Should Accounting Practice Principals Stay with The Firm After It Sells

The title is stolen from the lyrics of an old song by The Clash. “Should I stay, or should I go now? If I go, there will be trouble. And if I stay, it will be double”. The lyrics could not have said it any wiser.

During definitive agreement negation for an accounting practice, there is a big decision to be made. Both buyer and seller have a say in this decision, but what is suitable for a buyer might not be good for the seller.  It’s an emotional and strategic decision with a significant financial impact on the overall sales price. 

This blog will explore the nuances of this decision from the perspective of the buyer, the seller, and the other constituents.

Table of Contents

Earnout Period

To set this up a bit, when selling a small accounting firm, you almost always have an earnout component to the sale. This is a part of the purchase price that must be earned over time and is almost always tied to revenue. An earnout component is needed because many of the clients develop a personal relationship with their accountant over time.

In addition, some of the clients might be relatives or related parties that may not transfer to the new buyer when the practice is sold and the selling principal leaves. The amount of the earnout and the term of the earnout is negotiated between the buyer and the seller and their attorneys. The impact of this decision and the resulting financial implications are crucial to understanding. 

The Buyer Wants Downside Risk Protection

The buyer wants downside risk protection if clients don’t make the transfer after a sale. It’s a reasonable and common-sense-based request. The seller usually understands this and grants some degree of the earnout. If the selling principal stays on to work after the sale, however, the earnout period expires while the principal is still at the firm.

Clients (like relatives) would likely not leave until the selling principal leaves. Client losses and the resulting revenue loss would happen after the retentive period, and the purchase price would, therefore, not be affected.

The buyer also wants to try to get as many of the clients to stay as possible. The substantial goodwill value in a practice is based on the clients.  If they leave, the firm is worth less than was paid for the firm.  The best way to keep a client is often to keep the seller and employees intact for the first year or two after the sale while the new principal or reporting structure has an opportunity to form relationships with these clients.

Alternatively, if there is going to be a loss of clients after the sale (which there generally is), the buyer wants this to happen sooner rather than later so these losses can be used to offset the price of the firm in the retention calculation described above. This would support having the selling principal leave right away.

Retiring sellers are sometimes resistant to change and may have trouble supporting the new direction of the firm. Another reason Buyers may want to have the exiting principal leave right after close. 

The Seller Usually Wants To Stay On During The Retentive Period

The seller, if mentally and physically prepared to continue to work, usually wants to stay on through the retentive period. It’s difficult to fully retire and turn your baby over to a stranger who may either be very good with clients or a really bad operator who drives clients and employees off.

The seller feels if they stay on with the firm after the sale, they can help to mitigate that risk.  It’s a significant risk and should not be underestimated. If the seller leaves right away and the buyer loses a bunch of revenue, it’s the seller’s loss because it would occur during the retentive period.

There is also a theory that a buyer might drive some clients out intentionally so they are left with just the cream of the crop.  A simple 1040 client with a W2 and no other services is not worth much, but an S-Corporation principal may have multiple tax returns, payroll, bookkeeping, and other services.

Some unscrupulous buyers might drive clients out right after the sale if they are not highly profitable, which would force revenue down, and the selling principal would pay the price.

Get Help From a Professional

As you can see, these decisions are complex and filled with substantial financial risk to both sides.  Discussing these variables with an accounting practice broker like Berkshire can be highly impactful and financially rewarding for you.  If you are contemplating exit and want help discussing these items, marketing your firm, and finding the right buyer, call Ryan Gipple at 602-614-3583 or contact him online.

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