On this new episode of Growing Your Firm podcast, we chat with Joel Sinkin, author and President of Transition Advisors, about how to successfully transition and sell your CPA firm.
In this interview, we discuss important topics on how to successfully transition and sell your CPA firm including:

  • When to start thinking of your succession plan
  • How to structure your deal
  • How to value your accounting firm
  • and so much more..!

 Click Below to Listen to the Interview:

Show Links: 
Transition Advisors
Selling your CPA Firm Resources
CPA Firm Mergers & Acquisitions: How to Buy a Firm, How to Sell a Firm and How to Make the Best Deal

Key Summary

In your tenured career, you have been a valued service to your clients and built a firm that makes you proud.
But what happens next?

Have you thought about your transition plan? Do you desire to sell your firm or are you interested in joining your practice with one that is complementary?

Joel Sinkin is the President of Transition Advisors who built his practice to become the ultimate resource for CPA firms for making introductions, performing valuations, advising on deal structures, assisting with negotiations, drafting contracts, and conducting due diligence.
Joel says for buyers and sellers of CPA firms, the considerations are all the same.

  1. When do you start planning the succession?
  2. How should you value the practice?
  3. How do you structure the deal?
  4. What are the keys to client retention upon completing a transition?

With this in mind, let’s jump into the first consideration to help you successfully transition and sell your CPA firm.

When Do You Start Your Planning Process?

Ask yourself how many more tax seasons do you want to work full time before starting to slow down. If your answer is 5 years or less, then Joel suggests it is time to start your succession plan. It is best to start this process 3 to 5 years ahead of time before you actually transition.

Clients of small and medium-sized CPA firms are loyal to the partner of the firm. These clients do not have a good understanding of tax intricacies; otherwise they may have chosen to do their tax work themselves. You are their trusted and valued advisor. Joel reminds you that the clients have a choice of accounting firms and they have chosen you.

Joel says to take advantage of this loyalty.

Typically, you are meeting with your clients at least once a year.

Joel says it is very important to give yourself a 3- to 5-year head start for selling your practice or slowing down your services because with each meeting, you are properly and gradually preparing your clients for this inevitable change.

Be upfront and transparent with your clients in advance of your succession

And How Do You Structure Your Deal?

Joel says most transitions are structured in one of two ways: Direct sale or partnership merger.

1. Immediate sale

In this scenario, the firm owner is looking to exit fully from the practice. The owner does not want to stay full-time, rather the owner may stay through a transitional period while introducing clients to the new owners Merger leading to a buy-out In this scenario, two firms merge together with the purpose of a partnership exit. In a multi-partner firm, one partner may want to retire soon, while the other partners may want to continue with their practice. This firm would lack the capacity to replace their partner.

2. Merger leading to a buy-out  

In this scenario, two firms merge together with the purpose of a partnership exit.  In a multi-partner firm, one partner may want to retire soon, while the other partners may want to continue with their practice.  This firm would lack the capacity to replace their partner.

So instead, they arrange a merger into and a buy-out by another accounting firm. This decision is made both for professional and financial growth reasons. The existing partner may still stay on for a transition period.

Joel discusses the idea of creating a two-stage deal. This deal is designed for someone who is one to five years away from slowing down his or her practice but is concerned about giving up control, autonomy, or income. In a two-stage deal, the transition is more natural – while clients will be billed under the new firm name, the accountant continues to service the clients. Over time gradually, clients begin to meet and work with the new contacts at the firm in a transition period.

How Would You Value Your Deal?

Once you have decided when and how you will transition your firm, the next question is “how much is my business worth?

Joel says to ask three questions: “What is the multiple? What is the multiple? What is the multiple?” And in this case, the multiple is the billings multiple.

However, Joel cautions that the accounting world is “facing the greatest exodus of talent the industry has ever seen.” According to the AICPA, 70% partners are over the age of 50 years old that means more and more practices will be up for sale resulting in declines to the value of the firm.

When placing value on your practice, a combination of factors including how much cash is paid up front, how long the payout retention period will be, and how profitable the firm is to the buyer, will determine the multiple.

According to Joel, the 5 key variables that reach a firm valuation are:

1. Cash up front, if any.

Joel says that it is “rare that deal has more than 20% upfront. Most are more towards 0 or 10%” cash upfront.

2. Duration of the retention or guarantee period.   

How frequently you have interacted with your clients in the past will impact the duration of the retention period.  Joel says in 100% of the cases he sees, the clients are loyal at small firms.  

The seller’s purchase price can be impacted by how client fees rise or fall, post-close. Joel recommends structuring a retention period of two years or more. In Year 1 post-close, clients will experience new changes during tax season and will evaluate their experience. By the second year, the new firm would have greater visibility on whether clients will have stuck around for a second tax season. Sellers will be able to earn more from their sale over a longer retention period through better client retention.

3. Duration of the payout period
Based on his experience, Joel suggests structuring a payout period between 4 to 7 years and from 6 to 10 years for firms with $2 million or more in revenue.

4. Buyer’s profitability

The value of the firm is increased if it is profitable to the buyer and not the seller. For example, when absorbing the new business, do additional costs such as overhead, rents, staff, and software drag down the overall profitability of the combined firm? Can the buyer realize synergies? Does the buyer take a capital gain treatment compared to an accounting deduction? These considerations matter when ascribing value to the firm.

5. Multiple 

A firm gets a higher valuation and becomes more profitable to the seller when the deal is structured with: a) less money paid up front b) a longer retention period, and c) a longer the payout period to the seller.

How Do You Choose The Right Successor?

Your transition will be easier when you choose your successor wisely. Choosing the right successor for your firm is most important consideration in the transition process.

Joel says to keep in mind the Four Cs when selecting your best successor:

1. Chemistry 

“If you don’t want to eat lunch with someone, then don’t sell them your practice. If you are not comfortable – why would your clients and staff be comfortable?” says Joel.

2. Culture

While culture can be defined different ways by different firms, Joel suggests to find the successor firm whose culture complements yours.

3. Capacity

This point does not get much attention. Combining forces can sometimes be better, but only if the successor firm has the skill-set, the senior resources, and the capacity to best manage the additional business.

4. Continuity

Clients like continuity. They fear a merger. They fear change. When transitioning, talk openly with your clients before your clients raise any objections.
Clients will care if:

  • You are still at the firm
  • Their fees will increase
  • They have to travel further to new office and
  • They will now interact with a junior resource vs. a partner

Good luck to you as you consider your next steps in transitioning your firm. Just remember, “Clients won’t focus on what was lost, but what was gained,” says Joel. Get out there and sell your firm!

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