Getting your public practice ready for succession or sale

Public practitioners should allow three to five years to “get their house in order” before selling a business.

Selling your public practice outright or passing it on to a family member aren’t the only paths available when it comes time to start planning for succession. Here are some of the many options.

In 2005, Bernadette Pitcher, a sole practitioner who ran a practice in Melbourne’s eastern suburbs with a mostly small business client base, engaged the services of a business coaching firm that specialised in accounting.

“The first thing they asked me was, ‘what do you want to work on?’” she recalls. “I said I wanted to get my practice sale-ready because I didn’t know when that day would come. I knew it needed to be in good condition to sell.”

Formulating a succession plan before she was ready to sell was a wise decision. Kerry Boulton, founder and CEO of The Exit Strategy Group, says the right time to develop an exit strategy is when you start a business – failing that, the right time is now.

“It’s a part of normal business practice,” Boulton says. “Begin with the end in mind.”

When it comes to retirement, public practitioners have a range of choices. One option is to sell the entire practice, a popular avenue as large firms seek to expand and new players attempt to enter the market without starting a business from scratch.

Another is to sell part of the practice to an employee, a larger firm, or independent buyer.

A practitioner can also sell the practice but continue working for an agreed period or retain ownership but wind the practice down to a few clients. Other options include a merger, family succession, or simply closing it.

Take time to get your public practice succession-ready

Boulton tells clients they should allow three to five years to “get their house in order” before selling a business. Systems and processes must be in transferable condition, she says. 

“Private business owners frequently run different expenses through the business that may need to be adjusted – you want to have at least three years of financial records that are pure to the business.”

This timeframe is a chance to improve a business’s profitability, liquidity, efficiency and growth – the main issues on which a buyer will focus – and address any underperforming areas.

As well as being an opportunity to rectify weak spots, practitioners can determine if the business is overly reliant on one client or employee.

“Make sure you have extracted the intellectual property that you need from those areas, and that it is well documented and systemised,” Boulton advises.

“Public practitioners build personal relationships with clients and anyone thinking about selling their practice needs to carefully consider how clients can be retained,” adds Keith Yeo FCPA, a member of CPA Australia’s Third Age Network (TAN) committee.

“After all, clients are the business and its equity.”

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The benefits of a well-planned exit strategy

Put yourself in the shoes of a potential buyer, Boulton continues. Identify key value drivers and potential growth areas.

“Ask what you would be looking for,” she suggests. “You might see some gaps in your business.”

A properly planned exit strategy pays dividends.

“The difference between taking a structured approach … and a last-minute rush to find a buyer can be many thousands of dollars,” writes Hayes Knight senior partner Greg Hayes FCPA in Succession planning pathways for CPA public practitioners.

It took Pitcher three years of hard work, aided by weekly consultations with her business coach, to improve her practice and its profitability.

“They made me see more of my worth,” she says. “My fees and the collection of debts were better.”

In 2008, Pitcher decided it was finally time to sell the practice she had run for two decades. Aged 55, she found the long hours and managing staff stressful and wanted to spend more time with family. Pitcher engaged a broker and weighed her options: sell to a small practitioner or a larger firm.

“You’re trying to find something that will suit your clients,” she says.

In the end, she sold the practice to a slightly larger firm located in the same area in Melbourne’s eastern suburbs. The sale process was straightforward, thanks to the work she had put in over the previous three years, she says.

Devil in the detail

However, Pitcher continued working at the practice for another 15 months to satisfy the retention clause in the contract of sale.

“You don’t walk away from a practice – you do have a time when they require you to work in the practice, usually a year to help with the transition.”

In hindsight, she wishes she had been more specific about the tasks she would be required to perform under the retention clause.

“I found myself sitting in another office doing what had caused me so much stress in the first place,” she laments.

Although Pitcher had initially planned to work part-time at the practice after the sale, her experience during the transition period left her wanting to make a clean break.

Today, she has a much smaller business auditing self-managed superannuation funds. She works two days a week – a schedule that suits her current lifestyle.

“It’s just one little thing, not a whole gamut of things like you do in a general practice.”

A post-retirement plan is just as important as an exit strategy, Boulton emphasises.

“If you’ve grown a business from scratch and it has been your life’s work, when you’re going to leave the business you really need to think about what it is you're going to do with the [next] phase of your life.”

Read next: Succession planning for accounting firms: Is internal succession the best option?

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