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.