All posts by John Ezell, CPA

Two-stage deal structures can work in certain circumstances.  Basically, a two-stage deal structure is when you have an initial period (stage one) where the firm’s cohabitate together, typically into the buyer’s existing office, and then close the transaction and the have the seller retire at some future date (stage two).  

There seem to be some initial advantages.  It allows for a longer transition period.  It also allows for the buyer to not start paying the seller for the ownership of the practice right away because the seller will continue to earn the same amount of money that he has been earning.

But there are some problems in two-stage deal structures.  First, there’s no money upfront and therefore there is not enough commitment by the buyer.  The seller is taking a big risk when they move in with the buyer.  The seller will lose his business identity when he merges in with another firm.  The identity that is developed over the next year or two will be the buyer’s business identity.  So if it doesn’t work out and the seller has to withdraw, he has to start his business identity all over again.  

Goodwill can diminish over time and sometimes it does not take for the value to decrease, especially when things are not going well.  In addition, while the seller may be the accountant of record for the client, there will be other staff and other partners involved with that client.  Let’s say the buyer decides they don’t want to execute on the second stage.  Or the buyer and the seller decide they no longer like each other.  The seller will need to leave and recreate an entirely new office.  When that happens he may lose some of his clients and his staff to the buying firm.  

Some of this can be settled in contract issues, but it can get complicated real fast.  So beware of the two stage deal and make sure you do it right.

Comments (0) • Posted September 30th, 2011 at 2:16pm

No one lives forever.  A day will come when it is time for you to retire, or to begin a new chapter in your life.  When that time comes, if you have not planned for a successful transition of your practice and your clients, you will find that many options have been lost to you.  Whether you are considering a merger or sale or planning for an internal succession, Succession Planning begins with your decision to take responsibility for your future.

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.

Comments (0) • Posted June 9th, 2011 at 7:37am

Even though its tax season, it is still very important that you consider ways that you can increase the value of 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.

Comments (1) • Posted March 3rd, 2011 at 12:55pm

A friend of mine ran a global consulting practice for a Big 4 firm in the 1990s. Eventually his firm spun off the consulting group and went public. After the IPO, he left to start his firm.

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.

Comments (2) • Posted September 29th, 2010 at 11:32am

You’ve identified a great practice that you want to acquire. The seller wants all cash up front. You want to hold on to your cash. How do you make this happen?

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.

Comments (0) • Posted August 13th, 2010 at 12:15pm

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 (3) • Posted July 9th, 2010 at 11:02am

In my last blog, I asserted that some brokers lie in order to induce practice owners to list their firms. So, how should a broker approach a practice owner?  They should be upfront and honest.  

First, I think it is very important to learn information about the practice and the owner before we talk about price and terms.  This frustrates some practice owners because they usually ask about price and terms early in our conversation.

Ultimately, it is not fair to a potential seller for me to tell them the price they want to hear just so I can get the firm listed for sale.  My reluctance to inflate a price means sometimes I lose a practice listing to another broker because they “quote” a higher price.  That is OK with me.

Next, even if I think I know who the buyer might be, I still want to market the firm to many prospective buyers as if I do not know who the buyer might be.  That may cost my company a little more in advertising and marketing the firm for sale, but it is important that we identify the “right” buyer for a practice and not sell to the buyer we just happen to have in our back pocket.  It is important to me that I do not get calls from buyers and sellers a year later saying they made a bad deal or the firm was a poor fit.  Frankly, I like to sleep at night.  

I look at it this way, either I will get the listing down the line when they figure out the other broker’s tricks or maybe the other broker did have a desperate buyer that was willing to pay an unrealistic price.  In both cases my goal is met, a happy seller and buyer.

Comments (0) • Posted April 30th, 2010 at 3:15am

It is an unfortunate truth that sometimes brokers lie to get listings.  It is an easy thing to do when a listing is on the line.  You see sellers usually want to get the most money they can with as much cash down and with the least possible hassle.

So an easy way to get practice owners to sign up, or list, is to inflate the price you tell the seller they can expect, assure the seller it is easy to get all cash and tell them you have a “special” buyer ready to pounce.  Great, where do I sign up?

