Succession deals can go more smoothly if good operations are considered.
by Rick Telberg
At Large
You’re a successful CPA. You’ve spent your professional life building a successful practice. But the sands of the Caribbean beckon. A certain golf course calls your name. Your babies have graduated from college.
It’s time to think about retirement, and maybe merging out is the way to do it. If you want, you (and your equally aging partners) can just dump your practice: Sell it to another firm and each go your merry way.
But according to Joel Sinkin, president of J. Sinkin Consulting Group Ltd. and a principal in Accounting Transition Advisors, LLC, slipping slowly out the back door is the better way to go. He calls it a Two-Stage Deal.
Succession is a key thrust of the AICPA PCPS. The program, which focuses on the importance of good business operations, involves a new book by Bill Reeb, “Securing the Future: Building a Succession Plan for Your Firm,” which includes a DVD containing tools and checklists, with Reeb highlighting each chapter with a panel of experts offering analysis and commentary; group and self-study CPE; and spotlight seminars at key conferences like the Practitioners Symposium, June 6-8, in Orlando.
“The Two-Stage Deal offers the transitioning partners the opportunity to start the process of succession, achieve their long-term succession goals, and maintain much of the status quo before they retire,” Sinkin says. “This approach also offers the successor firm benefits over the traditional approach of a straight purchase or a standard merger.”
Practitioners are often concerned, he says, with the change in culture, the loss of their firm’s identity, the continued satisfaction of their old clients, and their shifting roles as the new guys phase in and the old guys phase away.
Sinkin’s solution: The sellers and buyers agree on a two-stage sale. The retiring partner or partners continue to work in the “new” firm, but the contract sets a back-end date by which the sellers must reduce their time commitment. Only then – typically in three to five years – do the final sales payments commence.
During the first stage, the sellers work full-time or close to full-time. Fees and revenues continue at about the same rate.
During the second stage, the sellers reduce their time commitment. That (or a disability) triggers the purchase payments for equity in the firm.
And pretty soon, you’re packing your Winnebago and making a smooth exit in a southerly direction.
The benefits of a Two-Stage Deal are many. The sellers maintain their income while securing their succession. They can avoid investments in infrastructure during those last few years. They can focus on client service instead of on office management. They can reduce their time without compromising the value of their firm. They can retain the clientele that will support the final sale value.
The buyers make out well, too. Their new firm retains not only the clients but the good name image of the former firm. The new guys get a revenue stream going before they pay the purchase price. They can even grow the practice before buying it, offering new services to the old audience.
It’s a good deal, but you have to do it right. “Chemistry is the key in any merger,” Sinkin says. “Clients choose a CPA firm based on their comfort level with its people. Personalities are important. Don’t do a deal with someone you don’t enjoy having lunch with.”
Sinkin’s other caveats are pretty standard. Work out terms in advance. Don’t agree to agree later. Set a firm (even if flexible) back-end date. Determine who does what until when. Put it all in writing.
Then, don’t forget to put the golf clubs in the Winnebago.