My response:

It is going to depend greatly on the timing of the sale, the amount of WIP, the nature of the WIP and the two parties in the transaction.

• For timing example, if the selling practice has high quantity of individual tax extension work, closing a sale on October 1 vs October 20 would result in a very significant difference in WIP.
• For amount of WIP example, are we talking about hundreds of hours of WIP or less than a hundred hours?  If the amount is not too significant and will not take to long to complete it might make the most sense to let the seller finish the WIP and collect the fees.
• As to the nature of the work, is it a short term project or a long term project that is 80% complete.  If the seller has completed a significant portion of the work, they are going to have strength of collection for the entire job, plus they will be more efficient in completing it.
• The key is for the two parties to identify the WIP on a case by case basis, evaluate the type of work and nature of the project, and then determine the best way to finish the work and collect any outstanding and new fees due. It has to be a discussion point and agreed upon.

I have worked on transactions where the seller stays on to transition and complete and collect on the WIP and I have worked on transactions where the seller let’s the buyer collect on the portion of the WIP the seller completed prior to the sale.  It all just depends on the situation and other factors of the transaction.  I would recommend you attend our Buying webinar or our Selling webinar to learn more.

Let us know what other questions you have.

My response:

First, let’s separate the market between the single owner practices and the multiple partner practices. In the later, buy-ins occur particularly when the practice has a gross over $2 million and several partners of varying ages.  It is not uncommon in a firm of this nature for an outside practitioner to buy in to replace a retiring partner.

However, for a majority of the market, which grosses less than $1 million in annual gross the situation is quite different.

Partial buy-ins, buy-outs and carve outs are possible.  It obviously depends on the goals and plans of both the seller and buyer.  For example, if the seller has health issues, plans to relocate or wants to retire immediately or even in the next year or two, then a partial buy probably would not work.  It might be possible if their plans are a year or two out to structure a two phased purchase*, buy a portion today and buy the rest in a year or two.

From the buyer’s perspective, most acquire with the goal of gaining control and autonomy, which probably will not be the case in a partial buy. It takes a lot for most sellers to let go in the best scenarios, but it is certainly not a realistic expectation if they are still a working owner in the business.

Another concern for a buyer, if they separate some of the clients into a separate business (a carve out) should be retention.  The strongest point of retention is going to be the combination of an endorsement of the buyer by the seller and the fact that the seller is no longer available to the clients.  If the seller is still practicing, some clients may try to return to the seller instead of transferring to the buyer.

A partial buy also depends on the economic needs of the seller and the buying ability of the buyer.  Unlike a full purchase, a bank will not get involved with a partial buy, so any down payment will rely entirely on a buyer’s cash and terms will rely on how much of a note the seller is willing to carry.  This is usually the largest stumbling block in a partial buy.

So, yes buy-ins, buy-outs and carve outs occur and can be successful.  The key to a successful outcome, as in any endeavor of this nature, is being aware of what you are getting into and what the acceptable and unacceptable risks may be.

Let us know if you have any additional questions.

* A note on two-phased purchases: even with an "airtight" agreement, we have seen buyers change their mind and decide to not buy the rest of the practice at the appointed time.  This is particularly true when the buyer “acquired” the first portion with zero or little money down.  The result of this failed second half of the acquisition is huge mess for both parties.

Lead Generation.  How will you find new prospective clients?  Develop a strong referral network, telemarketing, direct mail, advertising, etc?  What are the avenues and components you use or need to develop to generate leads?

For the sake of digestible, short blogs, I will break my thoughts into four blogs:

• Your lead generation foundation (today’s blog)
• Passive Marketing
• Active Marketing
• Referrals

Let’s talk about your lead generation foundation.  What are the basic underlying components to support all of your lead generation efforts?

Understand the Value You Provide.  If you do not, the customer never will.  You need to able to communicate it effectively and concisely.  I will give you a hint, if you compete on price and are always trying to stay below the competition’s price, you do not understand your value.  What do you do for clients better than anyone else in your market?  Why should they come to you instead of a competitor?  Get away from price and try to express your value in the eyes of the prospective client.  If you don’t do anything better, start today and communicate it.

Communicate What You Stand For.  This is both the personal “you” as a practitioner and the collective “you” of your practice.  Can you make any guarantees to your clients?  What pledges or promises can you make?  For reference, you may look at the Our Commitment to You page on our website.

Remember, Benefits Instead of Features.  Okay, welcome to marketing 101.  Can you communicate your value from the client’s perspective? The difference is often platitudes, “We’re #1”, versus resonating with the client, “We understand what you are struggling with and can solve your problem.”  Instead of talking about whom you are or what you do, can you speak of the benefits a client will receive by working with you.

