Advice for selling an accounting practice: Part two
Accountant & Bookkeeper Guides
10 min read
Self-employed people don’t set aside enough time to plan the exit and sale of their accounting businesses. Kev Ryan sells accounting practices for a living and he has five tips to kickstart your preparation.
Kev Ryan – Founder, mergetoretire.com
This guide is brought to you by Xero and our Xero partner, Kev Ryan, because we share a passion for helping practices everywhere thrive.
In the current accounting practice market, buyers substantially outweigh sellers. However, the balance is shifting. With many baby boomers reaching retirement age, there are more practices for sale, and the buyer pool is starting to shrink.
Growth by acquisition is a popular strategy for bigger firms who want to scale up their business. Often referred to as ‘tuck-ins’, these smaller fee parcels are bought to:
provide a new client base for an incoming partner
replace top-line revenue from an exiting partner
speed up business growth
Smaller firms are those with less than $1 million in recurring annual fees – they commonly have a single professional owner. However, significant numbers of sole practitioners have turnovers of considerably less than this.
The five ‘gets’ to getting out – the stages of selling an accounting practice
If your retirement plans depend on the successful sale of your accounting practice, you need a plan.
The number one issue for sellers is time. Sole practitioners who are busy running their business struggle to plan ahead. But you need a strategy to sell a business. It’s vital. Here are five concepts to guide you:
1. Get planning – selling is a process, not an event
If you’re thinking of selling an accounting practice in the next three to five years, you need to take action now. Like anything in work and in life, failure to successfully plan generally leads to lackluster results.
Ask yourself some important questions
Have you paused to consider why you’re selling? Many sole practitioners love the day-to-day activities of their business. They enjoy working with clients who often become good friends. If you’re living for the work, selling might not be your best option – perhaps merging with a bigger firm would be a better choice.
You should also discuss your plans with your family. It’s important to align retirement and life goals. Consider what life will look like after you sell.
Determine your exit timeframe
Set a desired sale date. It will help put the plan in motion and give you a deadline to work towards. Your timeline might be affected by affordability. Can you comfortably retire on your savings, topped up with your likely sale proceeds? If not, how do you intend to bridge the gap? And how many more years of work will that take?
You may also want to align the timing with your current office lease. Leases can be a big issue affecting the sale of smaller accounting firms. Buyers will typically want to move your practice into their offices, and they won’t want unnecessary lease payments.
2. Get sorted – tidy up your finances, workflows and staff
Getting your house in order might seem obvious, but many sole practitioners don’t have the time to work on their businesses. They may not even be up to date with their own accounts. It’s just like the plumber with leaky taps or the painter whose house needs a recoat.
You can start getting sorted by creating a personal affairs checklist. This is a document that lists your key financial, legal and estate details, and where important papers can be located.
Perform an honest analysis of your practice
Take some time to do a SWOT analysis of your firm (list the strengths, weaknesses, opportunities and threats). It’s a simple way to get you thinking like a buyer and it will highlight the areas of your business that require attention.
Now review the way your firm operates. How does it get the job done? Focus on your people, systems and processes. Be brave enough to let go of underperformers in your team. You want to improve the revenue earned per full-time employee. Doing so will increase profitability during your final years, and increase the appeal of your firm to buyers.
Streamline your workflows
Getting on top of your workflows will greatly improve your business’ appeal to potential buyers. They’ll want to see that you’re able to do business quickly and efficiently.
You should also cease services to bad clients. You know who they are – the ones that pay late, create hassles, and are needy or demanding. You don’t need the extra headaches when selling an accounting practice.
Focus on improving cash flow
Work in progress (WIP) and debtors are difficult areas in smaller accounting firms. The time that elapses between doing work and getting paid is known as lock-up days. You need to try and bring down your lock-up days when trying to sell an accounting practice.
Buyers look favorably on firms that are good at billing and collecting. They’ll want solid cash flow from day one, especially if they’ve borrowed to make the purchase.
As part of your negotiation with the buyer, you’ll also need to decide who’s chasing debtors post settlement. If the responsibility falls to you, you’ll want your clients already trained up to be quick payers.
Review your charge-out rates
In most cases, your best buyer will be a bigger firm. Their fee schedule will likely have higher charge-out rates. You’ll be a in a much better position if you can bring your rates closer to theirs.
Buyers like firms that are good at billing and collecting. They’ll want solid cash flow from day one, especially if they’ve borrowed to make the purchase.
3. Get savvy – create a modern brand with modern technology
There are many smaller accounting businesses that have embraced the owner’s personal name as their trading identity, such as John Smith & Associates, or David Brown & Sons. However this kind of name can be a speed hump on the road to transitioning your client base to a new owner.
