In our last post, we explored the market dynamics for profitable, desirable accounting practices. In the overwhelming majority of cases, owners of profitable accounting practices can get all cash or all cash equivalent terms at closing-with absolutely no contingencies after closing.
In this segment, we will discuss why fixed-price deals help to create superior transition results post-close.
Earn-out deals create very blurry lines of responsibility between the buyer and the seller.
When the structure of the deal is clean, there are no questions about who is responsible for what. The buyer is empowered immediately to operate the practice as he/she sees fit. Control battles are eliminated. Clients and staff immediately know who is making the decisions, and that kind of clarity is crucial for a successful hand-off.
An earn-out sale almost always is accompanied by a lengthy transition arrangement where the seller works in the practice for years after closing. Not only is this completely unnecessary with the right buyer, it is a drag on results at best, and very harmful at worst.
The long transition is built in because most sellers won’t relinquish full-control when they have not received most of their money up front. Fixed-price structures allow for fast transitions which are actually better for client and staff retention.
The long transition is a problem because of the nature of human relationships. The seller has a relationship with clients and staff and the buyer has to develop his/her own relationships. When the seller is still active in the practice, this hinders the ability of the buyer to nurture those bonds. People have a tendency to continue to look to the seller for answers. Without going into all of the reasons here, perhaps an extreme example will help to paint the picture:
Suppose you are getting married to a person who has been married previously. As part of this new arrangement, the first spouse agrees to continue on as a “marriage consultant” in an effort to make the second marriage work. He or she agrees to live in the home with you for the first year or two to make your life easier. He or she will be there to give you helpful tips on all sorts of issues that are bound to come up…such as…to tell you how to avoid arguments, warn you of annoying family members, identify pet peeves, etc. After all, who would know better?
Clearly, this is an odd arrangement; so why apply it to a business transfer? A buyer who is reasonably good at client relations and technically capable does not need the seller to stick around.
Buyers will reach their potential much more quickly when they are free to lead the practice.
After all, isn’t that why people go into business for themselves in the first place; to lead?
(If you would like to know more about our compiled statistics for deal structure for our 2013 deal flow, please email us at firstname.lastname@example.org with your contact information. Please type “deal flow” in the subject line.)
To go to part 3 of this series, click here.
Check out our podcast series on our resources tab.
Buying or listing a CPA firm? We assist both parties in planning and implementing a strategic, successful transition of clients and staff.
About Brannon Poe: Brannon is the founder of Poe Group Advisors and has been facilitating successful accounting practice transitions throughout the US and Canada since 2003. He is also the creator of Accounting Practice Academy. Brannon is the author of the Accounting Practice Insights Blog and hosts the Accountant’s Flight Plan” podcast with other top thought-leaders in the accounting profession. Brannon is an E&Y alumnus. He has worked with some of the most successful and seasoned CPAs in the industry and has been privy to the behind-the-scenes methods that these clients have used to build highly profitable practices along with capable and independent teams. Brannon has authored multiple books, including Accountant’s Flight Plan – Best Practices for Today’s Firms (published by both the AICPA and CPA Canada) and On Your Own: How to Start Your Own CPA Firm, Second Edition (published by the AICPA). Brannon is passionate about entrepreneurship and is the president-elect of EO Charleston (Entrepreneur’s Organization)