After experiencing the challenges posed by a global pandemic, a shortage of staff, “quiet quitting”, and non-stop tax, regulatory and compliance changes, many solo and small firm practitioners are considering accelerating their plan to retire or join a larger firm. The more time available to prepare for a transition the better, but often the decision to sell is made without thought given to the time needed to prepare the firm for sale. The following are 10 steps a seller can take to maximize not only the financial benefits of a transaction but also the likelihood of its success.
After experiencing the challenges posed by a global pandemic, a shortage of staff, “quiet quitting”, and non-stop tax, regulatory and compliance changes, many solo and small firm practitioners are considering accelerating their plan to retire or join a larger firm. The more time available to prepare for a transition the better, but often the decision to sell is made without thought given to the time needed to prepare the firm for sale. The following are 10 steps a seller can take to maximize not only the financial benefits of a transaction but also the likelihood of its success.
Consider a market niche. Specialized CPA practices are typically more desirable than a general practice. If the seller has a particular expertise, the firm should concentrate its efforts on that specialty and consider weaning out clients and business development efforts outside this area of focus. Developing a market niche takes time and ruthless discipline, but a practice with specific expertise that is known in the marketplace, will attract more suitors and result in a higher purchase price.
Focus on the brand, not the individual professionals. It is important that clients are loyal to the firm, not individual practitioners. Staff at all levels should be included on client matters and direct communication between all levels of professionals and the client should be encouraged. If the firm is centered around a single accountant, and that accountant retires, clients often use the event as an opportunity to bid out their work. From simple steps such as changing the firm name to reflect an entity not a person to the more difficult challenge of firm leaders relinquishing total control, transforming a firm from one or two key professionals with a number of assistants to a cohesive firm takes time and effort, but is valuable in the long run. Some practitioners even decide to adjust their timeline for a transaction once the management and other responsibilities of the firm are more evenly distributed.
Align your fee structure with the marketplace. The most consistent impediment to the successful sale of a practice is a fee structure that has not kept pace with the market. Many practitioners are very reluctant to raise their fees and if they haven’t done so consistently each year it is very likely the existing fee structure is well below market. In that case, many potential buyers decide a transaction isn’t feasible, as the transaction to the acquirer’s fee structure will result in a significant loss of clients that are conditioned to below market fees. Review, benchmark and increase fees for all services annually. A few clients will leave, but those are typically the least profitable.
Update and adopt current technology. If there is sufficient time before a transaction, consider investing in software that is widely used in the marketplace and hardware that is routinely updated. Using technology that is near the end of its useful life or is otherwise non-standard increases the transaction costs to a buyer and instills a lack of confidence in the work product of the firm. At a minimum, ensure that all software is up to date or resides in the cloud and hardware is three (3) years old or less. While software (and hardware) can be a significant investment in time and money, a successful transaction requires current technology that can be converted relatively seamlessly to buyer’s platforms.
Retention of Staff. Many current buyers are really seeking qualified, experienced staff. Often a buyer’s interest in the seller’s clients is secondary to its desire to add the seller’s talent to its roster. Even if you are only at the early stages of contemplating a future transaction, take the time to fully staff and fairly compensate your employees. Consider entering into employment contracts containing client non-solicitation provisions with key employees. If possible, employment agreements that provide a bonus in the event of a firm sale, and an additional bonus if the professional remains with the buyer for a year post-sale provides stability to both the employee and the firm. Written contracts with key employees will typically increase the value of the practice significantly.
Get your legal house in order. One easy way to identify potential issues is for the seller to perform the same due diligence that a buyer would. This entails a review of the entity organization documents (LLC operating agreement, shareholder agreements, partnership agreement), leases, contracts with employees, independent contractors and vendors, retirement plans, employee handbooks, internal quality control policies, pending or threatened professional liability claims, etc. A buyer will perform its own review, so getting a jump on it will allow you time to fix any issues prior to marketing the practice for sale. A well-organized set of due diligence information will increase your credibility with a buyer often resulting in a smoother transaction and shorten the time to close.
Focus on client acquisition and retention. A firm that is growing is more valuable than one with a stagnant or slowly eroding client base. Even if the firm’s primary owners are nearing retirement, it is critical for the firm to keep marketing and developing new business. A firm with an aging and shrinking client base is simply not attractive. It is important to encourage employees at all levels, not just senior managers and partners, to engage in firm marketing activities.
Review client profitability. A CPA firm recently fired the bottom 20% of its client base. These were the poor payers, slow responders, bad record keepers, and typically only had “urgent” matters. After disengaging from these clients, total net income and profitability of the practice increased and the staff were happier. It is important to weed out unprofitable and high maintenance clients. The buyer ultimately will but if it is done post-closing it will likely reduce any earn out or result in a purchase price adjustment.
Fairly value the Practice. There are few business owners that don’t believe their business is worth much more than it actually is. Getting a third party valuation early in the process can be helpful in setting reasonable expectations of the purchase price. Testing the market (rather than only approaching a single potential buyer) can also be helpful. Firms often fail to sell because none of the multiple potential buyers were prepared to pay “what it was worth”. Pro tip – if multiple potential buyers are offering about the same consideration, it is likely that is actually “what it is worth”.
Consider Internal Transaction. The easiest transactions are typically with an internal candidate or group of candidates (i.e., the next generation of managers/leaders). These buyers typically know the operations and the clients. The purchase price can often be similar to a third-party buyer, but often has to be seller financed over a period of 3 – 10 years. In order to determine if this option is viable, you will have to decide if the buyers have the experience and leadership to run the practice and if you are willing to take the risk of financing the transaction. There are a number of other factors as to existing personal guaranties the seller may have in place, the length of the current lease, and how the clients view the next generation of ownership. That said, there is a benefit to selling to the very people that made the firm successful in the first place.
The market is still fairly active and there are many firms seeking to acquire clients and expertise. It is critical to spend the time up front to ensure that the sale goes as smoothly as possible. The easiest way to proceed is to assume the practice will be sold soon, and begin implementing these steps right now. There is no time to wait.