For example, “Our clients come to us because they are frustrated with monthly, quarterly and annual tax filings.  We take their headache away by…”

As you define these components, can you document them? Again, try to write these from a perspective of how the client will experience them rather than how you deliver them.  If you can document your value to clients and what you stand for, then developing your lead generation initiatives is going to be a piece of cake.

For single owner firms without the professional staff to develop, selling your firm becomes the main option.  Other firms might consider either and Internal or External Succession plan.
Several years ago we were engaged to consult with a firm where the senior partner (and founder) was negotiating with four (4) “junior’ partners.  These other partners each owned 1% of the equity of the firm.  One of the partners owned 2%.  These partners were clearly competent and they had enjoyed long and successful relationships with the firm and the senior partner.

Our initial consultation consisted of a couple of days in meeting and discussions with each of the partners individually, and the senior partner and a representative of the other partners together.  During these discussions it became clear that they had already been in negotiations for more than a year and that their previous long term relationship had soured and deep animosity had built up.  The senior partner’s succession plan had failed.

In addition to the meetings and discussions, ProHorizons performed an analysis of the firm so we could understand the fair market value of the firm and the relationships of the partners.  Over the course of several weeks of negotiations it became apparent we might be at a stand still.  The senior partner would not budge on some of his financial demands and the other partners were adamant they had developed some goodwill they felt were not being given proper credit (probably true).  Unfortunately ProHorizons had been called in too late.

The end result was that the “junior” partners “defected to a competing firm.  They were able to retain approximately 1/3 of the clients.  The senior partner, who had transferred many of his relationships, was able to associate with another firm and retain approximately 1/3 of the clients.  The remaining 1/3 just dissipated and went away.  Litigation ensued and no one came away happy.

Don’t let lack of planning ruin your retirement.

Here’s where the Perception part comes in. If you’re selling your firm (or just promoting it to potential clients), how do you think you’ll be perceived if you don’t have these in place?  Let me set aside the geek in me for a moment, and not address how many monitors litter your desktop. Let’s just concentrate on items 1 and 3.

The last, an active/maintained website is probably more important to potential clients. Remember too, the key word here is maintained. If you haven’t updated your website it will show…and not favorably. Potential buyers will also get a “sense of you” by looking at your website. Wouldn’t you rather they perceive you as on top of the technology issues? That’s the sort of thing that helps support any type of premium you might be asking for your practice.

I’ve saved the best for last, Time and Billing Software. You may be surprised how many practitioners we come across who expect to sell their practice for a premium, yet are unable to extract the most rudimentary data about their practice. In short, they aren’t very good at running a business…just telling others how to run theirs, I suppose.  It’s not necessary to be on the bleeding edge of technology. However, a well run, efficient practice that employs and uses technology will be able to command more of a premium when it comes time to sell.

A man died and went to heaven. After a length of time in utter tranquility, he expressed out loud that he was a little bored. Immediately, the devil appeared and offered to show him around his place, no strings attached, of course. The man said, “OK, I’ll take a look”.

So, they took the express elevator down below where the man was absolutely amazed. There was singing, dancing and absolute merriment. Everywhere there were tables of fine food and exotic (but tasteful) entertainment. His response, “Wow, I didn’t think it would be like this. Sign me up!  This is where I want to be.  The devil said, “In all fairness, I want you to think this over. So, we have a three day waiting period.  If you still want to join us, just give an out loud expression of your interest and I’ll come and personally pick you up, have you sign a little paperwork and bring you back. How does that sound?”

Well, three days later, the man made his decision. He’d had enough of the quiet, the peace, and the tranquility. He wanted a little merriment. As promised, the devil appeared, had him sign on and took him down below.

Once there, the man found nothing but wailing and weeping, large fires making everything very hot and a gray overcast that looked as though it would never go away. In short, the whole scene was a real downer.

“What happened?” he asked. “Where’s the happy place you showed me three days ago?” The devil replied, “three days ago you were a prospect, today you’re a customer.”

The moral: Be careful of what you think is being promised to you.

Why?  Because it probably isn’t true.

The truth is that all brokers and consultants that specialize in accounting practice sales have a database of potential buyers they have spoken with or that have registered with their firm.  We are in constant contact with these “buyers” and typically only receive serious inquiries from them when a practice of interest comes on the market.

You need to ask yourself, why would a buyer request a broker get involved and represent the seller? Answer, they don’t contact brokers to do this because they do not see a direct benefit, in price and terms, when they increase the knowledge and expertise on the seller side of the negotiating table.

You might be thinking, “but they asked specifically about my practice.”

One of the main concerns any seller has is “who is going to take over my practice, take care of my clients and look after my staff?” If this is your concern, be wary of rushing to the easy answer this headline proposes.  We had dialog with several owners that jumped last year at the hope this message provides and there was no specific buyer, for many this was true through the entire three to six month term of the contract they signed.

