In 2018, we had quite a few sellers approach us about selling just a portion of their practice. In some instances, this was driven by a desire of a partner to retire and the lack of desire on the part of the remaining partner to take on all of the clients and work of the retiring partner. In other instances, this was a desire of a solo operator to reduce workload in anticipation of retirement. And in still other discussions, this was driven by the practice owner’s desire to focus on just a single service or to reduce the number of services provided (i.e. focus on financial planning and sell all the business related to solely tax clients).
There are several things to be aware of if you are considering this line of thought:
We will start by stating the easiest solution is usually the best. Keep it simple and it is more likely to be successful. From the perspective of clients, staff, the buyer, and banks It is far easier for you to sell your entire practice than it is to sell just a portion.
- In regard to clients, if you remain in business but transfer them away, you need to be prepared with a really good explanation and a strong resolve to turn them away if they try to return to you after the sale… some will try to return because they don’t like change. Also, be very aware of networks amongst your clients like clients referred by other clients, or family groups, or business groups. You will want to either keep all tied to together or transfer them all. Keeping some within a group and letting others go usually will not go over well.
- In regard to staff, a similar issue to clients is hurting the feelings of those you don’t keep and possibly offending some of those you do keep. Can you keep them all if you sell off part of the business? If not, who do you keep, who do you let go, and how do they all feel about that? Handling this carefully is critical if both you and the buyer are hoping to experience limited disruptions in your businesses.
- In regard to the buyer, what are their concerns about you as a competitor if you remain in business? How is the sale defined? Are you just selling the business associated with your worst clients? A very solid definition of the sale, the clients being transferred, and non-compete will help, but you will probably need to give the buyer significant reassurance that the sale is final and you will not provide service to the transferred clients or compete with the same service or client demographic moving forward. Defined liquidated damages clauses are one form of this reassurance.
- In regard to banks, they usually do not fund partial sales. The reason is simple—it is very hard for the seller to define the profitability of the portion of the practice being sold. We even had an instance last year in which the seller flat out refused to provide the bank any of the proforma information the bank requested. Even if the seller provides this information, the bank is likely to be somewhat skeptical about its validity.
- In regard to price and terms, because it is difficult to accurately define the profitability, defining price is a challenge. In addition, because the seller is typically not transferring all of the goodwill of the business or the whole going concern (name, reputation, email addresses, phone numbers, location, referral sources, etc.) this is really just the sale of a client list which typically brings a lower price multiple than a sale of the whole going concern with all the goodwill. For terms, a seller should not expect the buyer to take on too much risk because they may perceive the seller’s ongoing business already presents significant risk. This, coupled with the likelihood of seller financing, means the seller could take on an unusually high portion of the risk to complete the partial sale.
If you wish to have a relatively easy sales experience and receive top dollar for your practice with lower risk terms, then we would advise you to never entertain the idea of a partial sale. However, if circumstances dictate you must sell a portion of your practice, we would advise you plan to sell off a particular group or groups of clients tied to a specific service you provide (i.e. all 1040 only clients, all bookkeeping or payroll clients, etc.). You should also be prepared to seller finance, provide proforma financial statement you can explain clearly and accurately to the buyer, and anticipate the buyer and bank, if one does show interest, are going to be more concerned about your ongoing business and competition.
If you are considering a partial sale simply to slow down and lighten your workload, we would recommend an alternative approach. Wait until you are really ready to relinquish control of your business and, at that point, sell the entire practice and, assuming the economics fit, go to work for the buyer for a few years.
ProHorizons is a West Coast brokerage and consulting company focused on tax and accounting practice sales and acquisition services.
If you are planning to sell your practice and would like more information about our service, please visit our Sell Your Practice page and/or Request a Sales Information Page. If you are looking to acquire a practice, please visit our Buy an Accounting Practice page, see if there is a practice of interest in our Current Listings in the Pacific Region, and/or Register with us as a Buyer.