Thinking about cutting back, succession, or your exit strategy? Ready to hang up your pencils? You’re not alone! We are part of an aging profession, and many practices (and practitioners) are reaching their “sell-by” date!
The three most frequent questions I get from practitioners are the following:
1. What’s the multiple?
2. What’s the multiple?
3. What’s the multiple?
Before I try to answer that, let’s look at the factors that drive the valuation of an accounting firm. I call them the 15 Cs.
Client retention is the key to monetizing the value of your practice. The key to cli-ent retention is finding the right successor and orchestrating a smooth transition. A client retention rate lower than 90% is, in my judgment, a failed transaction.
The culture of the acquiring firm is its single most important attribute. It has to match yours. The chemistry between you and the firm is the second most important factor. If these don’t align, the deal won’t work; if they do align, we can almost always work out the economics (after all, we are accountants). Your clients are with you because you care about them and they like you. Make sure your successors are ready, willing, and able to establish a comparable relationship.
When you’re looking at a successor firm, consider the following vital questions:
1. Does the firm have the capacity to service your clients at the same level as you? If they tell you they will have to hire people to service your clients, watch out!
2. Will they charge your clients approximately the same amount that you do? Fees are the first thing that will enter a client’s head when they hear about the change.
3. Is the location of the new firm close enough that your clients will be willing to travel to the new office? Even if clients never come to your office, they want it close by just in case.
Now let’s look at the deal itself. Should you look for an all-cash deal (as promoted by lots of brokers)? Categorically, NO. It’s not good for clients, it’s not good for your staff, and it’s unlikely to be good for you. Instead, look for 20–30% cash up front and the balance over 3–5 years. The balance will be contingent upon client retention, so everyone is motivated to make a smooth transition. If it’s done correctly, everybody wins!
I am a strong advocate of a multi-stage deal, with some or all of these “stages”:
- A Practice Continuation Agreement with your chosen successor firm. If something happens to you, they will step in immediately under pre-agreed terms. Examples are available at www.2020groupusa. com in the “Resources” section.
- Merge your practice into theirs, with an understanding that you will work full-time for, say, up to three years and your compensation will be guaranteed at approximately what you make now. The new firm gets all the overhead savings.
- Next step—start cutting back your time when you’re ready, and reduce your compensation accordingly.
- Last step—full retirement with an agreed payout but with an annually renewable consultancy arrangement at the option of the firm.
You will want to make sure the following key points are included in your agreement:
- Tax treatment, usually a combination of capital gain and ordinary income to the seller.
- Accelerate the payout if the acquirer is sold, and allocate the debt in the event a partner leaves the acquiring firm.
- Price determination, including the amount of cash down and the payout period (make it less painful for the buyer by scheduling payments when they will likely have cash in the bank).
- Employment for your people, including a new benefits package.
- Use of your name, including for how long.
- Advising clients; it’s good to have a plan for how this will happen.
- Consultancy agreement for your continued work; a standard agreement is for you to get 40–50% of the collections for time that you personally bill.
- Perks—this is important! Will the new firm pay your CPE, health insurance, 401(k), cell phone bill, auto costs, coun-try club dues, meals and entertainment, laptop costs, home internet, and buy you a new computer? Agree on this up front.
- Tail insurance, usually a four-year policy.
- Non-compete provisions, including proscribed area and time limit. Many states now make these provisions very difficult to enforce.
- The four Ds: death, disability, divorce, and disagreement.
For a checklist of key considerations regarding valuation and deal points, email Chris@2020groupusa.com or call 800-788-0190.
Here’s the deal on multiples: if your firm is in a major city or a suburb of a major city, the gross is under $1,000,000, and you’re profitable, buyers will be willing to pay at least one-time fees. If you’re in a major metropolitan area, the practice is well run and super-profitable, and you have a key specialty or niche, you can command an even higher price. If you’re in a rural area, there will likely be far fewer interested parties, and you may be looking at a substantial discount or no sale at all.