When an owner lists their practice for sale with ProHorizons, we create a market by building a large pool of potential buyers around the listing.  The buyer pool is interviewed and whittled down until we feel we have selected the best candidates based on the priorities and concerns the seller has shared with us through our thorough consultations with the seller.

Bottomline: if it seems too good to be true, it probably is!

If you are interested in having a conversation about selling your practice, and want to work through a successful, proven methodology to find a good buyer, we would be happy to talk with you.  You can reach us at 800-729-3242.

The Front Desk
First, what is the demeanor of the person manning your front desk?  Is the person naturally engaging and welcoming or is he/she naturally confrontational and off putting?  Putting the right person in this role should be the first part of your policy.

Once you have the right person, what should the welcoming procedure be? This may differ depending on whether you have drop offs or appointments.  Perhaps drop offs are warmly greeted, asked if they have any questions, asked if all the paperwork is in order and then they are informed they will be contacted with follow up questions.  Finally, they are thanked by name and wished a good day.

An appointment client might be asked to have a seat and asked whether they would like coffee, tea or water.  The accountant they are meeting is notified the client has arrived and the client is informed how long the wait will be if any.  Upon leaving the office the appointment client is thanked (by name if possible) and wished a good day by the front desk staff.

A pleasant, well structured, and consistent front desk procedure will provide the clients with comfort and familiarity every time they visit the office and will go a long way to creating a great first impression and setting up a productive meeting.  The opposite is true as well and I will confess that I no longer am a client of a very nice optometrist, who was highly referred and highly regarded, because I grew tired of how rude her front desk staff was to me and everybody else.

Greeting Clients
How does your staff greet clients?  Is there a smile, a hello and a handshake?  Is it a policy in your firm?  It should be.  Again, consistency assures that the clients expectations are in alignment with the experience.  If I work for you and I have a great, warm greeting with the clients for six years and then leave the firm, what happens with those clients when they come in the next time and are given an indifferent greeting? It may not happen right away, but in time the relationship will deteriorate.

On a few occasions, I have been in firms where every person I passed in the hallway would offer me a hello or at least a smile.  They didn't know me or why I was even in the office, but that made no difference. Talk about a welcoming environment.

Meeting with Clients
This is a substantial topic and there are many resources in the market for how to have a successful meeting, so I will again keep it very short and simple.  I am always surprised when a practitioner complains that their meetings go too long because the client talks too much about personal stuff.  This indicates one of two things to me, either the practitioner doesn’t value the relationship with their clients enough or they do not manage the meeting well.  So, two fixes:

1) Control the meeting.  Have an agenda for your meeting.  I use a simple bullet pointed list of five items we are going to go over with the first being “Why am I here?”  Your list should start with “Why are you here?” for new clients and “What has happened since our last meeting?” with returning clients.  This is where you will catch up on the personal stuff.

2) Remember, the personal stuff is critical and listening to it tells the client you care.  First, some of it will direct your work with them and, second, without it you are likely no different to them than any other practitioner they have worked with in the past.  The use of an agenda will help you manage the time spent on personal stuff and empower you to move to other items without risking any offense.

Clarifying Next Steps
Every meeting or important conversation should end with discussing next steps.  We call this providing a clear future.  If it is a tax appointment, is anything else needed and if so when, when will the return be complete and filed, what else is required of the client and when will the next appointment take place.  Finally, what will the next communication be (email, phone, appointment) and when will it occur?

Some of these might seem obvious, but policies and procedures for your front desk, for how to greet clients, for how to meet with them, and for how to determine next steps are critical in defining how your firm treats clients. Remember, how much a client likes your firm may have as much influence on them as the level of competence your firm demonstrates.  It is often the difference in client retention and client referrals and can turn a short term client (2-3 years) that worked with a single preparer into a client with a 20 year relationship with several different preparers in your firm.

Fee Increases are Important

The number one way you can increase the value of your business is to increase your income.  A little increase can go a long way.  A 3 to 4% increase seems like a very small amount and it is hardly noticeable to your clients, but it compounds to you every year and over time.

If you consider a 3 to 4% increase over a 10-year period, it takes what was a $300 tax return and makes it a $400 to $420 tax return.  The value of practices is primarily based on the gross income, so in this 10-year model you would increase the value of your practice by approximately 35%.  Not a bad return on your investment.

Another way to look at this is based on a single year; a $300 tax return from last year now becomes $312 with a 4% increase.  Not a lot of money.  But let’s say you have 500 tax returns you just increased by $12.  That becomes $6,000 in your pocket every year, now we are starting to talk real money, particularly since its going to go straight to the bottom line.

Look for New Clients when You are Busy

Another often overlooked area of increasing the value of your practice is client acquisition.  CPAs are very busy during tax season and tend to focus their efforts on providing services to the clients they already have.  A laudable goal.

