Considerations for Selling Your Accounting Practice

YOU SELL YOUR ACCOUNTING PRACTICE FIRM ONLY ONCE . . . THERE ARE NO SECOND CHANCES . . .

What do you have to contemplate when the time comes to sell your accounting practice?

by Terry Stidham, President of Target Search Group

By the time clients are five to ten years from retiring; most accountants have already reviewed and assisted in working out their financial and continuity needs, including possible future mergers or sales of the businesses. Many accounting firm owners with only one to three years to retirement, however, may not have not yet established a successor, either within or outside the organization.

The answer, of course, is for the sole proprietor or mid to large size accounting firm to give careful thought and planning to the succession of the practice. The practice may have taken many years of hard work and quality service to establish. It probably is expected to be the source of income in retirement years, either through the form of periodic payments or as a lump sum from a successor. In any event, maximizing the benefit from the practice will depend upon the successful transfer of clients to another practitioner--either future partners or a purchaser of the practice. Both the transferring firm and the successor firm will want a successful transition. Clients that are lost in the transition will usually reduce the payout to the retiring party as well as being a dampener to making future deals by the successor firm.

Ownership transitions are difficult. How to prepare for and maintain continuity, especially when egos as well as dollars are at risk, is indeed a major question.

 

Considerations When Selling a Practice

The single most important concern to selling or transferring a practice is the likelihood that the clients of the transferring practitioner will remain with the successor firm. Without the prospects of continuity, there can be no viable transfer. Although many variables come together in deciding when and how to sell a practice, there are some that have greater impact than others. For purposes of the discussion, the transferor will be referred to as the seller, even though the client service may be assumed by another in a merger or by the formation of a new partnership.

Time and Client Comfort

The more frequently a practitioner usually services or communicates with its clients, the easier and more quickly a transition can take place. If a client is visited monthly, within just one calendar year, the seller and his successor should have ample opportunity to execute a proper transition. For example, during the first quarter, the seller and his successor could visit the client together. The next several visits they can alternate between the successor alone and the two together. By the last quarter, the successor should be able to go alone with the seller making an occasional follow-up by telephone.

If the seller generally sees clients on an annual basis, such as to prepare tax returns or prepare a year-end financial statement, it may take several years for clients to see the seller and successor together often enough to create a comfort level. In this type of practice, the time to put a transition plan in place is several years before the seller's actual or full retirement.

Aside from the number of visits, consideration must be given to the relationship between the seller and the clients and the level of services performed some work is so involved it may very well take additional time for an effective and lasting transition.

While some clients may be visited infrequently, the practitioner and the client may be in constant communication by telephone. After an initial personal introduction, the important thing is to get the successor involved in these communications. In the beginning, conference calls including the successor can provide the answer.

If the seller's staff has an abundance of client contact, the seller may not be needed for as long a transition. In many instances, the staff can be of greater value with certain clients then the seller. If that is the case, it will be important for the successor to continue to employ key staff that has developed the confidence of clients.

Desire or Willingness to Continue Working

This is a personal decision, affecting not only when to sell, but to whom. If a seller wants to continue working full time or even part time while a successor is put in place, he or she may have to consider successors with their own self-sustaining practices. The seller might merge with such a successor early on, in order to promote the image of greater continuity without immediately reducing workload or income. In this type of merger, a merger out (a euphemism for sale), practitioners generally phase out over a given or contractual period of time. They merge with their successor and gradually shift from full time to part time and then perhaps to consultant status.
By affiliating with a successor who has a self-sustaining practice, the seller need not subsidize the successor or change his or her immediate lifestyle. If a practitioner wants next tax season to be the last one with a full-time role, a successor should be in place by May or June of the preceding year! Most practitioners have a percentage of clients that they see only during tax season. In the "perfect world," clients should see the seller and successor working together for, at least, some period of time. By the time the seller's clients realize that he or she is phasing out, the successor will have had ample opportunity to prove his or her own competency. If the successor is in possession of the client records and the seller remains a consultant to the practice, the successor will most likely have to mess up to lose the clients.