I have to admit; early in my career I may have inflated a price or two just to get the listing. I think this comes from fear and inexperience. Fear that if I did not tell the client what they wanted to hear they would not hire me. Inexperience because an experienced broker knows their worth is not in the number of practice they list but in the number they actually sell.

Timing is a funny thing because as I wrote this a friend of mine received an email message that stated, “A buyer contacted us specifically about buying your practice in his city (I will keep it confidential). If you’d consider selling this year we will provide more details regarding this particular buyer.”  My friend sent it to me because he found it funny since he does not own a practice and he never has.  I found it disturbing because it is such an obvious trick to get an owner to call the broker.

We work hard in our role and in maintaining our ethics.  We see ourselves as valued advisors, but struggle with the market perception that “brokers” are not trustworthy.  After all, how trustworthy is a relationship based on a lie?

Comments (2) • Posted April 21st, 2010 at 4:43am

Many accountants we meet are excellent business advisors but sometimes neglect to take their own advice, especially when it comes to firm development and succession planning.  For many accounting practice owners, the exit strategy has been thought about and consists of building up a client base, adding a few staff, and then selling the practice to an employee or younger partner, merging with another firm, or the selling their accounting practice to an outsider.  Then, the plan is typically shelved until just before the accountant is ready for retirement.

Steven Covey, in his best selling book, The Seven Habits of Highly Effective People, advises people to begin with the end in mind.  So the wise accountant, even with no plan to sell their firm for several years, develops their firm keeping their exit in mind.

The reason this is typically not done and the plan is shelved until just before retirement is usually a flawed perspective of succession planning.  When asked what succession planning is most will reply that it is a plan focused on a single succession event.  We think succession planning is a development process that leads to an event.  The focus is spread across a series of development stages and growth steps with the natural outcome being the sale or merger of the firm to an outside firm or the continuation of the firm under new internal leadership. 

The succession plan begins with understanding your firm and your long term goals.  Only then can you begin developing, documenting and executing a succession plan.  The plan should be an all inclusive roadmap of your development stages and key milestones including client acquisition, staff development, pathways to partnership, expansion of services.  The succession plan should be developed today if not yesterday and implemented long before the seller or partners approach retirement age.

The result of a well-designed, implemented succession plan will be a larger, more profitable and easier to manage firm that can be transferred with greater ease to the successor.  The reward for the exiting owner is in greater value and consideration at the time of succession and a stronger legacy for years to come.

Comments (2) • Posted April 19th, 2010 at 7:00am

We heard from an accounting practice owner last fall, “My practice is doing about 10% more than last year”, he said.  That caught my attention since we were in the midst of a recession.  He attributed the growth to his “marketing efforts the past few months.”  Last week we checked back in with him to ask how tax season was going and he responded that his efforts were paying off and he was having the best tax season in his practice’s history.

It’s no wonder his practice is doing well.  He developed a marketing plan and executes his plan.  This may seem like a no-brainer for many, but the fact is many accountants do not plan when it comes to marketing.  We surveyed more than 1,000 accounting and tax professionals last year and 48% responded that they seldom or never follow a strategic marketing plan.  Only 21% of respondents often or always follow a plan.

Can you imagine investing in a company that admits to not creating or following a marketing plan?   A company that is going to rely solely on referrals and repeat business clients from last year to help them achieve this year’s goals. 

Now, I am not saying that every firm needs a marketing plan or that every plan needs to be extensive.  Some accounting practice owners are happy with the status quo.  But 54% of respondents to our survey expect their practices to grow this year, both in revenues and in number of clients.  Many are going to hit that number by accident.  Others will do it by keeping busy and working hard.  A majority or going to need to work hard, be smart and following a strategic plan if they hope to achieve this goal.

My advice is to spend some time after tax season looking back at what worked for you and what didn’t work. Then, lay out a simple plan on how to leverage those successes throughout the remainder of the year.  Then, implement and follow the plan.  You will likely need to make adjustments during the year, but having a roadmap is an important starting point and will help you document lessons learned so you can tune and improve the plan year to year.

We will have discussions and posts related to this topic throughout the year.  Keep an eye open for them let us know what you think.

Comments (0) • Posted April 12th, 2010 at 8:55am