But remember, the tax season is an ideal time of the year to reach out to new clients because it’s the one time a year that taxes are on people’s minds.  Not everyone’s but the collective mind of the society.  Consider all of the advertising that takes effect during tax season, whether it is advertising for H&R or Jackson Hewitt, or advertising for some tax resolution service on TV, radio, or the Internet.  Advertising for tax services is at its peak during tax season.

That is when your prospects, your future clients’, think about taxes.  Not during the summer when you are slow and have time to market to them.  They are going to be much more responsive to your message now than at any other time of year.

Reaching out to them could take the form of a variety of different methods.  It could be meeting them at the Chamber of Commerce.  And who does not need a little break from the office to attend a chamber mixer.  It could be doing a direct mail piece to small business clientele.  It could be appointment setting telemarketing for small business clientele and taking that opportunity to try to meet with them.

I realize that during tax season you are all very busy but you would serve yourself well to spend a little bit of time and resources on marketing.  Extend a few extra tax returns this year and spend just a few hours a week on marketing your services.  It will help increase the value of your practice dramatically over the years and it will put more money in your pocket this year.

First, how is the front room presentation in your office?  After the exterior of the building this is the first impression a client or prospective client will experience.  A well styled and comfortable reception area plays a vital role in the experience a client has when they visit your office.  In fact, it can even overcome a rundown exterior.  I had a client that had converted an old house into a quaint little office.  The outside was not too impressive, but when you walked in the front door you were literally blown away by how nice the interior was.  Every appointment I sent to that office had exactly the same impression.  It was almost like we were in on a secret or had found a diamond in the rough and my client confirmed that her clients always commented on how much they enjoyed visiting the office.

On the other extreme was an office I visited that was an office share for three different CPA practices.  The reception area was a central room and the CPAs, each a solo practitioner, occupied three of the four private offices around this reception hub.  The fourth private office was shared for storage.  However, the storage office was not large enough to hold everything, so most of their file cabinets were placed in the middle of the reception area.  Around these file cabinets they had a dozen mismatched chairs for clients to sit in while waiting.  There were two carved throne chairs next to a few folding chairs next to a desk chair next to a kitchen chair.  When I entered the reception room, I stepped outside to be sure I had entered the correct suite and then re-entered and tried to figure out where the owner I was meeting was located.  He actually stood up in his office on the opposite side of the filing cabinets, got up on his tip toes and waved me over.  It was a cluttered and uncomfortable introduction to his practice.

You do not need to be in Class A space or even Class B, but you do need to do the best you can with what you have.  The best offices I have visited were impressive in their presentation and gave me the immediate impression of organization and competence, two things all accounting offices should aspire to imprint on their clients.  So, review all areas a client may visit in your office, from the reception room and private offices to bathrooms, and be sure they are tidy, organized and comfortable.

The reception area may not require much time or money.  A few pieces of comfortable furniture (that match!) and a table with some reading material (be sure to remove personal addresses).  It may need a fresh coat of paint.  Maybe round it out with a few plants and some nice warm pictures on the wall.  Do not let this be a processing or storage area with files and documents strewn about.  Keep it clean, organized and welcoming.  Same goes for your conference room if you meet with clients in one.

In your private offices, it is understandable to have some files on your desk and about.  But avoid big stacks of files as it may make the client feel they are just one of many or, even worse, you are so busy that they should not refer anyone to you.  Also, do not put any paperwork on the floor, it does not belong there and will give a client nothing other than a negative impression.  Ideally, you want to appear hard working, but very organized.

In general you should aim for a nice, comfortable, warm environment that will put clients and prospective clients at ease.  The side benefit is this will also result in an environment that the staff is more comfortable working within and that they take more pride in.  I would enjoy hearing about other treatments of your office environment you have found critical to the client experience.

To start our deeper exploration of the client experience, let’s look at how responsive your practice is to client inquiries:

1. Do you have an “Answer/Ignore Calls and Emails” policy in your practice?  This may seem silly in concept, but in practice it is important to be clear on when it is appropriate for you and your staff to answer calls you receive and when it is appropriate to let a call go to voicemail.

For example, a staff accountant in a meeting with a client may need to follow the policy of putting the phone on mute so even the ring does not interrupt the meeting.  However, when not in a meeting, this same accountant may be expected to answer the phone when at their desk between certain hours.  In a different example, the receptionist at the front desk may be expected to answer every call within four rings.

The same type of policy should also be established for email.  Have you ever arrived in the office in the morning with two or three pressing priorities on your mind and then spent half an hour going through email.  If you haven’t, I will wager that some of your staff has.  As much as its convenience is an asset, the ability of email to distract from more urgent matters is a very real liability in today’s business world.  Consider when in the day email should be reviewed?  Perhaps a surface review first thing in the morning to be sure there is nothing requiring an urgent response and then a more detailed review of everything after the morning priorities have been met?  A starting point in most email systems is to implement rules and macros that will route the email to specific folders and help you weed out the urgent from the less urgent.