Upcoming Investments

What if a seller is close to considering a sale or merger but anticipates the need for a significant investment that may affect the timing of the sale process? Investments might include lease renewals, computer upgrades, or a new phone system. Any of these could accelerate the desire to consider an affiliation eventually leading to a sale or just a "plain vanilla" sale. For example, if within the next year, a practitioner is considering some form of transition, why should he or she commit to an investment now? Remedying some of the needs or problems may represent unrecoverable additional costs that may be addressed by the existing resources of a buyer.

Staffing

Can staffing affect when to sell or merge? Absolutely! The loss, by a sole practitioner considering retirement, of a manager or strong senior may be a triggering point to contemplate the sale or merger, up, down, or out. On the other hand, such an event could lead the practitioner to bring in an individual, not only to fill the current void, but to be the ultimate successor. Why should a practitioner hire, train, and work with a new employee without this potential if the plan is to start moving forward soon with some form of transition?

Sale Transition Exit

This is how most small to midsize practitioners sell their practices. The successor acquires the equity from the seller and a transition of some sort follows. The key to making this effective is the transition; there is always a need for the clients being transferred to get as comfortable as possible with the new firm.

In some client transitions, the first time many clients really understand what is happening is with the arrival of a letter announcing the new arrangement. The envelope would probably have the seller's firm name and address, ensuring that the envelope will be opened, read, and just not junked, as just another firm's marketing piece.

Most transfers start with the appearance of an affiliation, not a sale. While people, per se, cannot be bought and sold, client retention can still be amazingly effective with a proper transition.

Contact us today if you have a practice that you would like to sell.

6 Key Components of a Letter Of Intent

Letter Of Intent

by Terry Stidham, President of Target Search Group

There is a potential buyer that has expressed interest in your business, you feel that it might be a good fit and now this buyer wants more information. It's time to move to the next step via the letter of intent, or LOI. It’s important to understand that a letter of intent is not the end of the negotiation process but merely the beginning of formalizing it. A well-written letter of intent can reduce the potential for misunderstandings later and will get all of the parties’ assumptions and views on the critical terms of the deal on paper. A letter of intent is not, however, the actual agreement that governs the terms of the purchase, and in fact, if written properly is not an agreement at all.

Although LOI’s resemble written contracts, they are usually not binding on the parties in their entirety. Many LOI’s, however, contain provisions that are binding, such as non-disclosure agreements, covenants to negotiate in good faith, or "stand-still" or "no-shop" provisions promising exclusive rights to negotiate to the potential buyer. 

6 KEY COMPONENTS of a LETTER of INTENT

1. Clearly identify the document as a Letter of Intent - The document should make it clear that it is not a binding contract to buy or sell the business. The parties may want to include, and some states will impose automatically, a duty to negotiate in good faith. A good faith provision can be useful, especially for the seller, to prevent one party from using the negotiation and due diligence process solely to collect information about the other party and their business.
2. State from the outset whether the deal will involve the sale of stock or the sale of assets - It would be unfortunate if both sides spent significant amounts of money but one party thought from the outset that they were talking about a stock sale and the other party thought they were talking about an asset sale. If this point is not discussed from the very beginning, the deal could fall apart as the deal structure that is preferred by one party may not be feasible for the other party.
3. Include both a purchase price and an explanation of the assumptions that the purchase price is based upon - During the due diligence process, it may turn out that many of the early assumptions used in calculating the purchase price will turn out not to be true. If the method for calculating the purchase price is included in the letter, the parties have a road map on how the purchase price should be adjusted.
4. If the deal is an asset purchase then the parties should allocate the purchase price to the different assets on the acquisition target’s balance sheet - This allocation can have great effect on the tax implications of the deal for the parties. Since tax considerations are often critical to whether a deal is feasible, there needs to be a common understanding of purchase price allocations at a very early stage of the deal process.
5. The method of payment - As in point 2, if one party has in mind an all cash deal, and the other party has in mind a deal where the seller will hold onto a note or some other retained interest in the acquisition target, then it is a good idea for the parties to get on the same page from the outset, before either party has spent significant amounts of time and money on the deal.
6. All other major deal points - If either party has any other deal points that are crucial to them, they should let the other party know relatively early. Examples of these include: whether key employees must be retained for the deal to close, any expected non-compete agreements that the seller will sign, and if the buyer will be assuming any liabilities of the seller. Springing these on the other party late in the process may result in a failed deal after everybody has spent a lot of time and money.

