You’ve spent decades of your life building your successful CPA practice and forming close, trusting relationships with your clients. Now it’s time to sell your CPA practice and start a new chapter in your life. But selling seldom means cutting all ties. Sellers are usually involved after the sale, at least to some degree. One of the tricks for a smooth transition is to consider ahead of time – and discuss with the buyer – what you expect your post-sale involvement to look like.
The seller and buyer should document what specific work the seller will perform for a smooth transition and to maximize client retention. This could entail several weeks of explaining relevant issues and systems to the buyer and introducing the buyer to your key clients. Highly complicated and specialized practices may require significantly more transition time due to the complexity of the clients and work to be performed. Helping the buyer retain the clients during the transition is a reasonable part of selling your business. A good transition will ensure that your successor will have a better foundation to keep the CPA practice running well far into the future. One important point to note: The buyer should never require that you perform billable work for free as part of the transition. In addition, you should set a limit on unpaid transitional hours.
Many sellers aren’t ready to cut the ties, and many buyers can benefit from a longer transition where the seller and buyer agree to the seller performing a reduced level of billable hours for the buyer. This is fine, as long as your roles are clear. For such situations, the buyer and seller should negotiate an hourly rate for the seller’s billable time.
The seller might agree to do certain clients’ tax returns one last time, or to review returns that an employee has done. This time should be paid to the seller at an agreed-upon hourly rate.
The buyer might also pay the seller for rainmaking. The seller spends time out in the community, in contact with potential clients and sending them the buyer’s way. Some sort of paid referral arrangement with the seller would be appropriate.
The important thing is to draw a clear dividing line between transition time required to sell a business, and the seller’s billable hours post-sale.
A seller should avoid entering into a deal structure known as a deferred compensation arrangement.
Surprisingly, many people erroneously call this type of structure a CPA practice merger. All too often, this type of deal essentially results in a sale of the CPA practice being reclassified from the sale of intangible assets to “compensation” to the seller in the form of a payroll check or contract labor over time. The seller ends up losing the benefit of capital gain treatment for the sale and must pay ordinary income tax rates plus FICA (or self employment tax). The tax difference could be massive.
Another problem with this type of deal is that the seller often works full time for the buyer. The seller receives payments from the buyer over time based on the collections of the practice. In addition, the seller often performs most or all of the billable work for a buyer related to the practice being sold under such arrangements . . . over a long, drawn out transition. The seller essentially receives ordinary income for the work being performed, but no significant additional amounts for the actual purchase of the practice. This arrangement clearly costs the seller money not only in taxes, but also in the form of a huge opportunity cost.
As an example:
If a seller wants to work full time for the next three years, the seller should not sell his or her firm until nearing the end of that three year period of time. This way the seller can earn 100-percent of the income from the practice with the additional payoff of selling the practice nearing the end of the third year for full value to another buyer. This new buyer at the end of the third year would presumably have the capacity to do the sellers work at that time without the requirement of the seller working full time. In addition, if this seller were to use Accounting Broker in the third year to represent the practice, he/she would likely obtain a deal comprising a high multiple of billings and high cash at closing amount in the year preceding when the seller wants to significantly reduce his/her hours (or retire).
The disadvantages of a deferred compensation arrangement should be obvious. This is especially true when you consider that such an arrangement never has the huge cash payoff at the end related to an actual sale of the practice for cash at that time. Most deferred compensation arrangements are equivalent to giving the firm away while working full time for the buyer.
If you want to work full time, work for yourself until you are ready to slow down or retire . . . and sell at that time. You will be much happier and significantly wealthier. If a buyer has offered a deferred compensation arrangement related to the sale of your accounting practice, you need to find another buyer by calling us immediately.
At Accounting Broker, we get the best prices and have the happiest clients. It comes down to our vast network of industry contacts, and our experience. Accounting Broker Acquisition Group is the only national business brokerage of its type comprised 100-percent of brokers who are CPAs with significant “Big Four” merger and acquisition experience. Our customers know that we are absolutely different from other brokers. Contact us today.