2. What is your policy for returning phone calls?  Two hours, fours hours, maybe 24 hours?  And, what about responding to email messages?  Policies for responding to phone and email messages will go a long way in defining your practice to clients that contact your office regularly via these avenues.  Be sure these response policies are understood by your staff and followed.  Then communicate these policies to clients.  Doing so will help manage their expectations and keep the clients in alignment with your practice.

One rule you might consider implementing is returning the toughest calls early in the day.  It may seem counter-intuitive, after all who wants to start their day calling demanding clients?  Well, the truth is the anticipation of making the tough calls can be demoralizing and weigh down everything else.  So, get that weight off your back early, take a deep breath and enjoy the rest of your work day.  Your responsiveness to other client needs and your work production will both improve.

3. How do you communicate your turnaround times to your clients and do you meet or exceed your estimates?  I have always referred to this as the Chili’s principle, since I grew up near the second Chili’s in the nation and they always told us it would be a longer wait for our table than it ever turned out to be.  In short, you should under promise and over deliver whenever possible.  If you are sure you will have a tax return done in 48 hours, inform the client it will take four days and then call them on day three to communicate it is done.  It may seem like a bit of a game, but the resulting perception is that you prioritized the client and got it done early.  How’s that for responsiveness?

So, there are three areas that can quickly and easily be addressed and significantly improve your clients’ experience in regard to how your firm responds to them and their needs.  These policies are going to be defined by a mix of client needs, firm culture and type of service being provided.  There is no set rule of how these policies should be structured, but you should develop them and put them into practice…even if you are the sole operator in your business. I would enjoy hearing about other areas of responsiveness that you have found critical to the client experience.

My response contained two questions that every practitioner should consider:

• Are you contemplating organic growth?  This is internal growth through practice development processes one client at a time.
• Are you contemplating acquisition or merger growth?  This is growth through the purchase of a practice or a merger with another firm.

These are not exclusive avenues and every practitioner should put significant focus on practice development systems and processes for long term success.  An acquisition will give you a boost, but without new client development you are going to see decline unless you acquire again…and again…and again.  By the way, this is an option that many practitioners find to be acceptable and in some cases it has been very successful.

In response to this email, I also offered my overview of three key elements of any successful practice development plan:

1. Client Experience.  How do your clients experience your business?  From taking calls or returning them to visiting your office, what is the client experience?  What is the level and quality of service provided? I list this first, because it can and should be addressed first.  If systems and process are not developed to make the client experience both satisfying and consistent, you will be wasting your money with the next two elements.
2. Lead Generation.  How will you find new prospective clients?  Develop a strong referral network (client experience is the basis of this approach), telemarketing, direct mail, advertising, etc.  What are the avenues and components you use or need to develop to generate leads?
3. Lead Conversion.  In my experience, I have always found generating leads to be relatively easy.  It is qualifying and then converting the leads to clients that require the most effort and focus.  Do you have a process to engage a lead and convert it to a client?  How do you interact with a prospect, present your service and ask for the business?  In my conversations during the past seven years I have been surprised how often a practitioner does not have a process and just “wings” the initial meeting.

Each one of these requires thoughtful planning, development of systems and processes, and diligent execution if your organic growth efforts are to be successful.

I would love to hear your thoughts and experience with your own growth efforts and will post more on this during the next few months.

Two years ago, we saw a heavy mix of buyer financing and bank financing with a smaller portion in seller financing.  In the past 24 months, we have seen a substantial decline in buyer capability to finance, tighter lending policies from banks and, therefore, an increase in the portion of an accounting practice sale that is financed by the seller.  But what if you cannot fund any of the acquisition, you cannot secure a loan and the seller is not willing to finance more than 50 or 60 percent?

I worked with a buyer this past Fall in exactly this situation.  He was young, very capable and a great fit with the seller and the selling practice, but he wasn’t financially capable and was not able to secure a loan.  So, he worked with friends, family and associates to set up a small investment group to support his acquisition effort.  Not an easy proposition to achieve, but he was motivated to buy this accounting practice and saw the value of the acquisition.

The good news was he achieved his goal by receiving initial pledges equal to 33% of the purchase price.

The bad news was his primary two investors became skittish when he discussed the details of his offer with them.  The problem here was they were both from a different professional service industry; both had bought and sold practices in that industry which like most industries has its own unique valuation criteria, and neither understood that they were comparing apples and oranges.  A further point of contention was that the standard in their industry is 10 year seller financing, not the three to five years we typically see in the accounting industry.

So, the buyer’s offer, which was not the seller’s ideal but met his needs (a bit above one times gross, seller carrying over 60% of financing on a seven year term), was seen as too risky by these two investors.

My point.  If two parties want to get a deal done, there are always creative ways to finance the deal.  However, the more people that are added to the decision process the more difficult it will become.

