Succession—Practical Planning for Small Firms

Source: Florida CPA Netlink

CPAs Joel Sinkin and Terrence Putney, partners in Accounting Transition Advisors, LLC, www.transitionadvisors.com, give the following important advice to small practitioners whose exit strategy is sale of the practice.

Choice of successor and how it affects the value of the practice.

Though you may sell the practice, your clients decide whether they will stay with the new firm. Their decisions obviously affect the amount you ultimately realize from the sale. Here are some of factors influencing your successor’s retention rate:

• Frequency of your visits. If you see a client infrequently, say once a year, you should start the transition as soon as five years before you plan to leave the firm. This may entail a phased transaction. You enter into a sale agreement but stay with the firm at your current earnings level. By working with your successor, you help enhance its acceptance by your clients. By the time you are ready to leave, the transition should be complete and the value of the firm maximized.
• Location. If the location of your office is important to your clients, try to select a successor firm that is also near your clients.
• Fees. The transaction agreement can control the successor’s ability to raise fees during the phase-in period.
• Staff. If your staff has special knowledge or skill but will not be retained, make sure your successor has the same expertise.
• Clients. The agreement can prevent the successor from selecting only the best clients and abandoning others. The agreement can also require the successor to use its best efforts to retain clients and to assure suitable response to client issues.
• Successor’s plan for combining the practices. You should feel comfortable that the personnel assigned to your clients will have the time and ability to service them.
• Chemistry. If you do not feel comfortable in your relationship with a potential successor, there is a strong possibility your clients and staff will feel the same.
• Prior transactions. If the successor firm has had previous experiences in mergers, find out what the retention rate was.

How to value the practice

Accounting firm value is typically a multiple of fees. For most practices under $2 million in revenue, the multiple is a function of:

• Amount of cash at closing—the more cash up front, the lower the multiple.
• Buyer synergies—the higher the tax or operating synergies, the higher the multiple.
• Probable rate of retention—the lower the risk of losing clients, the higher the multiple.
• The period of the payout—the shorter the period, the lower the multiple.

The following depicts the effect on the multiple under three different scenarios:

To read other articles on this subject from our archives, click on this link: Practice Management Index and scroll down to Mergers and Succession Planning. You will find many articles on this subject.

From Florida CPA Netlink, the official Website of the Florida Institute of CPAs, November/December 2006, 325 W. College Avenue, Tallahassee, FL 32301, 850-224-2727. For the complete article, click on the following link: http://tinyurl.com/28q25t.