months.
you doing the returns while clients are in your office makes you a worker and not an owner. also, transferring these clients will become more difficult because of your close and evident hands-on relationship. the value of what you do can be measured by considering what would happen if you raised your fees 10 percent. if you lose more than 10 percent of your clients, then you will make less and it shows that your relationship is not as important as the low fees you must be charging. anyone buying your practice will end up at some point increasing the fees. if you do not think you can retain more than 90 percent of your clients with a higher fee, what make you think that the buyer of your practice would do better than you? it won’t happen. two suggestions are 1) increase fees 5 percent to 10 percent this year and then 2 percent to 5 percent yearly after this, and 2) wean the clients away from you personally by having your clients drop off their 1040 information, be interviewed quickly if necessary and then mail returns to them or have them pick up the next day and assign some work to a staff person or a per diem preparer.
there are many types of buyers. one of them wants to acquire the tax practice and use it as a loss leader to sell financial products such as annuities and mutual funds or manage investments. tax clients with low fees who appear unlikely to buy products will be discarded quickly. if you have a retention guarantee, you’ve given the buyer a look-see and got nothing to show for it. you are also not doing right for your clients.
another type of buyer wants to get into business and the payment to you is for their admission ticket and they will try the hardest to retain the clients, but will lack the experience you have and probably the desire to maintain the close personal relationship needed to replace you. they also will be less experienced with running a business and dealing with clients.
moving in with a prospective buyer is a good move, but i don’t like having a binding agreement to sell two years out. i prefer a letter of intent with clear terms, but nothing binding on either part. things change, including your desire to retire, and especially according to a predetermined schedule to which you might not want to adhere. sharing space will make your clients familiar with the new surroundings, the people, the address and the people answering the telephone. i also suggest retaining your telephone number and email address. extricating yourself from a move can be done easier when you don’t have to provide a new phone number. some people in these arrangements change the firm name to include your name with theirs. this can be done only for your practice and while checks will be made out to the new name, until you have a final agreement you should have complete control over that bank account.
your death and disability can be handled by agreements i previously, many times, have suggested, so i am not re-covering them here.
another issue that is common is when the retention guarantee period ends. this depends on the type of practice, continuity of the seller, personality and desire of the buyer and availability, presentation to the clients and perception by the clients. many of these are controllable, but not all. i suggest a one-year guarantee period, but not longer than two years. if the buyer has the clients for two years, then any loss should be theirs. don’t forget the seller wants to step aside. the guarantee period can be extended to the entire payment period if a large enough down payment is made. another way is to have a smaller down payment, but have the payout made based on collections so the seller gets the benefit of increased fees along with the declining client base. fyi, i did the last two a few times and it worked for everyone. as a buyer i never minded paying more for what i got as long as i wasn’t locked into paying for what i did not retain.
as to your work arrangements, if you move in with a nonbinding letter of intent but do not merge, then there is no work arrangement – you keep payment for what you do. you might have to pay “rent” for the facility and backup, but you are paying it now where you practice. if you sign a sale agreement and stay for one or two years, usually you would receive a percentage of the fees generated from your efforts, which will be negotiated based on circumstances and revenue amounts.
i also know many people in similar circumstances with the person asking this question, and the bottom line is that if you do not really want to retire, you will have many excuses to keep working – nothing wrong with that, but don’t delude yourself or agonize over every detail.
i think that not much will be done by you until you actually decide what you want to do about continuing and staying active, and if and when you want to retire, and how you will spend your retirement time. once you decide that, i believe the solutions will become clear.
also, nothing is ever perfect – deal with the available choices at the time you want to deal with them.
good luck!