Put your plan together right away.  Why?  Because you are headed into tax season and, in our experience, no one wants to work on their sale during or even right after tax season.  Why does this matter?  We see two highly active periods during which practitioners invest time and energy in the exploration and evaluation of acquisition opportunities.  The first of these periods begins around May 1 and ends around June 15.  So, if you are not organized prior to tax season and do not have the energy or interest in getting organized during the two weeks immediately after tax season, you will miss an important window of opportunity with potential buyers/merger partners.

You have many options in the market from selling your accounting practice on your own to listing with a brokerage firm.  In my business process, I discuss the following as I help clients plan for their sale next year:

• We set up the listing in December or January.  The client sends in financial and other information so I can draft my 9-page report on their accounting practice sale.  We have our conversations to address questions and finalize the report prior to the client getting too busy with tax season.
• The client focuses on tax season and I do not disturb or interrupt them during this busy time since my report and promotion are now working for them.
• On March 16^th, I begin the promotion of the accounting practice for sale.  I field inquiries and begin to develop a pool of potential candidates. All of this is done without bothering my client, the seller.
• Around April 1^st, I check in with the client to remind him that I will need updated financials soon.
• Around May 1^st, when the market picks up considerably, awareness of the sale is pretty high (based on six weeks of promotion) and we have serious candidates.

The key to all of this is that my client (the seller of the accounting practice) does not spend valuable tax season time with me or prospective buyers and they do not miss the first peak in market activity that occurs in May.

So, if you have decided you are going to exit or sell your accounting practice in 2011, get it set up prior to tax season to maximize your opportunity to build the largest pool of prospects and, as a result, find the best buyer for your business.

Perhaps I am confused or naïve, but I do not see the direct correlation between the economy and value. Looking at the larger picture, when I go to the grocery store, I do not see a reduction in the price of a gallon of milk. I certainly have not seen much decline in the price of a gallon of gas. When I look at the corporate world, many companies have increased in value and massively overvalued transactions continue to take place in the high-tech sector. In fact, I believe Google is doing so well it just paid all employees a 10% bonus.

Some equate practice sales with home sales, so let’s look at that idea. There has been a pretty significant downward shift in home values across the nation, in some regions more so than others, but the basis of this shift has been a huge upswing in supply and a decline in demand as the sub-prime lending market went through upheaval, foreclosures increased to record highs and home mortgages became harder to secure.

In the accounting industry, we have seen the reverse as demand is outpacing supply. Fewer practices are put on the market because, for many, retirement has been put off until more certain times. At the same time, we have seen an increase in buyers with the growth on two fronts: 1) practitioners exiting the larger public firms and private industry looking to get their ownership start through an acquisition; and 2) existing practice owners that have identified an acquisition as the best way to increase the bottom line in the current economy.

So, I find this CPA’s statement fascinating because we find that a practice that has maintained its revenue and profitability during the past two years, and now finds itself in a higher demand market, has higher value than it did prior to being tested, and proving strong and stable, through the worst economy our nation has seen in 80 years. A practice that has grown during this time, and many have, is certainly doing the right things during difficult times.

The reverse is true as well. If a practice is struggling and having a tough time in these economic times, then its value is going to decline…just as it would in any other economy.

The economy has had an impact on accounting practice sales. Some regions have been hard hit and practices in those regions have declined. Financing has become more difficult to secure.

However, I would suggest that if you are not willing to pay as much for a strong, stable practice today as you would have two years ago, then your sense of fear and risk in the current economy is out of sync with the facts and maybe you should not consider an acquisition until we find ourselves in a more certain economy.

Sunday night, I had the fascinating joy of watching 5 pre-teens (ages 8-10) sit down on the living room floor and wrap up a great evening of trick-or-treating.  They each chose a section of floor space, poured out their bags full of candy and carefully sorted and organized the array of treats.  Then, they got down to business…the annual candy barter.

I was amazed to watch as three Crunch bars and a Milky Way were eagerly traded for a six-pack of Oreos.  It was a trade I would never have made, but I realize I appreciate Crunch bars and Milky Ways (thankfully it wasn’t a Snickers or I would have had to intervene) far more than Oreos and far more than the recipient of the six-pack.  However, both children were thrilled.  The trades went on and on, with only Milk Duds failing to raise interest, until at some point the energy faded and everyone settled on their final lot.

The whole process made me think of the power of the “eye of the beholder” and how this principle applies to practice sales and acquisitions.  Earlier this year, I was advising a partnership on an acquisition and the seller insisted on over a 1.35 multiple of gross.  I had run my pricing analysis and, based on market comparisons, found the practice to be worth somewhere between a 1.15 and a 1.20 multiple of gross.  I advised the partnership accordingly but with the caveat that I could not define what it was worth to them.  You see, this particular acquisition would have made the acquiring partnership the top firm in their market.  That didn’t mean anything in my analysis, but it meant everything to my clients.  So, they decided to pursue the acquisition at the high multiple and, only after due diligence, eventually stepped away because it turned out to be too risky.

