One of your jobs as a CPA is to be a strategic advisor. You advise your clients on how to be prepared with the right documentation, details and records to protect and even maximize the monetary value of their personal and business financial activities. This is one of the skillsets you will need to utilize when selling your accounting practice.
We recommend the following 6 steps to prepare your CPA to sell. If you and your firm perform and complete these steps, you will improve the market value of your CPA practice. But remember, the following are tasks to complete before launching into the process of selling your accounting practice. The end result will be a much smoother and profitable sale.
- Improve Your SDE
SDE in accounting practice sales represents a firm’s annual earnings (net income or loss) before interest, taxes, depreciation, amortization (EBITDA), discretionary expenses, and the owner’s compensation and benefits.
Your CPA practice’s annual seller discretionary earnings, or SDE, can be a predictor of price and will be one of the most important factors during negotiations as leverage to maximize your accounting firm’s value. Why? Because, while having healthy annual billings is great, make no mistake, buyers will zero in on and analyze a CPA practice’s attractiveness based on its net profitability to the owner(s).
While a firm may have great annual billings, if it has a low SDE, it shows work has to be done to eliminate waste and/or increase the billing rates, intensifying the risk and increasing the amount of time and effort it will take to buy a CPA firm and achieve his or her ROI (return on investment).
We have the largest, most complete buyer pool in the nation, bar none. We know accountants wishing to buy a CPA firm are attracted to and will compete for a CPA practice with a solid SDE because it is indicative of good ROI potential. There is more market demand for higher profit firms. For the firm with a solid SDE, this demand maximizes the market value and in concert with other factors, makes it possible to negotiate the highest price possible with the most cash at closing with minimal contingencies, if any.
Prior to the actual year you think you will be ready to sell your accounting practice, analyze your financials and cost of operations, minimize the waste, streamline processes, increase your client base and ensure that you are really charging the market rates for your services.
- Clean House
Selling your accounting practice is much like selling a home. Consider how many hours a week you spend in your offices. Is it 40 percent of your week? More? Now imagine how much time the buyer will be there to transition and carry the business forward.
Further, as in the sale of a house, do not underestimate the importance of having an attractive office. It is a psychological factor that will either support or diminish the potential of receiving maximum value when you sell your accounting practice. A 35-year-old CPA who wishes to buy a CPA firm will likely picture himself or herself sitting in your chair inside the walls of your office.
We are not suggesting that you tear down a wall or remodel the office, or hire a home stager, but you do need to think about presentation; putting your best foot forward. No potential buyer will appreciate clutter, dust bunnies or an office microwave with its very own radiation resistant bacteria colony. It’s time to put the gloves on and clean.
A clean and organized office is suggestive of a well-managed business. You have to take the time to make the physical space a place where potential candidates who want to buy a CPA firm will want to spend a considerable amount of their future lives.
- Minimize Long Term Commitments/Long Term leases
If you are like most business owners, you lease your commercial space. If you are preparing to sell your accounting practice, bear in mind the lease terms associated with your business will, in most states, pass on to the buyer and therefore may negatively affect the sale’s price.
In our experience, potential buyers typically want to stay in the commercial space leased to your CPA practice for at least one busy season, but after that, the majority will relocate. The more inflexible and longer the terms of your lease are, the more your CPA practice’s potential sale price will decrease.
Consider and examine the terms of your lease and the state law when you plan to make your exit. Some state laws stipulate that “consent may not be unreasonably withheld,” while others do not. If your lease renewal is imminent, work with the landlord to minimize the terms of the commitment and look for an assignment clause, which will allow the lease to transfer with the sale. This often requires landlord consent
If your state law does not require the aforementioned clause, or the lease does not contain that clause or any form of an assignment clause, you will need to get certified approval from the landlord to transfer the lease to the buyer. Without a workable lease arrangement, you may run into trouble closing your accounting practice sale.
Your best option during the planning phase of your accounting practice sale, is to enter into one-year lease contracts with options, which will afford you and the buyer, flexibility in the timing of the sale and in negotiating with the landlord. The same applies to any other long-term commitments your CPA practice may have.
