United States: 5 Pitfalls To Avoid When Selling Your Accounting Practice

In preparing for an eventual sale, the owners should avoid these five all-too-common pitfalls.

We all know the statistics.  In the U.S., 10,000 people are turning 65 each day for the next 20 years.  About 60% of all partners in CPA firms are over 50 years old.  What does this mean?  Mid-size and small CPA firms will have a lot of competition for potential buyers when the partners reaching retirement age finally decide to sell their practices and retire.

Selling your accounting practice doesn't have to coincide with retirement, however, and many of the most successful sales do not.

As a management priority, partners in accounting firms need to have regular, honest and open dialogues about whether and when the firm should be sold, as it is vital for the team to be on the same page.  In preparing for an eventual sale, the owners should avoid these five all-too-common pitfalls.

1. Timing the Sale

Accountants often approach the sale of their practice by stating something like, "I am working at the firm until I am 68 years old, and then selling."  While federal entitlement programs have trained us to consider a given age as the presumed age of retirement, when it comes to selling one's own practice, there are certainly far more relevant factors that determine the best time to sell.  Consider the following:

Personal goals

The decision to sell an accounting practice requires an owner to consider a number of personal factors, including physical health, financial security, family concerns and a desire to do something new or pursue an avocation.  Best practice: set your own personal goals (in writing) and then evaluate a sale based upon these goals, not the other way around.

The market for accounting firms

Like every market, the market for accounting firms ebbs and flows.  It may be that the demand for accounting firms is very high a few years prior to the arbitrary date set for retirement.  A firm may leave a lot of money on the table, or lose a sale altogether, if the owner waits past the market peak for no other reason than to wait to blow out another candle on a birthday cake.  On more than one occassion, I have seen a firm pass up a good oferr because it was earlier than the date they hade in mind, only to receive less for the firm a few years later.

The financial results of the accounting practice

When possible, you always want to leave your practice on a high note.  Easier said than done.  When the financial results are good, employees are generally happy, liabilities have been reduced and the future looks bright.  The thought of exiting during that high seems less attractive.  Many owners, however, attempt to sell their accounting practice after a very bad year.  The partners become worried about the future, aggravated at clients and staff and just "want to get out."  That type of behavior only guarantees the lowest possible sale price and perhaps selecting the first, not the best, suitor.

2.  Not Being Realistic About the Value of the Firm

Most owners value their firm higher than an objective third-party, and it is usually helpful to have an independent valuation of the firm.  Often, the purchase price can be increased by addressing problematic factors set forth in the valuation report that decrease the value, and a comprehensive valuation is a roadmap to an increased sales price.  I often hear clients state that "my firm is worth X times revenue" based upon nationwide industry averages or some other statistic.  While that multiple of revenue may be a very broad general rule of thumb, I have found that sales price is most often based on the following factors:

Practice focus

A firm with a specialty in a certain type of business - like franchises, certain industries like healthcare or that focus on a certain geographic area - are all very appealing to a strategic buyer looking to fill out a niche that their own firm is missing.  It is never too late to focus on building a specialty group or expertise in a certain area.

Client size

Typically, a firm with fewer larger clients is worth more than one with many small clients.  While a larger number of clients spreads the economic impact of losing a single client, each client has a cost to administer, manage and maintain, which reduces profitability.  Plus, smaller clients often present fewer opportunities to cross-sell other services - typically a value driver.

Length of client relationship

A firm with a long-term and stable client base is typically worth more than one dealing with the constant churn of smaller clients looking for this year's low cost provider.  Annual recurring revenue, such as audit or tax engagements, are also valuable to the buyer.

Competence of staff

Competence of staff is critical.  I have seen a number of deals that were completed solely to acquire talent.  It is difficult to hire, train and retain good staff, and buyers will pay a premium for a competent, experienced and loyal employee base.

Profitability of clients

A sophisticated buyer is able to easily determine the profitability of clients.  The most common item that decreases value is when a firm fails to routinely increase fees, resulting in very low margin clients.  It is important to raise fees each year to maintain pace with inflation and make certain that the fees are at market level.

Casting a wide net

Many accounting firms believe they already know the identity of the buyer of their firm.  It may be their main competitor or a firm with which they have a good relationship.  Like selling your home to your next-door neighbor without putting it on the market, you have no idea what the market is actually willing to pay.  The best way to ensure the highest price is to have multiple potential suitors - and hopefully a bidding war.  That is easiest to do with a broker or investment banker, but there are many ways to make sure there is more than one potential buyer.

3.  Being Synonymous with the Business

From a buyer's point of view, a firm in which a single owner or one partner totally controls all aspects of the firm is not valuable.  These are the owners or partners who sign every check, review every invoice, make every decision and maintain every client relationship.  The practice is much more valuable if it can run without the owner.  A good team greatly increases the value of the firm, and being able to delegate to competent team members is key.

4.  Ignoring the Warts

Every business has "warts" that decrease the attractiveness of a firm to a potential buyer.  Common warts present in accounting firms in which partners are approaching retirement are:

  • Obsolete technology;
  • Manual accounting or other systems;
  • Aging workforce;
  • Paper records;
  • Low rates; and
  • Lack of agreements with clients or employees.

The best way to identify the items that descrease value is to take the time to perform the same due diligence a buyer would perform.  If you can't answer the questions that will be asked, or don't like the answers you are able to give, it is time to address the deficiencies.

5.  Not Being Ready to Sell

There are many firms who grow by acquiring smaller accounting firms, so you never know when a buyer will come knocking on your door.  Be ready.  Know the realistic value you are willing to accept, the time frame to closing and any employment or other terms that are important.  It is often too late to try to determine the firm's sale price with an offer on the table.

On the flip side, it is sometimes the case that as a deal comes closer to fruition, the partners start erecting roadblocks and reasons to terminate the deal.  The real reason is often that they are not ready to let go of the firm.  Partners have often spent many years at a firm, and much of their identity is tied into the practice and the profession.  Finding self-worth after retiring can be very difficult for some, and taking time off to develop hobbies and outside interests to make sure you are ready to retire is critical.

The partners must have open and honest discussions about the future of the firm and agree that it is time to sell.  If only a few partners want to sell, maybe a buyout of those who do makes more sense than selling the whole firm.  If most of the partners aren't on board with a sale, it may be a very different transition.

Avoiding the pitfalls above and following these relatively straightforward suggestions will help your firm stand out from the field of other selling firms in the fierce competition for the best buyer.

Originally published in the MA Society of CPA's SumNews (May 2018)

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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