The selling season for accounting practices and CPA firms is well underway. Because there are more firms selling than buying (due to the Baby Boomer Exit), each nuance of the selling process must be considered, and action is taken where appropriate. Firms specializing in taxation have an incredible challenge that many existing principals are unaware of.
The selling season is very short, leaving just a few months to find a buyer. This may not cause any issues if there are ample buyers but in today’s market, sellers must compete head-to-head with other sellers for a single buyer. This piece will explore these issues and provide some general solutions to the problems they present.
The first tax deadline of the year is generally around mid-April. Tax Principals and staff are up to their eyeballs completing and filling tax returns from February 1st, often all the way through the first deadline referenced above. By the time they reach the end of the season, they are incredibly tired, worn out, and stressed out. Many tax practitioners are hard to find immediately after tax season because they are at home catching up on sleep and/or taking a much-deserved vacation. It’s completely understandable, as they have not spent any quality time with their spouse or children in the last 3 months. For approximation’s sake, we will say that this recovery period generally takes around 14 days.
Once the tax season deadline has passed and they have taken their recovery period, they head back to work. During the next 3 to 4 weeks, they are catching up on work they neglected during the deadline season. Taxes are not the only activity they do for their clients after all. There are tax projections for an upcoming client’s sale of a business. There are cash flow projections on a client’s new capital-intensive expansion. There are financial reviews, compilations, and potential audit work that need to be completed as a boatload of special projects that clients have been waiting on. I haven’t met a tax principal yet that doesn’t care about their clients. They want to provide good service and get their client’s needs taken care of. So, for the next 30 days, they are busy catching up!
It’s now June 1st, and they have not done their own accounting and tax returns yet. You should all know that it’s the “cobbler’s kids who get their shoes last.” They follow up with the friends and family that they provide per gratis returns, and then they complete their own returns. This also takes time but in order to start their own exit process, they need to make sure their books are in order. Let’s estimate a 2-week period to get all this work done (or at least to a place where they feel good about it). This takes us to June 15th, when they start reaching out to “that guy that knows someone” who might want to purchase their firm. After all, if “that guy” buys it, they can avoid paying a substantial commitment to an M&A guy or broker who may help them sell. This is in no way criticism. I would do it too if I were in their shoes (pardon the shoe pun). The first meeting, which is just an introductory meeting, takes a week to put together. There are no financials exchanged or deal terms discussed. The real work only begins in the week or two following the initial meeting after NDAs (Non-Disclosure/Confidentiality Agreements) are compiled by their attorney, routed and signed. We are now in the middle of July, another 3 weeks before they realize that “that guy” doesn’t have similar expectations on deal terms, and they must reach out to an intermediary.
The intermediary takes 2 weeks to obtain their financials, price the firm, sign listing contracts and prepare the practice for sale. That means the intermediary only begins to market the firm in early August. Do you know what starts happening in August? Clients who put off filing in the first deadline (many for legitimate reasons) are now sending in their information for the upcoming extensions season. There are tax deadlines in mid-September and mid-October. This is ok because at least their firm is being marketed during this time. So, while they may be under some pressure during this period, it is usually a little lighter than the first deadline in April. Summertime, in general, however, brings all kinds of delays as buyers, sellers, attorneys, intermediaries, and bankers all go on vacation, causing a general slowdown of the whole process. We won’t assign any additional delays here, but you are likely beginning to understand the real problem.
Financing adds considerable delays. Once you find your buyer and your attorneys and intermediaries put a deal together, it must go to the bank for underwriting. Banks take, on average, 60 days to complete and fund a deal. So, unless you are solidly in a deal with a buyer by the end of October, you will not close by the end of the year. If you are not even marketing your deal until August or September, then there is almost no time left to find the right buyer, make a deal, and get it through the bank.
There is another unfortunate phenomenon that takes place during the tax practice selling season. Buyers are often most active early in the selling season. They have grown through acquisition plans and goals, and so they want to find their firm and get it under contract and closed. Each month that goes by, specific buyers find their acquisition target and exit the buyer pool. Intermediaries know this phenomenon well. The later in the year it gets, the pool of available buyers and the chances of success both shrink rapidly.
We just walked you through what happens to many principals during their year of exit. The selling season is only 8 months long. When it’s shorted by bank financing, summer vacations, extension season, and other delays associated with administering a practice, it leaves just a few months to find a buyer. Below you will find just a couple of tips for those considering a sale.
Table of Contents
- In the year before you want to sell, go talk to everyone you think might be a player in your exit.
- Select your intermediary in the year before the sale.
- Make the sacrifice to prioritize your chosen path and go full speed in a week or two right after the first season deadline.
In the year before you want to sell, go talk to everyone you think might be a player in your exit.
This includes intermediaries (December and January are good months for this). Have the meetings and exchange deal terms and expectations with them to see if they are a legitimate candidate for the beginning of your exit. If a buyer makes an offer, consider taking it a year early or accept a non-binding LOI for next year. Good buyers are hard to find. It’s likely that you will need to stay on a year (or even several years) to properly transition your firm and meet the buyer’s expectations anyway.
Select your intermediary in the year before the sale.
You do not have to go into a contract with them but do the dance, so you know exactly who you will use next year if an intermediary is the correct answer for you. You can also review their contract, negotiate and make changes if needed. In the year of the sale, however, do not mess around. You may need the entire buyer pool and extra time to find your buyer.
Make the sacrifice to prioritize your chosen path and go full speed in a week or two right after the first season deadline.
If you are talking to someone, but it’s far from done, your intermediary will likely negotiate a significant reduction to commission if it’s a buyer procured by you. A good intermediary can change your leverage substantially in any negotiation. If you are talking to only one party, you have no leverage. You either exit or you don’t. Buyers know this. An intermediary should bring at least the appearance that you may be talking to others which changes leverage and timing considerably. Savvy buyers may stretch you out to where you feel like you have no choice but to accept lower cash out, deals where you have a higher level of risk, or a lower price. While this is simple advice, it comes from a veteran in this space who sees these issues regularly.
An intermediary is not always the correct answer, but if you would like to talk to an intermediary in the search for your right strategy, consider Berkshire Business Sales and Acquisitions. We have years of watching these situations unfold and a tremendous amount of deal experience in selling accounting practices and CPA practices.
