The easiest practices to sell, and the ones that get the best multiples, are the most focused and profitable practices. That statement is quite obvious, but it is often a forgotten truth when it comes to succession planning. There is a lot of buzz going on in the profession about the need for succession planning and about how unprepared most accounting practice owners are. While I’m a proponent of planning in general, some of the succession planning advice out there seems to be quite misleading for smaller firms.
Here are 3 important topics for owners of accounting practices to consider when thinking about succession planning:
1-Internal vs. External Sale:
The fewer partners and employees a firm has, the more difficult an internal succession is likely to be. Internal succession makes perfect sense for larger firms for many different reasons. Large firms have human resources and recruiting departments. They have systems in place to continually seek and nurture people who demonstrate partner potential. It would also be impossible to conduct an outside sale every time a partner wants to retire. Large firms tend to have a clear partnership path to replace retiring partners.
Small firm succession planning needs to factor in a few very important differences. First of all, the fewer staff you have, the less likely you are to have a good candidate to take your place. Most people are just not cut-out to be business owners. Think about your clients and think about what it takes to run a business. The most successful business owners are a different breed. Most of your employees are not likely to want the responsibilities of ownership and if they do, they still may not be capable of doing so. Entrepreneurial accountants are a small percentage of the profession. It is quite likely that you have no one on staff that is willing and capable and no matter how hard you might try to make someone capable, it simply won’t work. Secondly, if you are lucky enough to have one such individual on your staff, then you are limiting yourself to one buyer. It is far easier to negotiate fair-market terms with a larger universe of buyers….and thirdly, they may not have the money to purchase. (minor detail right?)
2-Grooming a Person to Take Over:
So…if no one’s capable in-house, why not invest in hiring someone to groom? This can work, but I’ve talked with so many accountants who have tried this approach and for whatever reason it didn’t work out. Usually, it is for one of the reasons as stated above and the person ends up leaving the firm. If you are seriously considering this approach, you should get a non-competition agreement from this person when they join the firm. You should also do your due diligence before hiring them – about their level of ambition and financial means. (If they are truly ambitious, why do they want to be an employee?) Remember, you are still limiting yourself to one buyer. How can you negotiate an arms-length transaction when your entire succession plan depends on one buyer?
3-Improving Your Practice-The Better Succession Plan-Focusing on Practice Improvement as the Primary means of Planning for Succession:
As I mentioned in the opening, the easiest practices to sell and the ones that get the best multiples are the most focused and profitable practices. Grooming, mentoring, and creating an internal succession plan has significant costs. Perhaps most costly is that it requires a heavy investment of time and energy from the owner(s). Energy is often very precious to retirement minded practitioners. Why not use that energy to make significant improvements to your practice over a 3 to 5 year timeframe? You will create a far more marketable practice, and you will probably have a lot more fun doing so.
Although our sole focus is on accounting practice sales, mergers and acquisitions, we have numerous resources to help you build a better practice. Please click here to see our powerful tools to help you optimize your accounting practice. What’s paradoxical about this approach is that when owners make significant improvements, they don’t mind working longer. Improving a business and making it more profitable is fun and energizing. It’s also the best, the most practical, and the only succession plan that most small practice owners need. It’s simple really…build something that people want to buy!
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)