Advice for selling an accounting practice
Selling an accounting practice can be a complex business. It’ll take planning and preparation.
The accounting practice marketplace is heating up
With many accounting firm owners reaching retirement age, there could be a glut of accounting firms hitting the market – but there are only so many buyers. If you’re looking to sell your accounting practice, you might have some competition on the horizon. Here are seven things to think about before putting your business on the market.
Seven things to think about when selling an accounting practice
1. The smaller your practice, the easier the sale
If your accounting practice is small, it will probably be easier for you to find a buyer. This is especially true if you’re the sole owner and have complete authority over the business. Small accounting practices can be appealing to larger firms because:
- acquiring a list of clients from a smaller practice is much quicker than adding clients one at a time
- smaller practices typically have fewer staff to accommodate in transitions
A smaller practice also typically costs less to acquire, which means you have a bigger market – from big companies right down to small practices and even individuals. If you own a larger firm, or you’re a partner selling your equity, be prepared for a harder sale.
2. Is internal succession an option?
Selling an accounting practice to another business can mean the end of your firm, as you knew it. If you’d rather ensure the continued vision and culture of your practice, you should consider passing the reins to someone internally.
In larger firms, partners can sell their equity to the remaining owners or rising stars. Succession is built into the business plan. It’s much harder for small practices as there may not have been a budget to hire and mentor potential partners. You’ll have to decide if you have someone with enough:
- experience and leadership to run the practice
- capital to buy you out
You’ll also need to figure out if you have the time and resources to get them ready to take over. If you have a good candidate to buy the firm, you might want to start talking about your plan now. They’ll need time to decide if it’s what they want, and they’ll need to build a financial plan for making the purchase.
3. The importance of client retention
Client retention is one of the key metrics in deciding the value of an accounting practice. Buyers rarely agree to an upfront sale because of the risk that clients will leave after the handover when the principal has gone. Instead, they’re more likely to pay yearly installments, which are adjusted based on client retention.
If the firm loses clients, the annual installments will go down. If it gains clients, annual installments will go up. In other words, it won’t be enough to demonstrate that your firm has loyal clients. You’ll need to ensure that loyalty continues after you’ve left. Make sure your clients have confidence in your staff.
The quality of your clients can be just as important as the quantity.
- Have you worked hard to gain new clients? A slow growth rate may lower your practice’s value, so try to keep adding accounts.
- Are your clients easy to work with and do they pay on time? Unprofitable accounts will likely hurt your sale price.
4. The timing of the sale
Many firms have busy and slow cycles that affect revenue and cash flow. You might be compliance focused, with a busy tax season. Or perhaps you serve seasonal industries, like tourism. If so, beware of when you sell. Buyers won’t want to invest in your practice during a time of weak earning.
Your accounts receivable can also affect the sale. The money owed for work you’ve already done is in effect your revenue. However, claiming it after closing the sale can put pressure on the buyer.
Buyers want a quick return on their investment. They don’t want to have to turn around and pay you more money straight after the sale. Think of ways to sweeten the deal, like:
- handing over control of your practice just before your most profitable time of year, to help the buyer hit the ground running
- loaning the buyer your accounts receivable for a short time, to give them more cash flow
A degree of generosity on your part could mean less capital investment from the buyer – and potentially a better selling price for you.
5. Prepare and plan
A successful sale rarely just happens. Give some thought to how you’ll position the firm to potential buyers.
To help decide what your sales pitch is going to be, evaluate your firm’s performance and find where you excel. Promote those metrics strongly. Equally, you should acknowledge where you’re not doing well and try to address those issues before they get in the way of a good deal.
When selling an accounting practice, past profits are obviously important but try to paint a rosy picture of the future too. Tell a wider story about where the business is going.
6. What technology does your practice use?
Choosing which technology to use in your firm can impact its future sale. Does your practice run on dated software or spreadsheets? If so, buyers will assume you do a lot of low-yielding, manual work. They’ll think they have to work harder for every dollar that comes in the door.
If, on the other hand, you’ve adopted cloud accounting or tax and practice management technology, promote it. Tell potential buyers how quickly you’re able to do business. Also, make the point that:
- your staff are proficient with technology and can transition to a modern firm (or help transform a paper-based parent firm)
- your clients use cloud accounting and are therefore efficient to work with
7. Consultants can help you value your practice and find potential buyers
As an accountant, you’re a small business specialist. But you probably don’t have much experience in pricing, marketing or selling an accounting practice. Consider using a specialist.
Merger and Acquisition consultants are often qualified accountants and they can help you decide on timing and pricing. They probably also have advance knowledge of firms looking to buy and can:
- help get your firm in optimal shape to impress buyers
- promote your firm
- act as the broker
Plan your practice’s future
Whether you’re selling an accounting practice next year or in 10 years, it’s never too soon to start planning. Decide if you’d prefer internal succession, merger or acquisition, and start preparing for the best outcome. That might mean training your staff to take over, or making your firm an attractive acquisition target. Whichever way you go, you’ll need to make sure the practice can succeed without you. Your firm’s ability to retain clients after you’ve left will determine whether or not it flourishes, and it could decide the size of your final pay check.
Xero does not provide accounting, tax, business or legal advice. This guide has been provided for information purposes only. You should consult your own professional advisors for advice directly relating to your business or before taking action in relation to any of the content provided.
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