Whether you look forward to two more busy tax seasons or 20, you should start planning today for a practice transition or sale that realizes the true value of your hard work.
I have tremendous respect for those of you who’ve weathered the storm and emerged triumphant: We’ve been tested, and we’ve passed. The ups and downs of COVID-19, the challenging labor market, supply chain issues, and inflation have been enough to make any business owner throw their hands up in surrender. And many business owners have— and without proper planning, walked away without extracting the real value they built over the years.
So, what’s next for you and your practice? Look a few years down the road: Do you still want to be sitting at your desk, or do you have different plans? Here’s what you can do today, to plan for that day:
1. Define the Next Phase and Timeline
Perhaps you’d like to retire from full-time work but still do part-time consulting, or maybe you want to sell your firm as soon as you turn 66. Or maybe you’re still deciding!
Even if you’re not sure of what you want to do after you leave the firm, it’s important to set a timeline that’ll help dictate your actions. For example, if you want to transition away from your firm in two years, your action plan will be different than if that timeline is 10 years.
2. Understand Your Options
Is there someone in your firm with partner potential rising through the ranks? Do they aspire to be a partner? If the answer is yes, this could be an excellent option for practice transition.
But you need to share your plans and timeline and get a clear picture of their desires and goals. With enough time, you can grow the right person into the role, but without an internal player with partner potential, the most likely path to realizing the full value of your practice will be an external sale.
3. Know the Value of Your Practice
The value of your public accounting practice could range from 10 percent to 150 percent of your annual fees. While 1 times fees has been a long-standing average valuation for an external sale, it’s no longer a guarantee.
Buyers value niches and specialties, larger business clients, strong profitability, and growing geographic locations more than they do a generalist practice with no client concentrations, low margins, and a ton of 1040s in a slow-growth market. Buyers also want to be sure your client base will stick around after you’re gone, and that requires an effective and orderly transition, generally taking two years.
4. Determine How Quickly You Need Your Payout
While not a rule, internal buyouts often have longer payment terms than external sales. An internal buyout could stretch a payment plan out for upwards of 10 years, whereas an external sale could have you fully paid out in as few as three. So, if you’re counting on the sale of your practice to build your beach house, make sure this is clear in your communications with prospective buyers.
5. Put Your Plan Into Action
Knowing what the landscape looks like and understanding your own timeline means you can make choices that influence the value of your practice. Talk to your staff about their thoughts on being a partner and develop them to be in a position to take on your practice when the time is right.
Weed out smaller, less profitable clients in favor of larger, more profitable clients to boost the value of your practice. And, if an external sale is the end game, talk to other firms that could be suitors to gauge their interest in acquiring your firm. You can always change course depending on the circumstances but having a plan in place will increase your odds of making choices that add value to the firm and solidify your legacy.
You’ve worked too hard to give up and leave the future of your firm to chance. A little planning today can go a long way toward a more seamless and lucrative transition to what’s next.
The original article appeared in Insights Magazine, the official publication of the Illinois CPA Society.