FAQ

How do I determine the value of my accounting practice when seeking acquisition by another accounting firm?

Your firm’s location, size, client demographics, as well as other attributes all affect your value. However the single most important issue is deal terms. The final value of your firm is heavily influenced by a combination of the following:

• How much, if any, is given as a down payment?
• How long is the retention period, since client revenues and retention directly impact the balance due the seller?
• How profitable is the deal for the successor firm?
• How long is the payout period?

Once those four variables are determined, the multiple of revenues the practice will be valued and can be determined.

Here are some articles that will help you understand these variables better and in greater detail:

Price Equals Value Plus Terms

The Next Generation - Valuing the Smaller Accounting Firm

How do I ascertain the value of “my share” in my accounting firm when selling out to my partners?

Many larger firms have changed their method of valuing equity away from multiples based on ownership and more toward a multiple of compensation. Most regional firms use a multiple of 2 to 3 times average income for partners paid over the 3 to 5 years prior to their retirement. This is usually paid out over 8 to 10 years, frequently providing the firm a current deduction, plus capital. Other firms, especially smaller firms, commonly use a multiple of firm revenues times equity ownership.

The links below bring you to articles that go over in detail the thought process involved in valuing ownership in an internal sale:

Succession Planning - Valuing Partner Equity in Larger Firms

Replacing Retiring Partners - Succession Planning in Today’s Economy

How do I structure “the deal” when I’m still 1-5 years away from slowing down and still want to maintain my income, autonomy and control?

It is critical that firms leave appropriate time for a transition, which can and typically does take several years. This is critical to maximizing client retention which leads to maximizing your firm’s value. Most practitioners however are hesitant to merge with their ultimate successor too far in advance, as they prefer:

• Not giving up control
• Not giving up income
• Not losing the ability to come and go as they wish, handle financial issues and make decisions.

Because of the above reasons and others, a new approach to long term succession planning has evolved called a “Two Stage Deal”. This structure enables the practitioner(s), who are 1 to 5 years from slowing down, to gradually transition ensuring better retention, giving the seller protection relating to death and disability, enabling them to maintain control and income without the accountability and liability associated with a merger.

See the article and case study below for more detailed answers to this unique deal structure:

Two-Stage Deals - A sequenced transition can smooth a firm’s ownership transfer.

Using a Two Stage Deal, Seller Transitions His Practice Over Time

When should I start the process of planning and implementing a succession plan?

There are several factors you should consider when you begin to plan your succession. They include:

• How often you personally see your client base
  
  1. You must realize that in all likelihood if you are three years from slowing down, for the bulk of your clients that may only be three visits.
• How many years you plan on continuing to work FULL TIME.
  
  1. You may elect to work part time for many more years than you are prepared to work full time.

There are many others to consider. The articles below may give you additional insights into this issue:

Has Your Firm Got What It Takes for a Successful Succession?

Succession Planning: Where Do You Stand?

What are the criteria utilized in choosing a successor?

Here are some questions you want to ask yourself when considering a successor.

1. Are the fees charged to their clients comparable to what I charge mine?
2. Are the firm cultures similar and will our firms be a good fit?
3. Does the successor firm have the technical skills required?
4. Are they geographically accessible to your client base?
5. Do they have the capacity to replace the people in your firm slowing down?

Chemistry: be sure you are comfortable with your successor professionally and personally, so your clients and staff will be, too.

Continuity: choose a successor who will maximize continuity and minimize change.

The article below provides some insights into selecting a successor. Although it is geared toward smaller firms, lessons are available for all who read it.

Succession Planning for the Sole Practitioner

How do I maintain my staff and clients through the merger or acquisition process?

There are several keys to client and staff retention. They include but are not limited to:

• Clearly communicate the value and benefit of the new firm and/or partners to your staff and clients
• Deemphasize the loss of what is changing in your firm and try to minimize changes that impact the clients and staff, especially early on
• Institute transition positively and slowly

The reasons clients chose the accounting firm they work with is because of their trust, knowledge, comfort level, longevity of relationship and confidentiality, to name a few. Therefore continuity is of utmost importance when going through any transition.  Staff will appreciate transparency and communication throughout the transition process and this will ensure staff retention and good morale.

