The single most important step to protecting value is to understand how value is determined. Protection of value is achieved through a variety of methods. Before we disclose those methods lets identify current external factors putting pressure on practice value:
- Aging of our profession. The aging of our professions is producing ever-increasing numbers of firms seeking succession and/or merger opportunities. Over the next several years these numbers will continue to increase and produce downward pressure on practice values.
With a properly designed and executed succession plan, the potentially negative impact of our profession’s aging can be minimized or eliminated. It is possible to lock-in practice value, maintain control of your income, keep client relationship responsibility and choose the time and timing of your succession.
- Increased regulatory environment. For some firms, depending on their current service portfolios, increased regulatory environment may force a decline in attractiveness, which translates into value. Note: The regulatory environment can actually be made into an advantage for some firms with proper analysis and planning.
- Outsourcing. In 2011, the CPA exam was offered outside the US for the first time in history. Many believe this trend will accelerate and soon produce global competition for service currently performed by many local tax and accounting firms.
Many firms currently outsource tax work to other countries. When this is done, the rate for producing tax returns is literally a few dollars per return. The small firms will feel the impact of this outsourcing in the next decade. It is going to become extremely difficult if you are competing for business with CPA firms outsourcing work beyond our borders.
Those are just a few external challenges to value. Setting those aside for a minute, it is important to understand and acknowledge that value can be completely different even when two firms are exact clones of one another. Many arbitrarily assign a multiple of revenues and declare that is the value. While multiples are often used to make a value declaration, it is how the multiple is derived that is the true manner in which value is determined.
Some methods firms have found that has helped their value include, but are not limited to: being up to date in technology, having clients who are open to speaking to more than one person in the firm so transitioning clients is easier, not being stuck in any long term lease commitments, practices who have young talent, lucrative niches and good operating systems in place. Closing your deal prior to slowing down so you can execute a strong transition is also a key.
For more information:
- A Two-Stage Solution to Succession Procrastination by Joel Sinkin and Terrence Putney, Journal of Accountancy, c2013
- Alternative Deal Structures by Joel Sinkin and Terrence Putney, Journal of Accountancy, c2014