There is a myriad of reasons why anyone would sell their business. This concept also applies to the accounting practice industry, along with a few industry-specific nuances.
The number one reason that a principal or principals decide to sell their firm by far is retirement. This is not the only reason, but most practice sales we see today in the accounting industry are for retirement purposes.
According to the Census Bureau, baby Boomers own approximately 2.5 million small businesses across the United States. In a recent survey by Wilmington Trust, 58% of these small business owners have not completed any succession plan, which means they will try to sell the firm when the time comes. This group in 2023 will be between the ages of 59 to 77.
These simple demographics are why we see the bulk of firms being transferred for retirement purposes. Health concerns, staffing problems, burnout, new venture, partnership conflicts, and firm distress follow this.
Below we will explore these reasons and comment on the impact this has on the industry.
Table of Contents
- Retirement is the number one reason owners of accounting firms choose to sell.
- Eroding Health Concerns
- Burnout/New Venture
- Partnership Conflict/Firm Distress
Retirement is the number one reason owners of accounting firms choose to sell.
As mentioned above, this is largely just demographics. The boomer population is reaching retirement age. One might think that CPAs and accountants would be doing all kinds of succession planning for their firm, but this is simply not the case. If you have not planned for succession, any principal at retirement can sell or just walk away. As a specialty broker of CPA and accounting firms, the vast majority of incoming deal flow is from retiring principals. As we discuss other reasons for sale below, you must consider the demographics because it’s often a combination of reasons, with retirement being the overwhelming cause and many of the other reasons are supplementary and in conjunction with retirement.
Eroding Health Concerns
As we age, we encounter deteriorating bodies and minds. We all wish it were not so, but eroding health is a fact of aging. Often when we see principals retiring before 65 years of age, the cause is at least in part health-related. Cancer, Parkinson’s Disease, and Multiple Sclerosis are just a few of the many health-related issues impacting retirement.
Other physical ailments include back trouble, nerve-related illness, heart conditions, and many more. It’s not always a physical ailment that drives retirement but mental health concerns as well.
We have seen early onset Alzheimer’s, Dementia, memory loss, and a general slippage in the crispness of the mental construct or other mental health-related problems. A significant contributor to the principal’s health is the health of a spouse or a child.
Health or mental health problems with your spouse or child demand that principals spend more time at home and re-prioritize business activity often causing a need to sell.
We have spoken extensively in our past blogs about the problem of human capital and capacity that the accounting industry is currently facing. Aging staff, eroding health of staff, and the difficulty the industry is facing with regard to finding qualified and credentialed replacement candidates to fill open positions is likely the most difficult issue this industry faces right now.
The closer a principal gets to retirement often correlates to the age of the staff servicing the clients. Firms that are down one or two staff members and forced into the marketplace to attract new employees are often frustrated with the quality and cost of new staff.
The demand for staff has never been higher and this also drives wages up, which reduces the profit of the firm. We have seen many principals call wanting to sell because they cannot find and hire quality staff. The principals are aging themselves and face constricting margins due to the rising cost of labor and software.
Their age, in conjunction with the difficulty of attracting staff, often drives the sale decision. Unfortunately, if down one or two positions in their staff, it may make the firm unsellable because few buyers have any idle capacity.
The accounting profession can be lucrative but is also incredibly stressful. Over time, the deadlines inherent in this industry, rising costs, margin compression, human capital needs, rapidly changing software, and the pressure to get everything right for the client cause a high burnout. This can trigger a sale decision.
In addition, sometimes burnout causes the desire to be in a different profession or to enter a private industry where principals feel less pressure. Burnout often drives a principal to sell and pursue a new venture. Pursuing a new venture can be a stand-alone reason, but it’s likely not one of the top reasons for the sale itself.
Partnership Conflict/Firm Distress
General firm distress caused by market conditions or partnership conflict is another reason we see driving accounting firm sales. Partnerships are hard to operate, and many times there is a conflict that arises between the partners. Once trust is lost or disagreement among partners becomes personal in nature, selling the firm is expected.
Market conditions can also drive distress. We mentioned the capacity problem firms face today. Still, margin compression, the pace of change within the industry in technology and software, and the constantly changing and complex IRS rules for compliance can put the principal, the staff, and the firm in distress.
Distressed firms often need to be sold at a discount because it forces a buyer to address the distress, which costs time and money.
With all these top reasons, driven mainly by the aging demographic, we expect to see more firms on the market than demand can assume. A buyer’s market means there are more sellers than buyers. Given the demographics alone, we expect more supply than demand for years.
These demographics impact selling principals in a negative way as market forces will cause sellers to consider concessions in deal negotiations, and it may affect their ability to sell at all.
If you are still several years away from retirement, you should consider engaging in this process now. It is more important than ever that you can differentiate your firm from other firms on the market, and it may take more than one year to sell the firm.
Berkshire Business Sales & Acquisitions are experts in this field. We have been selling accounting and CPA firms in Arizona for over 15 years and have watched the market change considerably. We are intricately detailed in finding the differentiation points needed to market and sell your firm and have existing networks that will help dramatically increase the odds of a successful sale.