The LOI is the entry point to the due diligence phase, where the buyer examines in varying degrees of detail, important trade secrets of the company. These may include customer lists, contracts, employee details, supplier agreements, etc. Because this information is so important, and in many cases, critical to your business, the  LOI serves to let only the  right buyers through the door.  Following successful completion of the due diligence phase, the LOI is replaced by the final purchase and sale agreement.

This article is for general information only. The information presented should not be construed to be formal legal advice nor the formation of a lawyer/client relationship.

Are You Attractive For An Equity Investment?

Equity Investment Candidate

by Terry Stidham, President of Target Search Group

Equity capital generally is composed of funds that are raised by a business in exchange for an ownership interest in the company. This interest can be in the form of ownership of common or preferred stock or instruments that convert into stock.

In addition to taking an ownership interest in your company, equity investors may also participate as a member of the company’s board of directors and take an active role in managing your company.

However, in comparison to debt financing, or loans, which must be repaid over time, equity financing does not have to be repaid.

While equity investing can come from family and friends, it’s often raised from high net-worth individuals or from venture capital or private equity firms. Investors are looking for early stage companies that can’t yet obtain traditional financing; a return on their investment of at least 30-40 percent and a clear strategy to realize their investment within 3-7 years.

What Makes a Company Attractive for 

Equity Investment?

• Industry – Typical companies that receive equity investment are high-growth companies, with the potential for a high rate of return.  These high growth industries include the energy sector, technology and media and entertainment to name a few. The companies receiving investment generally have the ability to be a market leader and often capitalize on "first mover advantage" in other words,  being first in a growing marketplace or industry sector.
• Clear Exit Strategy – Angel investors and venture capitalists are attracted to companies that have a clear exit strategy, allowing them to obtain the return on their investment. Often known as a "liquidity event", this includes an initial public offering; private placement, acquisition or merger with another company or management-led buyout. In general, investors are looking to exit an investment within 3-7 years.
• Financial Return – Equity investors are attracted to companies that clearly demonstrate the likelihood of significant financial returns. In general, these investors would like to see profit margins of more than 50 percent.

Requirements for Obtaining Equity

If your business is a likely candidate for venture capital, you must prepare certain information to sell your idea. This includes a very short oral presentation; an investor-oriented business plan and executive summary; and documentation for any due diligence analysis.

Oral Presentation - In searching for venture capital, you will have to pitch your idea to potential investors, often in informal settings. To do this, you must present your business concept and reasons for a high return in a short, concise (no more than two minute) presentation. If you are then invited to make a formal presentation to a venture capitalists or group of angel investors, these presentations generally last between 5-10 minutes.

Business Plan - You must prepare an investor-focused business plan that remains current based on market or business model changes. This business plan must include the following: .

• Executive Summary
• Description of the Company
• Analysis of the Marketplace
• Discussion of Products and Services
• Marketing and Sales Activities
• Discussion of Management and Ownership
• Organization and Personnel
• Funds Required and their Use
• Financial Data
• Exit Strategy

Due Diligence - Any company looking for venture capital should anticipate and prepare for the due diligence analysis that will be undertaken by any investor. In general, investors will want to see support for the assumptions and projections that are made in your business plan and presentation and to assess any liabilities. They will review financial statements, tax liabilities and any other potential legal liabilities. They will also want to test any technology and review any licenses, patents or documentation required to operate your business.

If you are ready for an Equity Investment then contact the Deal Sourcing Professionals at Target Search Group today.