All posts from July 2010

As the summer progresses, we are entering the busy season of selling accounting practices.  We have been scheduling lots of meetings between sellers and prospective buyers so thought it would be good to spend some time blogging on these meetings.

The initial meeting between buyer and seller is where many buyers either win or lose the opportunity to purchase a practice.  To a large degree, the success of this meeting will depend on the ability of the buyer to connect on a personal level with the seller.

Many factors influence the way the buyer is perceived and will affect the degree of rapport established with the seller.  The seller has invested both financially and emotionally in the practice and wants to insure that it is sold to an individual who will care about the practice and the clients.  We will explore several issues in this series of blogs.

The first, and perhaps most important thing to remember is this:  The meeting with the seller is a confidential meeting.  Do not discuss the purpose of your meeting with anyone who may be remotely connected with the sellers practice.

Selling an accounting practice involves many, many people.  Including the seller, it also includes:

•    The seller’s family
•    The seller’s staff
•    The seller’s clients

It is the seller’s responsibility/privilege to tell the story he or she needs to tell about selling the practice.  In addition, and of perhaps greater interest to the buy, if news of the potential sell leaks prematurely, it can cause the practice to lose value.

If word leaks that a Seller is contemplating a sale of the practice, it could raise anxiety among the staff.  It might cause clients to use the transition to find an alternative service provider.  It may even cause hardship in the Seller’s family if they are not fully aware of his or her intentions.  

It is always best that the Buyer respect the confidentiality of the Seller.

Comments (0) • Posted July 28th, 2010 at 12:13pm

A while back we put out some statistics comparing our practice sales results to some For Sale by Owner (FSBO) statistics we received from the AICPA.  The comparison raised a lot of questions from practice owners on both the buy side and sell side of future transactions.  Today, I want to address the questions I most often receive from those thinking of selling a practice.

The main question I receive from potential sellers revolves around how shocking the FSBO numbers are:

Why, when people sell on their own, do they settle for such high risk transactions — Like no money down, percentage of collection deals?

The answer primarily lies in the emotion tied to selling a practice to an unknown person.  One of the biggest questions looming for any practice owner is “who can run my practice?” or perhaps more accurately “who can I trust to turn my practice over to?”  In our experience, this question can have incredible importance to a degree that the answer carries higher priority than price or terms.

Often, this is where the FSBO seller starts.  Who do they know?  Who do they trust?  Who is just like them and will get along with the clients?  It might be the practitioner down the hall, the one they have spoken with for years at the chapter meetings or a friend of a colleague they have heard great things from.

Starting with this base of known practitioners immediately limits the market the FSBO will explore.  Then the FSBO, having identified their buyer, has the job of convincing the buyer to buy.  Fair Market Value of a business is defined as the value of a transaction in which “neither party is operating under compulsion”.  In transactions we develop, we see value being defined by a seller and a buyer both operating under compulsion.  In the FSBO transaction we have just outlined, the seller is typically under more compulsion than the buyer.  In many cases, the buyer may have no compulsion and in fact may believe they are doing the seller a favor.

The disparity in the statistical comparison is due to the fact that we, like most business intermediaries and unlike FSBO sellers, do not pursue a single buyer.  We work to create a market of buyers around the sale of a specific firm and let the market determine the price and terms.

Comments (0) • Posted July 22nd, 2010 at 4:40am

We present several webcasts per month and frequently poll the audience about the old industry rule of thumb that all practices are worth one times gross.  So, we thought we should take a look at this rule of thumb and let you be the judge.

For a basis of our analysis, let’s say we are looking at two practices each grossing $500,000 annually.  Under the one times gross rule of thumb, they are each worth the same amount, $500,000 or one times gross.

But wait, we delve into the practice information and find one of these practices is netting $250,000 and the other is netting $150,000.  Are they still worth the same amount?  In our webcasts, our attendees almost unanimously agree that the $250,000 net is worth more.

Now, let’s say the owner of the $250,000 net firm is personally billing 2,000 hours per year and the owner of the $150,000 net firm is personally billing only 500 hours per year.  Now which one is more valuable?  This is where it gets tricky.  Is 1,500 billable hours worth only $100,000 in additional net?  What is the line between quality of life and money made?  A very personal determination, but all our webcast attendees unanimously flipped their perception of value with this additional layer of information.  Not a single one across all of the webcasts we have held believed the $250,000 gross was more valuable if it required the owner to personally bill 1,500 additional hours.

You can draw your own conclusions, but we have just barely scratched the surface of these two example practices and already the one times gross rule of thumb is looking pretty flawed.  Our experience is that not all practices are worth one times gross.  How could they be?  A practice is far more complicated than just a gross and differences like staff, billing rates, location, length of service, types of clients and owner’s billable hours among dozens of others are critical components that need to be factored to determine value.

Year in and year out, we see practices selling for 1.0 times to 1.35 times annual gross, with very strong practices selling above 1.35 and struggling practices selling for less than 1.0.  In the end, if a practice sale is well executed, the market will determine the price and it will be based on far more than just the gross.

Comments (0) • Posted July 19th, 2010 at 6:29am

We speak with practice owners and partners about sales, mergers and succession planning issues on a daily basis.  Many firm owners have a general idea of what they want their exit strategy to be, but have not formalized it into an executable plan.  They have an idealized vision of their exit. 

For most firms the responsibility for creating and executing the succession plan falls on the managing partner.  Managing partners tend to be very busy with clients and day-to-day operations of their firms.  As a result, it is all too easy for succession to be put on the back burner. 

Sometimes casual conversation among partners passes for succession planning.  But it is not tied into the overall strategic planning of the firm.  Nor are the real needs, motivations, and values of the individual partners addressed. 

In order for us to increase the probability of success in multiple partner firms, ProHorizons uses three distinct phases in our succession planning process: Discovery, Design and Execution. 

The Discovery Phase involves identifying the individual values and goals of each partner, and defining value alignment and shared goals among the partners.   Conducting a thorough discovery increases the probability of a proper succession or merger at the time of execution.  The goal of the discovery phase is to help the firm owners understand their individual and mutual interests and motivations in the succession of the firm. 

The Design Phase involves taking what was discovered in the first phase and linking it to strategic needs of the firm.  During this phase, partners address issues identified in the Discovery Phase.  They anticipate challenges that will affect succession.  This also allows them to manage the expectations of clients and staff.   The plan will include objectives, target dates and necessary resources to assure a successful exit.

The Execution Phase is where the outcomes of the earlier phases get tested and implemented.  This phase begins as soon as the Design Phase is complete.  It includes a regular review of the plan. Changes in the firm will lead to adjustments in the plan.  The final portion of the execution may be a merger, an internal succession arrangement (selling to insiders), a sale to outsiders, or some other solution. 

Succession planning sustains the viability of a lifetime’s work.  In smaller firms, it means peace of mind and ensuring your hard work is rewarded in the long run.  In larger firms, it ensures stability in the leadership and management of a firm.  It assures the needs of clients are not neglected in times of transition and the goals of the partners are acknowledged and met.

Comments (0) • Posted July 9th, 2010 at 2:02pm