Your clients should be loyal to a brand, not an individual
Rebrand your business so clients relate more to the firm’s identity and less to you as an individual. You don’t have to spend a lot of money to modernise your firm’s look and feel to be more corporate. Creating a fresh brand, web presence and social media strategy has never been easier or more affordable.
If merging, the rebrand should be in collaboration with your merger parent. By developing a similar look to theirs, you’ll help prepare your clients for the transition.
Embrace cloud accounting technology
More and more buyers are committing to cloud-based systems. They’re far more attracted to sellers who have at least started the cloud journey.
Cloud-based buyers have often built service packages inside their own firms. They sell these products on a subscription basis to improve overall profitability. Their return on investment on the purchase of your firm will be better (and quicker) if they don’t have to burn time and money educating your clients on the benefits of the cloud.
Invest in automated communication systems
Do you have regular and automated electronic communications processes in place? Many less savvy firms don’t even have a proper email database. That’s not great when it comes to selling an accounting practice.
Your buyer is purchasing your client base. They’ll expect to be able to communicate and strengthen loyalty with those businesses. They’re a significant part of your business’s goodwill.
As a smart vendor, you should implement a loyalty-building strategy. Effective automated electronic communications like newsletters will help you do that – and will impress a potential buyer.
4. Get lost – step away from the business
When purchasing a small business, buyers will consider how much goodwill is tied to the business owner. This is particularly relevant with smaller accounting businesses, where clients may have only interacted with the sole practitioner.
Distance yourself from your clients
If you’re giving yourself the right amount of time to plan your exit, you’ll have three to five years to displace yourself as the first point of call for clients. It might be the most important thing you do.
Make someone else the main point of contact and become hard to get hold of yourself. The less the business relies on you, the more cash you’ll receive at sale time. This is easier said than done. You'll need the right team member who can manage the work and interact with clients as successfully as you could. Either promote your senior accountant or hire one. And be honest with them about your plans and expectations from the outset.
Get the right talent to steer the ship
The person who replaces you as the main point of contact is unlikely to become your buyer. Internal sales rarely achieve the same dollar value as when selling an accounting practice to a bigger firm.
However, your planned buyer could help you find the person who’ll replace you as the face of the firm. If the buyer's practice is more attractive to talent, ask them to hire the person and place them in your business. When implemented properly, this strategy can eliminate the risk of a failed sale.
Learn how to let go
If you can find the right person to hand over to, your next challenge will be letting go. Delegating and stepping back is a major psychological issue for some business owners. You must train yourself to stop micromanaging everyone and everything. If you can, you’ll reap the rewards.
5. Get talking – communicate with clients, buyers and professionals
Selling an accounting practice can be scary prospect for smaller firms. You’re probably worried about what will happen if word gets out. Maybe you could lose key clients or some of the staff you rely on so heavily.
These concerns are mostly in your mind. You can limit any potential damage by communicating effectively. It works out so much better if you have a structured process. Then you can tell key stakeholders the sale plans and progress at the appropriate times.
Communication is the key to client retention
In the 12 months leading up to your planned sale date, make a plan to visit at least the top 20 percent of clients. Clearly telling them your intentions in person will improve retention.
These clients are also an important barometer for you. Ask them how competently your practice delivers services. The feedback can help you decide which areas of the business need attention leading up to the sale.
Involve your senior accountant in these meetings and promote them as the best contact person going forward. This will help you take a back seat.
Identify the right type of buyer
When selling an accounting practice, part of the payment will be tied to client retention. If too many clients leave within 12 months of settlement, you’ll get less money.
But remember, not all buyers are the same. If they’re a bad match for your clients – and they can’t hold onto them – you may not recover the full price you agreed.
It’s worth doing some homework. If you can find buyers in your area and build a relationship with them, you may not have to engage a practice broker – saving you more retirement dollars.
Work closely with a professional
If you don’t think you can manage the transaction yourself, speak with a practice broker. They can make the process easier and are likely to improve the outcome. Plus, they will:
make you look more professional than if you were trying to manage the sale personally
free you from the distractions of the sale, so you can focus on the day-to-day requirements of the firm
shelter you from the emotional disruption of the sale process
Clearly define the terms of the sale agreement
Vendors generally control the business sale contract so talk to your lawyer, let them know your plans, and ask what value they can add to the process.
Legal fees can escalate quickly. To avoid cost creep, spend time on the term sheet that outlines the terms and conditions of the sale with your buyer. This gives both parties a chance to define the parameters of the deal, resulting in a more accurate brief for your lawyer. It also improves your chances of getting the sale contract right the first time.
A successful sale means a successful retirement
If selling an accounting practice is a part of your retirement plans, you need to take the time to prepare. No two sales are ever the same, but by focusing on the five ‘gets’ to getting out, you can maximize your chance of success.