Cutting A Deal When There’s No Natural Successor.

One of the things I often find myself discussing with practitioners is succession planning.

It seems it’s all too easy to ‘put it off’ to another day.

Many, especially sole practitioners, seem to believe that one day they’ll decide to sell their practice and retire to the sun. That may well be so, but in order to realize the maximum value for their hard work over the years, and to pass-on that value to the new owner(s) of the firm, a lot of preparation work has to be done.

In many cases, the value of the practice will be dependant upon the amount of business that the acquiring firm retains, usually over a period of time of between three to five years.

So, it’s vital to make sure that the people taking over your clients have similar values, similar outlooks and values as you. After all it is your own ‘style’ of practising that kept the clients happy all these years, isn’t it?

So what are the key factors to consider in order to have something of real value to sell? Here are a few pointers:

• Quality working paper files – incoming potential buyers will want to examine your files and consider potential claims that they were not responsible for creating. Good working paper files is one of the cornerstones to a successful sale.
• Providing an awesome service experience to clients – again, incoming potential buyers will want to know that they are not looking at a ‘high risk’ block of fees.
• Excellent history. What did you bill client ‘X’ last year? And the year before? And the year before that? Any major fluctuations could be a red flag, so have your client history at hand to explain any such occurrences.
• WIP – too much? Too old? What is the right balance? This will be a major component part of your discussions and if there is any doubt about the quality and recoverability of WIP, you might find yourself having to bill what you can for it directly to clients you are then asking to give the new owners a try.
• Write offs. These come in two distinct flavours:1. Time2. BillingsNeither taste that great. A good recovery history and few bad debts will go along way to verifying your claim that you have a good set of clients.
• Staff. Clients usually build a good relationship with someone special to them at your office. In a sale, clients want to be assured that there will be continuity in service and the people that they have worked with for so many years will still be around.It is often wise for the incoming practitioner to try to keep all staff of the old owner at least for the first few years.
• Timing. Many deals tend to happen in the fall, just because during tax season few are prepared (or able) to devote much time to discussions with prospective purchasers when they have five hundred tax returns to steam through. If that sounds like you, NOW is the time to start to think about finding a buyer.
• Culture. It is often overlooked as a ‘softer’ issue, but it is critical that clients continue to be treated in the same (or better) manner as they have been accustomed to over the years.Finding a firm to succeed you who have similar values and culture can be a full time job in itself, so time invested in frank and open discussions with third parties will pay dividends after the deal has closed.

All in all, it often takes between 6 and 12 months to close a deal, even in today’s market, where there are way more buyers than sellers.

The best option is to ‘grow your own’ successor by taking in a partner or senior manager with high potential 2 to 5 years before you plan to retire, allowing them to build relationships with key clients and when you are ready, they will be an established part of the firm, rather than the ‘new kid on the block’.

This means paying excruciating attention to detail when hiring, being open about your plans and the timing of events, and probably being prepared to take a cut in income as the new recruit builds momentum so that you can start to ‘take your foot off the gas’.

Unfortunately, for reasons of:

- Lack of available talent
- Reluctance to take a cut in net profit share
- Reluctance to relinquish sufficient control
- Or all three, many sole practitioners miss a great opportunity.

I cannot tell you just how much fun this type of can be for me. I get to se a whole range of different accounting firms in totally different situations, each with a different solution, but the solutions only start to happen when you take action.

Please, don’t leave it too late.