Most Common Mistake When Selling Your Accounting Practice or CPA Firm
I get this question a lot from principals that are working through the process of exiting their accounting or CPA firm. There are many mistakes that can be made throughout the process but I will discuss just one mistake that can impact your financial results significantly.
The One Mistake that can Impact your Financial Results Significantly During the Exit of Your CPA or Accounting Practice: Retention – Most contracts that are written for the acquisition of an accounting firm or CPA firm have something called a retention clause. This clause directly reduces the purchase price of the business for lost clients (clients that do not return after the sale). Many sellers believe that because they have a great relationship with their clients or because they are staying on for the transition, that there will be very little impact to the bottom line. The most recent AICPA succession survey quotes 75%-80% as the average retention achieved after a sale. In my experience, retention is better than this when a strong transition plan is in place but it certainly needs to be high on the list of items to consider when receiving offers. In my experience this can be somewhat mitigated by a strong transition plan and most of the companies we have helped have transitioned better than this average but it must be considered.
The length of the retention clause is also a very large factor. Typical practices have annual attrition rates of 5-10%. This is caused by people moving, death, divorce and a host of other reasons. While the original principal is involved in the daily practice, there are new clients that come in to replace those who have left and the practice revenue remains at or around the same level as the prior year. After sale however, the principal cannot normally replace these clients any longer and so the practice by nature is going to fall in revenue due simply to attrition. If the length of the retention clause is over 5 years, then you could have between 25%-50% attrition over the life of the deal. Negotiating a fair contract and understanding the nuances of this recurring issue is of paramount importance.
Increasing Your Chances of Having a Successful Transition When Selling Your CPA Firm: Key to establishing good retention is also the expertise and the personality/culture of the buying entity or individual. Don’t be afraid to do some buyer due diligence up front. You can increase your chances of a successful transition simply by understanding who you are selling to and what their intentions are.
There are many other strategies and tactics that can mitigate the negative effects of a retention clause to a selling principal. If you find yourself considering exit this year be sure to associate yourself with someone who has experience in selling accounting or CPA firms in this market. Berkshire Business Sales & Acquisitions has this experience with helping more accounting practice and CPA practice entrepreneurs exit than any other intermediary in the Phoenix Metropolitan Area.