- Keep it Quiet
If you do not take the proper measures and exercise self-restraint to maintain absolute confidentiality, unforeseen and dire consequences await. Absolute confidentiality must dictate how you approach every step in the sales process.
Selling an accounting practice is definitely a “Need To Know” situation. Do not tell your staff, your clients or anyone else that does not have a critical need to know that you intend or are preparing to sell your accounting practice. Key employees may get nervous and leave, taking clients with them. Clients may get nervous and go to your competition. If competitors learn of your plans, they may attempt to poach your employees and clients.
Breaches of confidentiality will often occur before a non-disclosure/confidentiality agreement is signed. This is one of many reasons why the use of an accounting business broker is essential. A good broker can help to mitigate these breaches and contain the problem before it happens. Usually the seller self-identifies out of habit on the first phone call or in the first email courteously answered. For a detailed discussion of the risks involved (and how to avoid them), please see the Journal of Accountancy article, “Navigating the Path to Success in Accounting Practice Sales.”
We employ strict procedures to maintain confidentiality to shield our clients from this very serious risk; while at the same time we perform the level of promotional, marketing and negotiating efforts necessary to assemble a pool of the right buyers in order to ensure you will sell your accounting practice at maximum market value, with the most cash at closing and the fewest, if any, contingencies.
Failure to maintain confidentiality is just one of the 12 Fatal Errors sellers make when they sell their accounting practice, leaving cash at the table. Yes, you will need to eventually tell your staff and clients, but you must wait until after the sale closes.
- Attain Non-Solicitation Agreements
To protect the CPA firm buyer’s investment, the buyer will require your employees to enter into a new non-solicitation agreement with that buyer. If a key employee refuses, the deal will be killed, and your plans for a quick and efficient transition and an exit will be wrecked, possibly for years.
A non-solicitation agreement prohibits employees from poaching clients if and when they leave the firm. This is not the same as a non-compete agreement, which being much stricter, prohibits a leaving employee from working in the same industry, or in the same industry in the same locality.
If you do not already have signed non-solicitation agreements with your employees, gently, yet steadfastly, make signing a non-solicitation agreement part of your standard human resources policy. This will set the conditions for the incoming buyer to get their agreement signed without looking like “the bad guy.”
You may have a key employee refuse to sign when you first implement this policy. That is normal, and can usually be solved by offering the employee some compensation such as a bonus or pay increase. It is typically worth the effort because not being able to get the buyer’s non-solicitation agreement signed is one of the top reasons deals fail.
- Mitigate adverse circumstances
Bad things happen. If your CPA practice has suffered a recent material and adverse event, our advice is to hold off on your sale until you can mitigate the damage. Adverse events may include a negative peer review, the loss of a key client or a significant number of clients, or a sudden loss of key staff.
Adverse events will, without a doubt, prevent you from attracting the right person to buy your CPA firm at maximum market value. What can put them off is what they see as unacceptable risk. The accounting practice buyers that do show interest in a practice undergoing major adversity will likely be bargain hunting, and will often submit an insufficient bid, offering a paltry sum of cash at closing with numerous and onerous contingencies.
If circumstances permit, you should hold off on selling your accounting practice until you have mitigated the effects of these adverse events. It may take some years, but the pay off at the end will be significant if your goal is to achieve the maximum market value, with the most cash at closing and the fewest contingencies.
Are you planning or preparing for an accounting practice sale?
In addition to preparing your accounting practice for sale, we also strongly urge you to hire an accounting broker who has significant mergers and acquisitions experience, a proven negotiating track record and the skill to market your firm to the largest buyer pool possible.
At Accounting Broker Acquisition Group, we have negotiated hundreds of accounting practice acquisition transactions involving many millions of dollars in value throughout the nation for sole proprietorships, small partnerships and larger firms.
We are like no other. Accounting Broker Acquisition Group is the only national business brokerage of its type, 100% comprised of brokers who are CPAs with significant “Big Four” merger and acquisition experience.
We have proven time and time again that our marketing and negotiating methods get the maximum market value possible, with the most cash at closing. We have the largest database in the nation of buyers who are looking for an accounting practice for sale and are willing to compete for your CPA practice.
No business brokerage in the nation is our equal when it comes to maximizing value when you sell your accounting firm.
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