This also applies to the seller side of the transaction.  I recently represented sellers who would not consider receiving less than 80% cash down at closing.  That was until they met their ideal buyer.  Once in dialog with this candidate, they became more comfortable with the idea of less cash down as the fit of the buyer diminished their sense of risk.  In fact, they still would not consider less down from other candidates.

How much is a practice worth?  I can talk with you about profitability, market demand, strengths and weaknesses of the selling practice, risk in deal structure and the related market comparables.  However, in the end, the value will always be defined, in part, by the eye of the beholder.

The typical path has been Darwinian in nature; where the strongest survive. Not much effort has gone to developing capable talent. Instead there was an expectation from those who made it that others should do as they had. Consequently, some great potential is not realized.  This may be in a multiple partner firm, where a young CPA is beginning a career, or it could be an owner of a solo practice. One is competing inside a firm while the other is fighting competition in the marketplace. Either way, some do not make it and remain on the delivery end.

One solution to this challenge is mentoring. In a larger firm, it may be a partner or someone in management grooming a junior. For an entrepreneur it may be someone in their network, mastermind group or perhaps a professional coach. It should always be someone who can play a role in overcoming obstacles and challenges.

Here are 3 roles a mentor may undertake:

• Role Model: This person sets an example for the mentee to follow. The role model may establish trust, listen to challenges, counsel and provide guidance as necessary.
• Guide: This person helps navigate and understand organizations and situations. They often refer and make introductions to persons or opportunities that will enhance the mentee’s career. They may open doors, help the mentee network and stay in touch for professional purposes. They can also sponsor, creating challenging and instructive opportunities that may not be available.
• Coach: This person takes an active role in observation, assessing capabilities and providing feedback and instruction. They teach, advise and motivate. They help cultivate professional interests and set career goals. They often help to keep focused on the performance and pushing through tough times, while developing, self respect and a sense of self-worth. Mentoring is an intentional process, with both parties sharing responsibility. 

Along the way, the person being mentored can slide into one of the roles and begin mentoring others. For the mentee the benefits are obvious. There are benefits to the mentor as well that we’ll address later.

Where in your business can you use help? Where can you give help? What value would you find with a mentor? Being a mentor?

Take a few minutes and respond below.

I had a CPA practice in San Jose for about seventeen years and, quite simply, got burned out. I didn’t want to do it anymore. I was sure I could find a buyer. It really didn’t have anything to do with saving a broker’s commission. I thought I would contact a few of my CPA buddies and give them a pretty good deal.  Oh yes, this was the truly old school approach: Here’s my practice, pay me 20% of collections a year for five years, and we’ll do it on a handshake. I was okay with that approach.

Unfortunately, the three separate buddies I approached didn’t really have an interest in my practice. By the way, it was pretty much a tax practice with a bit of bookkeeping and write-up. My rates were decent and, well, it was an okay practice. Why didn’t they buy? I don’t know. Maybe they thought my clients would be reflective of my personality. That could scare some people. Maybe I saw the practice through rose colored glasses. I don’t know.

Anyway, my office mate had just sold her practice through John Ezell at ProHorizons in a fairly short amount of time. So, I called John and three weeks later I had the practice sold. This was in July of 1999. It was an earn out over three years with about a 25% down payment. Now remember, I had no allusions about what I would ultimately receive, but I got what I was looking for: The sale of my practice at a fair price.  John actually had buyers who were looking for practices to buy, and he knew they would be interested in my practice.

Long story short (which means it’s already too long), I went off and did some other things for about five years and then joined ProHorizons as a broker in 2006.  I like what I do, and, more importantly to me, enjoy and respect the people and company I work with and for.

When he was with the larger firm in the 1990s, he frequently lost consultants who were finding work for more money. When he surveyed the independent consultants, he found most were leaving for lifestyle reasons.  They loved the autonomy and freedom to choose their projects and they liked having the ability to control their travel situations.  It was the dislikes that he found interesting.  Some of those issues were:

• Isolation and loneliness
• No career development
• No role in a larger venture

The feelings of isolation and loneliness catch many newly self employed by surprise.  The inability to test ideas and having a mentor is often a challenge. Some even miss the day to day chatter and camaraderie.

Many independent professional services consultants combat isolation through networking or mastermind groups or other practice networks. This would work with tax and accounting professionals too.

Why should you consider this? Five immediate reasons come to mind:

Moral Support: Even if they have differing goals, members are there for support. 

Inspiration and Motivation: Active participation in the right group will challenge and inspire you through tough times.  It is easier to maintain a positive attitude when you have someone with whom to talk through issues.  

