Planning Your Exit—or Entry—Strategy

Once upon a time, if you started your own CPA firm, you worked diligently over the years to build your practice. You built a strong, high-quality firm through long hours, a reputation for excellent work, and loyal clients. Business was brisk—you had a full client list, and people contacted you constantly to ask if you would be their CPA firm. And when you were ready, you sold your practice for a tidy sum and retired to live happily ever after in the Cayman Islands or the Colorado mountains.

These days the fairy tale has a slightly different ending.

The entire environment in which public accounting firms operate today has changed, which has inevitably changed the options available to firm owners as they plan their exit strategies. Those who originally planned to sell their firms and retire may find few interested buyers today. Why? Because individuals who would typically be in the experience range to buy a firm right now just aren’t there. When individuals who would now have about eight to ten years of public accounting experience were choosing a major in college or looking for their first jobs in the mid- to late-90’s, they weren’t choosing accounting. Instead, they were flocking to careers in finance and IT.

Those who did major in accounting were taking a step back and asking themselves if they really wanted to stay in public accounting long term. The owners and partners these young CPAs saw in action worked long hours, seemed like they were under a lot of pressure, and didn’t appear to have much work/life balance. Many got out of public accounting to pursue what seemed like a more balanced lifestyle in other areas of the profession, such as industry, nonprofit, and government.

The result is a shortage of experienced staff and typical buyers, reports CSCPA member Albert S. Williams, who has 30 years of experience consulting with CPA firms as they buy and sell practices. The staff shortage is coupled with an excess of client work and demands, as well. And while the increased work comes with increased fees and profitability, "there are very few CPAs wanting to buy firms now," Williams says.

Firm owners’ reasons for conveying (selling) or merging their practices vary widely. Some are ready to retire or change their lifestyle and plan to sell outright. Others want to sell but cut back their hours remain a part of the practice. Often, sellers are burnt out, tired of taxes, accounting, and the demands of busy season, and they may feel bogged down by practice management issues.

Today’s buyers don’t fall into one specific demographic, either. Buyers’ ages range from the early-30’s all the way to the mid-60’s, says Fred Mehring, owner of Select Business Group, Inc., which brokers sales of CPA firms and other businesses. One of Mehring’s sales, to a 64-year-old, was the result of a seller who wanted to cut back on work and a buyer who wanted more work. The seller was actually younger than the buyer in this case.

Regardless of age or gender, buyers have several things in common. "They want to be their own boss and control their own destiny," Mehring notes. "They’re an entrepreneurial type of person who wants to run the whole show and doesn’t want to work for anyone else. They’re results and goal oriented."

Mergers are often a way to grow a practice and benefit both firms involved. David Laundy, CPA, managing partner for Clifton Gunderson LLP’s (CG) Rocky Mountain Client Service Center, has been involved in multiple mergers. Laundy sums up CG’s key merger driver in one word: Talent. With a gaping hole in the eight- to 10-year experience bracket, acquiring a firm with these individuals benefits CG immensely. "We’re looking to supplement our existing marketplace, and we do that by adding talent that fits into our core services and niche practice," Laundy says. "We don’t want to buy clients. We’re really looking to add to our overall people and talent base."

Laundy observes that a merger often helps the merged firm take its client service to the next level through access to new resources. Entering a new strategic market also may drive a merger. The bottom line: "We need to feel that 1 + 1 = 3," Laundy says.

Conveyances and mergers usually start out as casual conversations before moving to the next level. But even deals that start out with an expression of mutual interest and a handshake quickly move into the due diligence phase, requiring more serious discussions by both parties.

Williams underscores the importance of buying a practice that is closely aligned with your own skills, style, and personality.

• The firm’s business should match your own technical skills—your accounting, tax, and business expertise.

• Practice management styles should be similar. Client documentation, billing styles, and client communication all play important roles. How are the clients used to working with the selling CPA? Don’t make sudden, drastic changes to what clients expect.

 • Personal characteristics such as gender, age, race, religion, political views, dress, appearance, personal habits, and overall personality also are important. You don’t have
to be from the same mold as the seller, but
Williams says extreme contrasts between buyer and seller should be considered.

Williams also suggests thinking as if you’re working on behalf of a client. "Distance yourself. Ask yourself, ‘Would I tell a client to make this acquisition, sale, or merger?’ It’s a strictly business, analytical approach. Be realistic." Williams says that sometimes CPAs are a lot more astute for clients than they are when working on their own behalf. So, he encourages CPAs to "use your professional skepticism. Involve your spouse, ask for help, ask someone to look over your shoulder."

Be alert for anything that doesn’t seem above board, as well, Williams adds. "If you get any refusal to look at documentation that’s not subject to privileged communication, such as financial background on the seller’s practice, that’s a signal you’ve got some problems," he cautions. Williams also advises having "a frank discussion with the seller about the details of the practice—almost a grading of the clients. Eighty percent of problems arise from 20 percent of the clients."

Set goals. What type of practice are you going to buy? Is it OK to have a few audits or not? Think about the fee structure and the geographic location. Have general ideas, rather than stringent expectations. Get pre-approved by a lender and know what size of practice you can buy. Buying an existing practice provides immediate cash flow and less risk than a start-up operation.

If you’re thinking about selling your practice, Mehring suggests planning ahead so you present a solid practice and a strong fee structure. "You’d be surprised at how many CPAs haven’t raised their fees in a long time and haven’t kept abreast of the market," he says.

• Keep a good file system for employers and employees. "This is basic, and the selling CPA probably recommends it to his or her own clients. He or she needs to do it, too."

• Stay abreast of technology to make your practice more attractive.

• Sign a short-term premise lease. Your purchaser may want to merge into an existing practice and will have to deal with the lease issues.

• "Have a succession plan," Mehring says. Unfortunately, few people are doing this.

• Have employees sign non-solicitation /non-competition agreements with the clients.

• Keep accounts receivable current. Mehring tells of helping with a sale where a firm had delegated this function to an employee, yet created no accountability. Once the employee was let go, it was discovered the accounts receivable were a mess. "Make sure you have follow through," he suggests.

• Consider using a professional, local broker who understands the uniqueness of accounting and practice sales. "It can be hard for owners to represent themselves," Mehring says. A broker can help qualify buyers initially and help determine if skill levels are a good match.

Laundy says that when CG considers merging with another firm, its top concern is commitment to staff. "We want to know you’re committed to taking care of your people and growing your staff professionally. We look for a good fit."