Selling/Succession for 1-3 Partner Firms FAQ

Valuation of an accounting firm will focus on five major variables and 15 key contributors to those major variables. The five major variables focus on making your firm attractive with regard to the framework of the deal itself. No one will acquire your firm to lose money but that doesn't mean you should give it away either. The five major variables in determining the value of a practice are:

• The amount of the down payment, if any
• Length of the payout period
• Profitability of the deal for the successor firm
• Duration of the retention period relating to clients being transitioned and other adjustment periods
• Price/Revenue multiple

How these five variables interact is how you will ultimately determine the value. Consider the following equation: the less money down, the longer the retention and payout periods, the more profitable the deal is for the buyer, the higher the multiple. Of course, the opposite is true as well! The 15 key contributors to the five major variables help establish a potential value baseline and focus on the following:

• Percent of service mix (Service mix is the percent by allocation of the work you and/or your staff perform for your total client base.)
• Percent of business clients
• Percent of individual clients
• Client demographics
• Staff strengths/weaknesses
• Location of practice
• Cross-selling opportunities
• Time & Timing
• Average number of times a client is serviced per year
• Lease obligations
• Cash flow
• Billing rates
• Realization rates
• Profitability
• Size of practice (gross billings)

For a deeper dive on valuing an accounting firm:

• How to Value a CPA Firm for Sale by Joel Sinkin and Terrence Putney, Journal of Accountancy, c2013
• Pricing Issues for Small Firm Sales by Joel Sinkin and Terrence Putney, Journal of Accountancy, c2014
• CPA Firm Mergers: Is it A Buyers' or a Sellers' Marketplace? by Joel Sinkin, AccountingToday.com, c2012
• The Great Mystery: How Do Billing Rates and Profitability Affect a Firm's Worth? by Joel Sinkin and Terrence Putney, The Practicing CPA/AICPA, c2011
• Succession Planning - Valuing Partner Equity in Larger Firms by Joel Sinkin and Terrence Putney, CPA Practice Management Forum, c2009

There are several things you must consider when determining the timing of starting to plan your succession:

1. How often you personally see your client base. Many firm's clients mail in the work, use portals or the cloud, are dealing with staff during the year and only see the partner(s) annually. Add those clients to your annual business and personal tax clients and most firms find out that the bulk of their clients are only seen in person or actually provided service by the partner once a year.
2. How many years do you plan to continue to work FULL TIME? Full time is defined as the same level of time commitment you currently contribute to your practice. The question is not "do you want to continue working?" The question is "how long do you want to work at your current level?" You may elect to work part time for many more years than you are prepared to work full time.

Now that you answered numbers 1 and 2 above, you must realize that in all likelihood if you are 3 years from slowing down, for the bulk of your clients it is only 3 visits. It takes time to transition relationships therefore, the more frequently you see your clients the less time you need to transition them. The opposite applies as well. If you are like most firms and the majority of your clients are only seen in person once a year, you need 3 to 5 years to perform a proper transition. Are your clients brand or partner loyal? If your clients are loyal to the brand, it will take less time to transition the relationships than it will if your clients are loyal to the individual partner more so than the brand. More information on succession planning:

• The Long Goodbye by Joel Sinkin and Terrence Putney, The Journal of Accountancy, c2013
• Succession Planning: What's the Future of Your Firm? by Joel Sinkin and Bill Carlino, Connecticut CPA, c2013
• Succession Planning: Key Questions for CPA Firm Partners to Ask Now by Joel Sinkin and Mark Basinski, Washington CPA, c2012

In most locations, clients have many choices when selecting a CPA. Since they have a choice, you need to determine why the clients have chosen you or your firm to work with. Understanding why will enable you to focus on firms that are similar in both personality and culture and can meet the Commandments of Successful Succession:

1. A firm with a similar culture and fee perspective
2. A firm having the expertise and licenses required to provide the services you currently offer your clients
3. A firm geographically sensitive to your client base
4. A firm with excess capacity or the ability to replace you, when the time comes
5. A firm with a similar methodology of working with clients (If you do a lot of client handholding, the potential successor must be able to do the same)
6. A firm that can give your clients the same level of interaction (If your clients are accustomed to dealing with a principal or partner, the successor must at least initially do the same)
7. A firm with which you have chemistry. (If you are not comfortable with your successor professionally and personally, why would your clients and staff be?)
8. A firm who will maximize continuity and minimize change.

