Running an accounting practice can be a rewarding and fulfilling career path, but there may come a time when you decide to sell your practice and explore new opportunities. Whether you’re approaching retirement or seeking a fresh challenge, selling your accounting practice requires careful planning and consideration. The help of a knowledgeable and experienced advisor can be critical. In this posting, we will discuss the essential steps to successfully sell your accounting practice, maximizing its value, avoiding common pitfalls and ensuring a smooth transition.
Step One: Evaluate Your Practice’s Value.
Before entering the selling process, it’s crucial to determine the value of your accounting practice. Factors such as client base, revenue, profitability, growth potential, location, and reputation all can and will influence the price you can command. There are popular “Rules of Thumb” for various business valuations. However, “Rules of Thumb” are, as they say, only good for measuring thumbs. The process to determine a price that an accounting practice is likely to sell at begins with finding comparable sales and evaluating those sales to figure out the factors that resulted in the price received, then applying these factors to your practice. Formulating an opinion of probable selling price is both a science and an art. It involves not merely applying determined multiples to revenue or, “seller’s discretionary earnings” (SDE)[1], or “EBITDA”[2] but also weighing factors such as location, billing structure, and the mix of the type of work performed. A professional advisor or valuator can be invaluable. Not only should they have the knowledge and skill to be able to evaluate the financials and cash flow metrics of your practice, but they also bring objectivity.
Step Two: Prepare Your Practice for Sale.
To attract potential buyers, it’s important to ensure that your practice is in tip top shape. Make sure your books and records are organized and updated. Evaluate your billing practices to make sure you are charging appropriately and collecting receivables in a timely fashion. Identify any areas that may require improvement and implement necessary changes to increase the appeal of your practice. In addition, be honest with yourself and your advisor. If there are issues, address them right at the beginning. Most problems can be addressed and if not fixed, at least dealt with in a way that will not derail a potential sale. If there is an unaddressed issue or a problem, it will be found during the due diligence review period and will likely result in the termination of the deal.
Step Three: Seek the Right Buyer.
For most professionals, the right buyer isn’t merely the buyer willing to pay you the most for your practice. The right buyer is the one who will pay a price you will accept and who you feel comfortable entrusting your clients to. Consider whether you prefer selling to an individual, merging with another firm, or selling to a larger accounting organization. Most accounting practices tend to be sold to a contemporary in the same general area. A business broker or business intermediary can help you find potential buyers and market your practice for sale. They are also critical in helping you address the next step.
Step Four: Maintain Confidentiality.
Confidentiality is crucial throughout the selling process to protect your practice. Using a business broker or intermediary helps to keep the identity of the business confidential. You want to maintain confidentiality until you and the buyer are ready to announce the transaction and jointly notify the clients and staff. Loss of confidentiality can have a disastrous effect. Revealing the intent to sell prematurely may create anxiety among clients and employees, potentially affecting the practice’s value. Therefore, it is critical that all marketing be done in a way that does not name the seller. No identifying information or confidential information should be released to a prospective buyer without signed Confidentiality / Non-Disclosure Agreements. A business broker or intermediary will understand the importance of confidentiality and will maintain confidentiality by acting as the point of contact, qualifying potential buyers, and ensuring Non-Disclosure Agreements are executed and returned before a confidential information memorandum or package is provided to a prospective buyer.
Step Five: Negotiate the Deal.
Once a serious buyer has been found, the terms of the sale need to be negotiated. By this time, you should have assembled your team, yes team. Your broker, your business attorney and financial advisor will need to work together to guide you through the negotiation process. Factors such as sale price, payment terms, transitional assistance, and any non-compete agreements all need to be considered. Tax implications of the sale also need to be considered. Remember, if you want to sell your practice, it’s important to strike a balance that satisfies both parties’ needs and ensures a successful transition.
Step Six: Due Diligence.
Once the deal is negotiated and the purchase agreement executed, you are most likely going to enter the due diligence period. The purchase agreement will set out the scope and length of time the buyer has to perform their due diligence. If there are undisclosed issues, expect them to be brought to light during due diligence. The buyer and their team of advisors will examine the business, its operations, finances, and records so the buyer can satisfy themselves that the business is as it has been represented and that there are no surprises that could spring up later. If you have not taken the time and made the effort to prepare your practice for sale, the due diligence period can be an anxious and unpleasant time.
Step Seven: Communicate with Clients and Staff.
Once the buyer has completed due diligence, the closing of the transaction will be scheduled. When the sale is finalized, it is crucial to communicate the news to your clients and staff. The exact timing and manner will be worked out between you and the buyer, but it is crucial that you be personally involved. Be transparent about the transition and introduce the new owner. Assure clients that the same high-quality service they have come to expect will continue and that their needs will be met. Address any concerns or questions promptly and provide guidance during the transition period to ensure a smooth handover.
Step Eight: Assist with Transition.
Steps Seven and Eight are vitally important and benefit not just the new owner, but you as well. To ensure a successful handover, provide support and aid to the new owner during the transition phase. Offer to introduce key clients, share important operational details, and supply training or consultation as needed. Maintaining open lines of communication and collaboration will facilitate a seamless transition and help retain client relationships. Maintaining client relationships is of vital concern for the new owner, and it may be a critical concern for you as the seller. The sales of professional service businesses often contain client retention provisions. It is not uncommon to have a portion of the sale price held back at closing for a period of time. At a set interval after the closing, the price paid may be adjusted based upon the level of client retention. An exodus of clints can result in a diminution of the amount of money paid for the practice. Assisting with a smooth transition to the new owner is your opportunity to boost client retention and protect the amount you receive for your practice.
Step Nine: Plan for Life After the Sale.
After selling your accounting practice, it’s essential to plan for your life beyond ownership. Consider your personal goals, whether it’s retirement, pursuing new opportunities, or spending time with family. Evaluate financial implications, such as tax planning, investment strategies, and estate planning, to ensure a smooth transition to your post-practice life. Most importantly, hopefully you will be able to enjoy the rewards of your years of hard work and careful planning and execution of the sale of your practice.
Selling your accounting practice is an important decision that requires careful planning and execution. By assessing your practice’s value, preparing for the sale, finding the right buyer, maintaining confidentiality, negotiating the deal, preparing for due diligence, communicating effectively, and assisting with the transition, you can maximize the value of your practice and ensure a successful handover. With proper preparation, a strategic approach, and skilled advisors, you can embark on a new chapter of your life, while leaving a positive legacy for your clients and staff.
[1] Seller’s discretionary earnings, sometimes designated as SDE, is a measure of the cash flow generated by a particular business. It reflects the income available to the owner. SDE is calculated by adding back owner compensation, non-recurring expenses, and other discretionary expenses to the net income of the business. In essence it is a determination of what the owner receives from the business.
[2] EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It is a metric that is used to evaluate a business’ performance and is another way to evaluate a business’s cash flow generated by operations.