Selling a Portion of Your Practice

Source: The CPA Journal

Small firms can sell a group of clients and retain others. This can be the first phase of an exit strategy and can increase profits.

One practitioner had clients he liked because they paid well and were less demanding. He also felt personally connected to them. He retained these clients, representing about $150,000 in annual fees, and sold the remaining clients, representing about $300,000 in annual fees. The buyer gave him the right to use its software and conference room, and provided administrative support at a low rate.
The buyer received a client base that was compatible with its practice. Because the buyer retained a relationship with the seller, the transition of clients was easier. The agreement provided for the buyer to have right of first refusal on the seller’s retained clients. The seller actually made more money despite working fewer hours.

These “cull out” arrangements also work well with certain niche practices. A firm with two partners and $1,500,000 in revenue also had nearly $500,000 in fees from financial services. One of the partners wanted to retire. The other wanted the financial services practice only. However, the financial services clients were also regular clients.

The firm was able to sell the regular practice to a buyer that did not offer financial services. The partners found a firm willing to buy the accounting and tax portion of the practice only. The partner who retained the financial services practice relocated to the buyer’s office. Although the entities were independent, the move was publicized as a merger. The buyer was able to give his clients access to financial services through the seller.

Things to consider in these transactions include:

• A noncompete agreement will protect both parties.
• There should be an agreed arrangement for referrals.
• Valuation of a portion of the practice is more difficult than for the entire practice.
• There should be a special transition plan for clients and staff.
• If culled clients are served by both parties, risk management issues should be covered in the agreement.

The propensity of clients to want to continue with the same partners while they are around can be an obstacle to the succession program. When a seller begins to focus on a niche, former clients may be served better by the new firm. Sellers should inform clients of this.

From The CPA Journal, A Publication of the New York State Society of CPAs, November 2006, http://www.nysscpa.org/cpajournal/toc/toc1006.htm. For the complete article, click on the following link: http://www.nysscpa.org/cpajournal/2006/1106/essentials/p60.htm.