These commandments are important because most deals, other than some of those with an internal succession solution, have a retention clause as a component of purchase price. Continuity = Retention. Benchmarking your potential successor against the commandments addresses the potential for continuity of culture and service therefore maximizing retention and generating the highest possible purchase price for you. For more information:

• How to Select a Successor by Joel Sinkin and Terrence Putney, Journal of Accountancy, c2013
• The Long Goodbye by Joel Sinkin and Terrence Putney, Journal of Accountancy, c2013

All the time, effort, energy and money expended putting together an affiliation between the firms will be wasted if absolute measures are not taken to ensure client retention. A detailed transition plan is crucial because without a plan the parties are inviting failure or at the very least encouraging challenges that are not necessary. There are several keys to client and staff retention. Keep in mind the acronym "TRACK" to assist you in developing your transition plan.

• Transition plans must be jointly developed and executed. This will ensure a well-represented plan.
• Realize that change experienced by the clients (not necessarily internal change) produces questions and insecurities for both staff and clients and a good transition plan addresses, up front, most if not all these questions.
• Acknowledge that a good transition plan includes all components such as technologies, personnel, training, location(s), processes and timelines, workflow, licensing, etc.
• Continuity equals retention of both staff and clients. Keep changes that the clients will see (for example, they won't care if you change the software) small and implemented over time.
• Keep emphasizing to all (staff, clients and partners) the gain of the new firm, partners, talents and services not the loss of the old one.

Transition Advisors makes available to its clients an extensive transition checklist, for firms of all sizes, ensuring a smooth transition. Should you wish to review this checklist please use the ASK THE ADVISORS link below to submit your request. More information on transition:

• Keeping it Together: Plan the Transition to Retain Staff and Clients (Part 2 of 2) by Joel Sinkin and Terrence Putney, Journal of Accountancy, c2009
• The Value of a Smooth Transition in Tough Times by Joel Sinkin, Small Firm Solutions, c2009
• The Long Goodbye by Joel Sinkin and Terrence Putney, Journal of Accountancy, c2013
• See also the Transition information in this section

It is critical that firms leave appropriate time for a transition, which can take a few years. Most practitioners, however, are hesitant to merge with their ultimate successor too far in advance, as they prefer not to:

• Give up control. It is hard to be master of your domain and then suddenly have the accountability of being a partner in a larger firm
• Give up income. Who wants to work the same, bring in the same revenues, have additional accountability and make less?
• Have liabilities relating to the actions of others instead of their own
• Lose the ability to come and go as they see fit, handle financial issues and make decisions.

Identifying the time frame needed to implement a proper transition is challenging at best. However, this challenge is well worth the effort as it will result in a significantly better financial proposition for you. Because of the issues raised above, a new approach to succession planning has evolved called the Two-Stage Deal. This approach enables the CPA with the near-term (1-5 years) goal of slowing down to gradually transition the client relationships to ensure better retention, to give the transitioning professional protection relating to death and disability, and to enable them to maintain both control and income without the accountability and liability associated with a merger. More information on the Two-Stage Deal:

• A Two-Stage Solution to Succession Procrastination by Joel Sinkin and Terrence Putney, Journal of Accountancy, c2013
• Two-Stage Deals: A sequenced transition can smooth a firms' ownership transfer by Joel Sinkin and Terrence Putney, Journal of Accountancy, c2006
• Using a Two Stage Deal, Seller Transitions His Practice Over Time (Case Study), Transition Advisors.

For additional alternative deal structures:

• Alternative Deal Structures for Succession by Joel Sinkin and Terrence Putney, Journal of Accountancy, c2014