Valuing your Accounting
Practice When Selling to a
Partner or External
Buyer Joel Sinkin, President
Transition Advisors
Accounting Transition Advisors
National Consulting Firm working exclusively with
accounting firms on issues related to ownership transition
If there are 50 things you need to think
about in a transaction…….
……the smartest of us will think of only 35
Why is Activity So High?
Economy:
2006 through 2008
versus 2009 versus
2015 ???????
Niche Development
The Boomers
Is it a Buyers or Sellers Marketplace
Whose in trouble re valuations?
Three Ways to Grow
• One Client at a time
• Develop marketable niches
• Merge or acquire another firm
Starting the Transition Process
When should we start? • How many more tax seasons do you
want to work?
• Client “face time”
• Investments including technology, leases, staff
Things going to get worse as supply (of sellers) increases
vs demand: Whose in trouble?
Is Your Successor Ready?
Do you know . . . . . . .
……. why the other firm wants to merge?
……. the staffing situation / excess capacity?
……. their physical space requirements?
……. current technology and equipment?
……. financial strength or issues?
Bigger is not always better!
What is the Seller Thinking?
“I am irreplaceable”
“I am MASTER
of my own
domain!”
“Clients NEED
me!”
“If I retire, I’ll die!”
Methods to Structuring the
Transition of a Practice through an
External Sale
1. Straight sale
2. Buy in to a Buy-Out
• Buyer opts in an interest into the firm
• Buyer may or may not bring clients into the newly combined entity
3. Merger or Buy-Out
4. Carving or culling out clients
5. Two stage deals
• Sell equity but stay on
• Less exposure for Seller than #2 and #3
Two Stage Deal
• Stage One:
– Calculate the owner’s net
– Calculate the labor the owner uses
to achieve the net
– In multi partner firms, the focus
shifts from labor to chargeable hours
– Focus on how long the owner intends to devote similar time, have a back date!
Two Stage Deal
• Stage One: (external sale)
* Successor takes on all costs of
operations: Labor, rent, etc…
*Seller paid on percentage of gross
collections from original clients
* Tax advantages to both parties
* Seller’s time commitment not critical factor
Two Stage Deal
• Advantages to seller in stage one
– PCA agreement on steroids
– Mitigates loss of client fees
– Free additional back up and support
– Work less since administration and other items passed onto successor thus more time to transition, develop new clients and enjoy life.
– Higher client retention = more $
Two Stage Deals
• Stage One advantages to buyer
– Synergies
• Labor
• Rent
• Software
• Malpractice insurance
• Better transition
Two Stage Deal
• Stage Two – When does stage one end and
stage two begin
– Retention period commences if applicable
– How do we pay seller for a part time
continuing role
– What about new business developed in stage one or stage two?
– Buyout terms: what is the multiple
Five Main Variables for
Valuing a Practice
1. Cash up front, if any (2014 economy impact)
• Dependent on time of year
• The deal’s cash flow
• Treatment of accounts
receivable
• Time to recover investment
Five Main Variables for
Valuing a Practice
2. Retention clause/guarantee (2014 economy
impact)
• Collection deals, deals by percentage
• Fixed deals
• Limited guarantees
• Economy clause
Five Main Variables for
Valuing a Practice 3. Profitability
• Seller’s current profitability / billing rates
• Buyer’s anticipated profitability / billing rates
• Tax ramifications of deal structures
(goodwill vs current deduction)
4. Length of the payout period
Five Main Variables for
Valuing a Practice
5. Multiple
• Cause vs effect
• Multiple = effect
• Balance = cause
• Basic rule:
• Lower down payment, longer payout period
• Higher profitability, longer guarantees = higher multiple
• Tax clients vs Traditional Accounting clients?
Other Items to Consider
Other assets, either acquired or required
• Furniture, fixtures, equipment
• Leases and location
• Staff joining the new firm or not joining
Participation in Future Growth
• Fee increases from prior services
• Fee increases for new services
• Fee increases for referrals
• New business incentive clause
Sales – Internal v. External
Internal Sales • Almost always go for less
• Often no retention period
• Death, disability, and penalty buyouts
• Remaining partners making more
• Non-multiple formulas on gross are more common
• Accounts Receivable & WIP
• Tax treatment and 736 (a) (1)
• Capital accounts
External sales are more of a “business” deal and go for high dollars
Transition Advisors
Transition Advisors
Transition Advisors
American Institute of Certified Public Accountants
Practice Information – Take a Look!
Billing Information
• Accounts Receivables
• Age analysis of Cash Flow
• Time and Billing vs Retainers
• Value Billing
• Billings in dollars (larger practices, lower multiples)
• Billing Rates and Profit and what they mean to you
Other Thoughts
• General “chemistry” between the parties
• Continuity/Culture of relationships will help retain clients
• Capacity to take over the roles being diminished
• A good deal is a fair deal
• Remember, it’s the package, not the individual variables
• Increase your firms value: metrics, IT, avoid leases, good talent
For More Information
Please visit our website for resources including
FREE reports, whitepapers and case studies.
Joel Sinkin
1-866-279-8550
www.TransitionAdvisors.com