no.1: timing, timing, timing.
by brannon poe
selling an accounting practice can be a hard decision, and an emotional one. having a clear vision of what success looks like is a great place to start.
more brannon poe: 10 questions to ask yourself before buying an accounting practice |. five key decisions for your exit strategy |. how to transfer a boomer-owned cpa practice to a millennial
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one of the first tasks of developing any strategy is to have a clear definition of what success looks like. successfully selling a cpa firm is no different.
there are five key components in a successful deal:
1 – number one is timing. timing your exit properly is crucial. we’ve seen many deals fail at all stages due to inappropriate timing. this could mean the seller is letting go before they are ready or letting go a little too late.
when we have a seller come to us prematurely, they tend to micromanage negotiations and sabotage a fair sale because they simply aren’t ready to pass on what they have built. it is a waste of their time, our time, and that of the buyer.
now, if a seller comes to us a few years too late, the practice can be in stagnation or decline, and the seller lacks the energy to foster growth in the firm. this can obviously make the sale of a practice less lucrative and more time-consuming.
in some cases, it’s obvious to an owner when to sell. for instance, there’s an illness in the family or the arrival of a new grandchild. but, in the absence of a major life event, you may be wondering how you will know when the time is right.
here are some factors to consider that can help you achieve optimal timing:
– when will you have enough money to retire? this is both an obvious and important consideration, and often cpas have a good understanding of their financial situations. that said, you likely won’t be ready to sell unless your retirement funds are in order.
– do you have a plan for what you’ll do after leaving the practice? knowing what you want to do with your time can be a big motivator for exiting. this could mean you have grandiose plans for leisure and time with family, or maybe even another career pulling you from the practice. a surprising number of our retired cpas find enjoyment in lucrative part-time employment that keeps them stimulated with a much-wanted reduction in time and responsibility.
– once you have decided to leave, how long will the exit take? this will depend on a number of factors: what kind of shareholder or partnership agreements you have, how marketable the practice is, and the length of time it will take for client transition.
the most important takeaway when it comes to timing your sale however is, to have clear goals and realistic expectations.
2 – number two is finding the right fit. there are several key areas you should focus on when initially deciding if a potential buyer is a good fit for your practice.
– who is their ideal client? what kind of client are they expecting to acquire? does it align with your current clientele? asking these kinds of questions upfront can give you a good indication of how you relate to this buyer. a good cultural fit is a very positive initial sign.
– what is the buyer’s background? are they from a smaller firm or a large global firm? what sort of firm culture did they experience during their formative years? how hard did they work? ultimately, you want to feel confident in their ability to retain your current employees and clients.
– ascertain the buyer’s management style and ability. find out if your potential buyer has ever managed staff before. do they see themselves being flexible or structured? understanding how a buyer intends to run your firm can help you decide if your staff and clients would mesh well with your prospective purchaser.
– what is the buyer’s technical ability? does this buyer have experience in the key revenue streams of the practice, and if not do they seem capable of learning?
– how does this buyer plan to grow your firm? most of our sellers are emotionally invested in the practices they have built and they want to see it flourish after a sale. get to know what your buyer intends to do with your practice and how they intend to keep current clients and staff happy.
– along with all of these considerations, your gut feeling can go a long way, so remember to trust your instincts when deciding if a buyer is right for your practice.
3 – number three is employing a proven process to guide you in the sale. this simplifies the sale, maximizes value, and helps everyone involved navigate the sales cycle. briefly, divide the process into these five stages:
first, start by exploring. understand your goals and desires for a smooth sale, your timeline for exiting, and the strengths and weakness of your firm.
second, look at pricing. set a fair and attainable price, based on market-based factors. the right terms can mean more value for both you and the buyer.
third, marketing the firm. you’ll want an intermediary who can vet, and present to you qualified buyers that are capable of purchasing your practice so that you can continue to focus on maintaining your firm and its value.
fourth, the negotiation. your representative should be able to lead deliberate negotiations, often with multiple qualified buyers at once. it helps to have an intermediary with good connections to specialized lenders so that you can maximize cash to you at closing.
fifth, transition. part of a good intermediary’s role in the sale of a practice is ensuring that the buyer has the right tools to help your practice flourish after your exit. you want to keep clients and staff happy so that you can step away with peace of mind.
4 – the fourth key component of a successful deal is clean terms. it’s popular in the cpa profession to do an earn-out structured deal when selling. this is where the seller transfers the business but is paid only with the actual earnings of the buyer when they take over. it is a high-risk structure for the seller, and often means high involvement for the seller after the sale. frankly, i don’t recommend it.
earn-out deals often go hand-in-hand with long seller-transition terms. there is high risk to the seller in an earn-out structure that just isn’t there in a cash deal, so the sellers insist on staying with the practice longer than is necessary. keeping a seller on after the sale too long confuses roles, creates tension, and actually makes client and staff transfers to the buyer more difficult.
in a cash deal, you may sacrifice marginally on price, but the benefit of clean terms is extremely valuable. sellers can make a clean break, leaving the buyer to run and grow their new business. you get to focus on your next chapter, whatever that may be.
5 – the fifth and final component is a smooth handoff. a smooth hand-off is the goal in any deal. but some things to keep in mind during this phase of the deal are as follows
– long transitions are rarely (if ever) necessary. it is better to allow the new buyer to foster their own relationships with clients and if a seller sticks around for too long, that process can be hindered, meaning client loss for the new owner.
– you need to have a game plan. you need to get affairs in order before closing so that you know exactly how you will be announcing the transition to staff and clients. preparedness in this instance can make takeover much less stressful. the first month after transition is always busy regardless of the time of year, so plan accordingly.
– be clear and honest with clients. there is a temptation to mask the sale as a merger or partnership. but we’ve seen this backfire. honesty is the best policy. it will help to leave those client relationships appropriately to ensure the buyer is set up for success.
– staff can be nervous about a transition, so the parties need to work to ease those concerns. be empathetic to your staff’s needs, they may be nervous about job retention and role changes. be sure to take the time to address their concerns so that the staff is eager to help the new buyer takeover.
lastly, keep in mind that fit is everything. hopefully, by the time you get to the handoff stage, you feel confident in your buyer’s ability to mesh with your clients and staff.
of course, no two people will run a business the same way but be sure that the buyer you choose will be well-liked and respected by both your clients and staff.