Good planning when preparing your public practice for sale or handover can increase its value and help you to still do the best by your clients.
If anyone can successfully manage the sale of a public accounting practice as part of a retirement transition plan, it should be an accountant. Excellent financial and business knowledge. Invaluable negotiating experience. Strong people skills.
However, while accountants are typically very good at advising their own clients, research from Bentley’s The Voice of Australian Business Survey suggests accounting firms are among 43 per cent of small businesses that currently lack an adequate succession plan.
Michelle Knights, principal of Rob Knights and Co, a professional accounting consultancy practice, says older accountants are often unprepared for their exit and, as a result, may lose a windfall.
“Practitioners are traditionally pretty poor at planning it themselves and often leave it to the last minute,” says Knights, whose firm has done around 5500 accounting valuations during the past four decades. “Unfortunately, it has some fairly significant impacts upon the eventual outcome.”
Rod Adamson FCPA, a sole practitioner based in Queensland, learned the importance of having a succession plan after he suffered a heart attack in October 2015 and couldn’t return to work until March 2016.
“I was a sole practitioner. I didn’t incorporate, and that was basically my biggest mistake,” he says.
Knights’ advice is to “plan, plan, plan” and to start the sale or transition process at least two or three years in advance.
A simple example of where practitioners can go wrong is when their charge rates for clients are locked in well below the market norm, making the firm unattractive to potential buyers. This would force practitioners to either live with the low margins or jack up rates and risk losing the new client base.
“No one is willing to buy the practice because they are going to have to increase fees by about 30 per cent,” Knights says. “The problem is that the firm hadn’t regularly reviewed its charge rates.”
Weighing up the options
Selling a public practice has become more complex in the past decade, particularly as automation and offshoring of labour are affecting the value of goodwill.
Richard Shrapnel, business strategist of Shrapnel Publications and former partner of Pitcher Partners, says older practitioners have a few options as they contemplate retirement. They can keep the practice, but wind it down as they prepare to retire. They can prepare it for sale, or they can transition the business to another family member or internal partner.
If a junior partner cannot afford to buy the practice outright, an alternative is to bring in salaried partners rather than equity partners. Although many accountants have children who are also in the profession, Shrapnel says they often ignore the family route.
“They tend not to envisage their children coming into their practice for some reason but it should be talked about as an option,” he says.
At the same time, many younger accountants are baulking at the costs and pressures of taking on an accounting firm. There are also potential lifestyle impacts of running a firm that may put some people off. They may find themselves wedded to the practice rather than their life partner.
“Younger people are finding it difficult to buy a fee base much larger than about A$300,000 to A$500,000.” Michelle Knights, Rob Knights and Co
The compliance work of traditional firms is also falling out of favour. Business advisory services are widely seen as the future of public practice accounting, so buying a compliance-based firm would make little sense.
However, Alchemy Career Management executive coaching partner Peter Black says many younger accountants still like the sense of challenge and status that buying a firm can bring. They are also beginning to appreciate the dramatic changes the accounting sector is undergoing, he adds.
“But it’s whether they want to take on the risk and can afford to do it,” he says.
Knights says more younger accountants are seeking to buy a practice or fee base than five to eight years ago, but they are facing constraints because of mortgage pressures and the prospect of being outbid by established firms that want to expand.
“Younger people are finding it difficult to buy a fee base much larger than about A$300,000 to A$500,000.”
The key, according to Shrapnel, is to focus on capital value and the ability of a business to earn enduring income after the owner has departed. A considerable period of smart management is required, so clients are not too wedded to the existing business owner.
“The value of any business and a practice especially depends on the ability to transfer clients over. If you leave it to the last moment, then you may well have run out of time.”
Finding a new owner
Knights is an advocate of internal succession, believing it can aid the retention of clients and staff after the reins are handed over. However, there are some possible drawbacks. First, the firm must find interested buyers, and that is not always easy. Second, a sale on the open market is likely to draw a better price for the seller than an internal equity acquisition.
Knights explains that external buyers, in many cases, can use their existing systems and processes to get economies of scale out of an acquired firm, and use the additional fees and revenue for a payback period of about two years. As a result, they can be more aggressive on the price they offer. An internal buyer, on the other hand, who may pay dollar for dollar of maintainable fees when buying a practice, could be looking at a payback period of five to 10 years or more.
“If you really want to maximise your price at the moment, you’ll probably get more for a whole-of-practice sale than if you sell equity,” Knights says.
Tax aspects of buying and selling a business: this course examines some of the more important issues to be considered before entering into a purchase or sale agreement for a business.
Black believes one way of broadening the cohort of prospective internal buyers is to implement strong, ongoing career development plans for employees, so they can make the leap from being accounting technicians to prospective business owners. The emphasis should be on their entrepreneurial capacity, leadership credentials, risk-management skills and consulting prowess.
“You then open up the pool of potential buyers or, alternatively, it makes the business more attractive.”
The next challenge, according to Black, is to retain those skilled-up people, “so they’re still there when you want to sell the business”. This may entail strategies such as enhanced remuneration, profit-sharing, bonus and shadow equity schemes, or progressively selling a percentage of the business to them.
Preparing a practice for sale
In its succession planning toolkit to help accountants prepare for a possible sale, CPA Australia stresses the importance of presenting a firm as an attractive investment opportunity and outlining its practice profile. This should include its history, team structure, vision and competitive advantages; details of all services and products being provided to clients and if there are referral sources to the firm; an analysis of the firm’s client base; a rundown on its marketing plans; and an overview of its human resources and technology strengths.
One reason potential buyers reject the acquisition of a firm or a parcel of fees is because of an over-reliance on mum-and-dad clients who need basic ... services. Peter Black, Alchemy Career Management
Black says one major reason that potential buyers reject the acquisition of a firm or a parcel of fees is because of an over-reliance on mum-and-dad clients who need basic tax and accounting services, rather than larger business clients that want value-added services in areas such as business advisory, financial planning and aged care.
“The quality of the client base is so small and with limited growth upside,” he says.
A practice’s systems and processes must also be in good shape. The CPA Australia toolkit recommends business owners should prepare a confidentiality deed to ensure that all parties entering into negotiations do not disclose any sensitive information.
Getting a fair deal
When estimating the value of a public practice, Knights says egos and sentimentality can get in the way of common sense. The normal industry method for valuing accounting firms is at a number of cents in the dollar of maintainable revenue. A common offer for firms with revenue of less than A$1 million a year is between A80 cents to A$1.00 of maintainable fees.
However, Knights warns that just because an owner bought in many years ago at A80 cents in the dollar, it does not mean they will get the same when they exit. Similarly, the price of competing firms in a suburb may vary significantly depending on the state of the business.
“By putting unrealistic prices or values on a proposition you’re potentially going to lose your opportunity to realise value or pass your practice on to someone else.”
Regardless, public practice owners need to start thinking about their succession plans even if they have no plans to retire yet.
Multi-service succession model for accounting practices