Differing Viewpoints:  Discussing different viewpoints with group members gives you varied perspectives on challenges and problems. This is your opportunity to test ideas. Even while disagreeing with others’ points of view, you can gain a better perspective and enhance your ideas.

Peer Accountability: Group members will hold you accountable for your actions helping to achieve your goals and objectives. Realizing you will be held accountable to your peers will also drive growth and development. The fear of letting down the group can be advantageous to your desires.

Wisdom and Experience: You can rely on the experience and wisdom of the entire group. Many heads are collectively smarter than one.

Whether a solo practitioner or a member of a larger firm which is compartmentalized, you can benefit from the right network or group. Many people find that they can stay on the right career track.  Others find that they are building a firm, rather than just creating a job for themselves. They are more likely to overcome marketing and business development challenges through the motivation, feedback and accountability from the group.

Have you ever felt isolated while building your firm?  What are some of the ways that you overcame those feelings? What would you add to this list?

Leave your comments below.

First, raise your fees. I know: “The economy sucks.” “My clients are suffering.” “I’m already at the peak of the local billing scale.” Except for that last one, I’ve heard the others before. At the end of the day, you’re in business to make money, not to support your clients through reduced fees.  Let’s say you’re doing $200,000 per year and you raise your fees 10%. That immediately drops $20,000 to your bottom line. I know, I know, you’ll lose some clients. Let’s say you lose $20,000 in fees. Doesn’t that put you in exactly the same position you were before, except that now you have more time to do other things? At a hundred bucks an hour, you now have 200 more hours to play golf, smell the roses, or whatever. Long story short, increase your fees to current market rates and you’ll demand more of a higher price for your practice. You’ll also make more money in your practice.

Second, get rid of the dead weight. That means “D” clients. You know who they are. The ones that will probably go away if you do raise your rates (see above) and the ones that are more trouble than they’re worth.  You’ll be left with the more loyal and premium clients. You’ll have a practice that is a lot easier to sell and get a higher price for. That dead weight can also apply to personnel. I’ve also seen the practitioner that just can’t bring herself to let Good Old Joe go, even though Joe hasn’t pulled his weight around the firm in a long time. Do yourself a favor and let Joe go (probably after tax season, though).  Both of these “triages” will garner you more money for your practice when you sell.

Third, it’s the 21^st century. That means bringing your practice up to date. Don’t be “pennywise and pound foolish”. You may not be totally paperless, but you should be working toward that goal. If you’re still doing your write-up work in 13-column ledger books, there’s probably no hope for you. You should be scanning documents and utilizing the newer software suites that are out there. If you’re upgrading on a regular basis, then the learning curve won’t be so steep.

So, these are the three simple fixes over which you have control (location, probably the biggest single factor, you can’t control).  These are the areas where can you implement short term changes that will maximize the value of your practice.

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It can be a challenge for someone who is in the early stages of practice ownership to have the necessary cash on hand and a shortage of working capital is the major cause of business failure in the nation. Over the past fifteen years of accounting practice sales, we’ve seen this scenario many times. One answer to this situation is obtaining outside financing for your practice acquisition.

Why Consider Outside Financing? There are many benefits to using outside financing:

Preservation of available cash: Securing a loan from an outside lender is the most reliable and successful method of funding an accounting practice acquisition without using all of your cash reserves.

Enhance your offer to the Seller: The seller, like you, desires to preserve cash. You honor this when you take the burden of funding off the seller, which means the acquisition is more likely to close and be successful. If you were selling your business, how much would you want up front?

Gain autonomy: By providing a larger down payment through outside financing, you reduce the seller’s sense of risk and investment in the practice after transfer of ownership. This will result in more autonomy of ownership and decision making for you as the new owner, and enable the seller to focus on the transitional role of "advisor" rather than "creditor."

Extend loan terms/improve cash flow: Anyone who owns a business knows the importance of cash flow. Through outside financing you can secure up to 10 year repayment terms which will dramatically reduce cash requirements compared to the 3 to 5 year terms required on most seller

Insure sufficient capitalization: In any business, particularly one with seasonality, having sufficient cash reserves to carry you through slower times is critical. This is even more important in the months following an acquisition. Depending on the circumstances we can sometimes secure working capital in addition to an acquisition loan to help new owners through those first few months.

Buyer Beware! 

Not all lenders are equal. Lenders all have different areas of expertise and it is rare that a lender who is not experienced with practice acquisition financing for accountants is going to come through with a loan approval for you. If they do, it will typically be secured by other assets you have.

This is an area in which a broker can be of assistance to you. They will typically have relationships with suitable lenders. They will be experienced in the accounting practice sales process and be able to help you navigate any challenges that occur.

You can contact our offices, or even comment below, for information on accounting practice acquisition financing. You can also attend our webinar Financing Practice Acquisitions: Why Third Party Financing makes Sense.

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.

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.

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.