Thinking of selling your accounting practice? Read this first
It’s crucial to identify the right candidate for your business, whether it’s an existing partner, current employee or external candidate (Getty Images/kate_sept2004)
Making retirement plans? Want to try a new career? There’s no shortage of reasons to sell an accounting practice. But before you do, here are a few tips to ensure the most successful outcome.
1. PLAN AHEAD
If you’re thinking of retiring, don’t wait too long to think about selling your practice. Start by focusing on the sale and creating the best conditions.
“It’s wise to study your options one to three years before you’re really ready to sell,” says CPA Randi Vetvik, Quebec market leader at Poe Group Advisors, a North American company specializing in the sale of accounting practices. “It’s a major decision that requires careful planning. Finding a buyer can also take more time than you think.”
A rule of thumb is that practices sell for roughly the value of annual revenues, according to Vetvik, but remember, no one is immune to a down year, which could set things back if the transition follows soon after.
However, be aware that there are several other factors—such as setting a price too soon, waiting too long to sell, selling too quickly or being inflexible—that can increase or decrease the firm’s value and the number of potential buyers.
2. DETERMINE THE FAIR VALUE OF YOUR PRACTICE
Profitability is the first thing that comes to mind, but is not the only factor to be considered. “Regardless of the valuation technique used, in most cases the fair value may include considerations such as, but not limited to, the type of customer base and ability to generate recurring revenues, client concentration, types of services offered, information about the owner, compensation and billing rates, staff retention and firm management practices including investment in technology,” says CPA Ismail Akhter, lead principal, Members in Practice for CPA Canada’s professional programs.
Here are a few other things to consider:
Location: “Practices located in large urban centres, such as Calgary, Vancouver and Toronto, tend to sell for higher-revenue multiples and also more quickly,” says Vetvik. In contrast, practices located in more remote locations can take longer to sell, because “you have a much smaller customer list which is harder to grow so it can be more difficult to operate the business, and find prospects,” explains Akhter. Moreover, he adds, it can be tough to find and retain talent.
Size: “Most buyers look for practices priced at $400,000 to $800,000,” says Vetvik. “There are also markets for practices valued in the millions and for smaller ones, but potential buyers are fewer.”
Terms of sale: “What percentage will be paid in cash? What will be the subsequent payment plan? These elements will have an impact on the price,” explains Vetvik. To show goodwill, the new owner could pay the seller a percentage of revenues up to a negotiated amount.
Miscellaneous: Range of services offered, newly acquired clients, condition and appearance of office space, recent investments, new technologies adopted (e.g. cloud solutions, project management software, chatbots)—list everything that could boost the sale amount.
The goal is to set a realistic price—especially if business is good—without driving away potential buyers. “You need to prepare a lot of information, but this is a good step to plan ahead and determine what you think the value of your company is,” says Akhter.
3. ENTERTAIN SEVERAL OPTIONS
Is a partner, a family member or an acquaintance interested in your practice? A study by Interfimo of 100 practices sold in France in 2018 showed that handing your business off to a partner or a family member was a factor leading to a lower selling price.
Also, keep in mind that if the cost is too high, young graduates, with their new CPA designation, could be tempted to start their own firm instead.
That’s where an intermediary with experience in this area could make a difference, especially since there may be more practices for sale than you’re aware of. Beyond an intermediary, “the idea is to identify the right candidate for your business,” says Akhter. “The list can include internal candidates such as existing partners in the practice or current employees or external candidates such as competitors or new entrants to the market…everything is possible.”
4. TAKE CARE OF YOUR CLIENTS
Finding a new client and developing a relationship with them takes time, so make sure the transition is smooth for existing clients. To avoid worrying them, don’t tell them about the upcoming change before the sale is finalized, says Akhter.
“You want to make sure you keep this matter confidential, so it does not get out to your clients, your employees or your competitors,” he explains. “The conditions of the sale should talk about how the communication with the client will happen, and the responsibility of the firm that is selling.”
Taking care of your client should be a part of planning when you decide to sell as some clients may leave because they are fearful, says Akhter. But you can also choose to leave gradually. The same study by Interfimo found that by maintaining a presence—even a few hours per week, with or without compensation—a seller can fetch a better price.
“You can stay on for six months or a year, in an adviser capacity,” says Akhter. “For bigger businesses, some partners even stay for two years. They want succession planning, but they want to do something until they gradually transition off. This will help clients and [also] help you as you transition to your next path.”
5. ENGAGE YOUR EMPLOYEES
Announcing the change in ownership is different from notifying your clients, but still very important. Once again, communication is crucial, says Akhter. Your employees are sure to have questions and concerns: What’s happening? What’s going to change for me? Does this mean I won’t have a job anymore?
“Given the current labour shortage, a firm’s employees are one of its most valuable assets—especially in a firm whose valuation exceeds the million-dollar mark,” says Vetvik. “Build a company culture that retains and engages and focus on your team’s professional development. It’ll pay off.”
In an article on Canadian Accountant, Bridget Noonan, CPA and a partner at Clearline Consulting, says that owners should not be the primary contact for their clients, otherwise their departure could adversely impact the selling price.
She adds: “[Your] employees must have a real depth of skills in areas such as assurance, taxation, technology and cloud computing and business advisory services. Employees that merely know how to punch information into tax software are quickly losing their value. They will [negatively] impact the value of your firm.”
6. KNOW WHEN TO STEP AWAY
Sellers tend to believe they are irreplaceable, says Vetvik.
“Conventional thinking has it that they play a crucial role in retaining clients after a sale,” she adds. “However, our experience with 300 practices sold over a 13-year period proves otherwise. If there’s good synergy between the buyer and the seller, the service provided by the acquirer will be the determining factor.” It would, for example, be inappropriate to increase billings overnight.
Vetvik believes that practices that are prepared to innovate, even if only gradually, will fare much better. Noonan agrees, adding that, “If it isn’t yet a buyer’s market…it is moving there quickly…”
ENJOY THE TRANSITION
Selling a practice will bring about some mixed feelings because it is a major life change, says Akhter.
“It is something some people have been waiting forever, sometimes over 30 or 40 years,” he adds. “When you have done what you could to make sure the company stays thriving, when you have done your part to transform the relationship you have built to the new firm, it is time to enjoy the next chapter. It is not only about the market and the business, it is about you.
“Take a deep breath and if you need to find help outside to deal with certain emotions, get that help. A lot of people talk about the business side of things, but they don’t see—or refuse—the emotional side of it, because they don’t know what to do out of the business.”
BE PREPARED
The Purchase and Sale of an Accounting Practice, a book by CPA Canada, will help you navigate through the various phases of the purchase or sale of an accounting practice, including pricing and valuation, structuring the deal and the complete transaction process. It also contains practical cases and examples of confidentiality and other agreements.