The links below will bring you to articles that provide excellent details on getting through a proper transition:

Keeping It Together  - Plan the transition to retain staff and clients

Practice Management /  M&A - The Value of a Smooth Transition in Tough Times

What should I review in the due diligence process?

Each practice brings unique aspects to the due diligence process and may require the parties to think out of the box in order to achieve a smooth transition. The nature of the deal (whether it is a merger or acquisition) and the terms can heavily impact what you review. For example, if you are acquiring a firm with deal terms that include a very short client retention measurement period, you should  perform a much more detailed due diligence on the clients being acquired than you need to do if the deal had no down payment and a long retention period. Below are two articles that provide strong insights to the type of things one should review in due diligence prior to acquiring a firm.

Practice Management / M&A - Short-sighted Mistakes Made in Due Diligence

Due Diligence Before Buying or Selling an Accounting Practice

How do I choose the right practice to buy?

It’s important to be sure that your firm has the ability, appropriate licenses and excess capacity to assume the work currently being done by the firm you wish to acquire (seller). Consider whether you will have to make substantial changes to the fee structure and method of servicing the clients. If the seller’s business structure and culture is diametrically incompatible with your firm and you will have to make substantial changes the clients will notice, you may want to reconsider this acquisition. To determine how you might want to proceed, read the article below:

The Great Mystery: How Do Billing Rates and Profitability Affect a Firm’s Worth?

What are the roadblocks to a successful merger?

Most practitioners perceive that the financial obstacles in a deal are the most challenging. Our history has taught us that it is rarely the dollars but more often the emotion, culture and additional accountability that causes the roadblocks in a merger. The following article walks you through the roadblocks and shares ideas about how to make your merger a success.

Mergers & Acquisitions of CPA Firms - Understanding the roadblocks to successful deals

How can I determine if we have the ability to execute an internal succession?

There are two key factors to initially explore:

1. Who in your firm needs to be replaced?
2. How much capacity do the remaining partners in the firm have?
3. How strong is your bench of near term partners?

When executing an internal succession, take into consideration the role of the partner(s) being replaced. You want to ensure that you maintain within the firm the skill sets of retiring partners and that their replacements are available internally.
If you find you lack the capacity or skill set, you have the following options:

1. Build a stronger internal succession team through external means such as lateral hires or mergers
2. Merge into a larger firm - let them take on the responsibility for succession
3. Cull out a portion of your practice to sell leaving your firm in a position to manage the volume and work you still have the talent and capacity to manage.

For more details on all of this, please review the links below to these articles:

Making the Transition - Has Your Firm Got What It Takes for a Successful Succession?

Succession Planning: The Available Strategies and How They Work

What are the keys to a practice continuation agreement and how does it work?

There are many considerations when establishing a practice continuation agreement. They include but are not limited to:

• Choosing the “right” firm to associate with;
• Making it a living, working agreement
• Addressing the financial implications and structuring a deal that will result in a win-win outcome to assure success.

You need to consider the implications of temporary and permanent disability as well as death. Choosing a successor who has the capacity, technical skills and desire to be your PCA partner is critical of course as well.

Here is an article that will help you understand these issues best:

Who Would Run Your Firm? Practice continuation agreements help plan for the worst.

I need to grow my accounting practice how do I determine if I should merge, sell or buy?

Establishing your long-term goals is a great place to start when deciding between a merger, a succession plan or an acquisition. Items such as limitations of staff, office space, capacity, financial resources and services offered will help you go down a path that will most likely end in a success.

• Mergers can bring back up, support, additional services for cross-selling, ability to attract more clients, but also bring with it additional accountability.
• Acquisitions are the fastest path to growth but are you ready to take on another firm and what size/nature of firm makes the most sense for you?
• If you or some of your partners are five years or less from slowing down, a viable succession plan needs to be put into place.

Transition Advisors will be happy to provide you with a confidential, no-obligation consulting session to help you decide which direction is best for you. We will share with you our experience and knowledge about market trends and help you ascertain what choices are available to you based on your goals, firm size and current market conditions.

Contact us at jsinkin@transitionadvisors.com or 866-279-8550.