As an accountant grows older, it is important to consider not just retirement, but the way in which one wants to exit the industry. What suits you and your exit strategy? Would you best benefit from selling your practice, merging, or implementing an internal succession plan?
Of the almost 11,800 public practice units currently operating, 89% are represented by sole practitioners and two-partner firms. With the average age of practitioners over 50 years-old, it is expected that there will be considerable movment in this field in the coming years. CPA Australia statistics identify that approximately 42% of members may ‘have a succession event for their practice’ within the next five years.
To implement a successful succession strategy, you must start planning ahead of time and not just leave it to the last minute. As Leadership Circle Asia Pacific’s director of commercial and governance Greg Lourey has said that “Succession planning is not a 12-month-out process – Partners need to be looking out five or more years to manage this process well”.
Here are five succession considerations to keep in mind as you begin to plan your exit.
In preparing to move on from your firm, your first step is to determine what the market value of your firm is. Just what will a buyer pay for your firm right now? And is there anything you can do to increase its value before you move on?
As with any other business, valuation is generally based upon:
- Capitalization of future maintainable earnings.
- Industry standards.
- Net book value.
- Discounted cash flow.
And then there are the factors outside of your control. The economic climate, interest rates, and the supply & demand of firms for sale at that particular time all play a role. Right now, the matter of supply & demand will play a significant role in your valuation due to the market saturation currently underway.
SUCCESSION THROUGH SELLING
Selling a practice is the most common form of succession. Buyers typically fall into one of the following groups:
- Employees from a firm looking to go into business on their own.
- Employees from your own firm.
- First-time entrants to public practice.
- Another smaller or similar-sized firm seeking to expand their business.
- A larger firm wanting to increase its fee base or its geographical footprint.
It is worth considering who the likely buyers for your firm might be before considering ways to increase the value of your firm. A larger firm, for example, is less likely to be interested in your infrastructure, but rather they will be interested in your existing client base and income stream. If you do want to target a larger firm, you are best-off investing in your staff who have existing relationships with your client base and historical knowledge of their accounts. Investing in infrastructure is wasted money in this scenario.
If the likely buyer of your firm will be an existing staff member or a practitioner looking to set out on their own, infrastructure is going to be a valued resource. If this is the case, keeping staff size down, investing in new hardware, and implementing software that values robust functionality and automation will heighten the value of your practice.
There are several ways to develop an internal succession strategy, a practice can consider assisting existing senior staff to achieve partnership. By bringing partners through in-house, it ensures that continuity exists for clients and staff within the practice. It also provides motivation for staff that show long-term promise to stay with your practice instead of launching their own practice in competition against your own.
As most practices are run by sole practitioners or two-partner firms, internal succession will usually require selling your fees to the incoming partner.
ESTABLISHING A PARTNERSHIP OR MERGER
If increasing the value of your practice is a priority, an effective way to achieve this is to expand the size of the practice and its fee base. This can enhance the opportunity for your practice to become a more attractive target for investment. A partnership or merger can also open the door to a pool of potential partners who may be in a position to buy you out.
There are three forms that such a business arrangement can take:
- Partnership – Two of more practitioners carry on business in common, with joint ownership, participation in gross returns, sharing of profits and losses, and the exercise of partners rights.
- Consolidation – A larger company purchases smaller firms, consolidating them into a larger practice. The company can then implement efficiencies and savings by sharing resources. Depending on the size of your own practice, you can prepare your firm to become an acquisition target, or take on the role of the larger company and buy smaller firms to integrate into your own company.
- Merger – With benefits similar to a consolidation, here two firms combine to become a larger firm. The equity of partners is typically based on the proportionate value of each firms fee base.
Eventually the day will come where it is time to leave your firm. While you may have spent several years planning for the event, your exit comes with legal, financial, and personal considerations.
- Finance – Your final payment transaction will likely be subject to heavy taxation, so ensure that you have structured your financial matters in such a way as to derive the maximum advantage from existing tax rules.
- Legal – As is common when you leave the firm, you will likely be asked to sign a declaration when you exit that restricts your future business movements. Typically, this will constrain you from launching another similar business for a specified timeframe or within a particular geographical boundary.
- Personal – This can be the most difficult for some practitioners and it is important that you are prepared for the radical lifestyle change that can come with retirement. For many, leaving behind their practice is leaving behind a daily lifestyle that was comprised of long hours, constantly being available on-call, and limited opportunities for holidays. While saying farewell to that may sound like a wonderful dream, the reality can be disconcerting for many. As you leave the professional world behind, ensure that you can transition into some form of activity, whether that be a holiday, project, or volunteering your time.