A temporary illness during tax season can wipe out 20 years of hard work. Some clients will wait for you to return, a few will be stuck because you have their financial records, but most will be forced to go somewhere else, and when they do, the chance of getting them to back is low.

Lack of a written practice continuation agreement is a serious problem many small practices ignore or assume they have covered by a loose relationship with a peer. Those situations can leave an independent accountant with a major exposure.

A worse situation is the false belief you are covered because of a few lunch conversations with a peer. In the event of an illness, disability or permanent incapacity to continue working, your friend or peer who agreed to the loose arrangement may find himself in a position he did not bargain for with your client base. Your method of delivering services, fees or software may be too much of a burden for him to overcome without a significant learning curve, cost increase or service disruption.

A written practice continuation agreement would have flushed out many of these issues and surfaced a bad match. There is a difference between friendly lunch discussions between two peers watching out for each other versus the reality of doing the work. Lack of a practice continuation agreement will impact your payout.

So to whom does a small practice turn for protection? Remember, client relationships were built on your personal touch and responsive service. If a small firm turns to a larger practice to set up a continuation agreement, will its clients get the service they are accustomed to? Will differences in fees or location drive people away?

As small firm, you need to look at the numbers. Bringing a $200,000 practice to a $5M dollar firm could be a sign of future service issues. Let’s face it, your practice represents four percent of their firm. If a crisis arises, it is possible your clients may suffer and unless you have a 100 percent buyout guarantee that means your payout will suffer. Once you have made the move, it’s costly to undo it.

What if you went to a small firm? A $200,000 practice going into another $200,000 practice is a lot of growth at one time. Unless you are prepared to continue to work it hard, how are your clients going to get serviced? The idea behind the practice continuation agreement is to have someone take over your practice because you are physically unable to continue, or to allow you to ease out over time. A firm that is too small may not be able to handle the work even if they have the desire to do so.

Look at some facts. There are 120,000 CPA firms in the United States. About 100,000 have five or less employees. And 70,000 are single-person offices. That means approximately 60 percent of the CPA firms in this country are one-person shops. Every year a large number of small CPA firm owners are looking to retire or will be forced out due to health issues or other concerns.

Assume a CPA practices for 40 years. If there are 70,000 one-person shops that means every year there are at least 1,750 CPAs looking for a firm to sell or transition their clients into. Probably 35,000 or more of those firms do not have a written practice continuation agreement.

This represents a significant opportunity for a small- to mid-size firm to set up a network of practice continuation agreements with independent CPAs in your area.

Examine a five-to-nine-person firm. With a few exceptions, these firms will usually generate from $400,000 to $800,000 in revenues. Taking over a $200,000 practice would represent 20-33 percent of the combined firm’s revenues. That is too much revenue to ignore, but not enough to completely overburden the recipient.

However, a good deal is only good if the end result is a successful transition of the practice with a high degree of client retention. Financial stability, available resources and the culture of the firm must be examined. If your clients are used to a family-oriented style, bringing them into a more rigid, business-like firm may not work. Transitioning a one-person firm into a five-to-nine-person firm is probably the best fit if the personalities of the owners and a few other factors match.

How does a firm identify a small practice that needs to find a match? You can run ads, send mailers, or call an agency, but the best solution to find a match is a phone call. Don’t call asking to buy a practice or ask, “Are you thinking about retiring?” It will appear pushy and suspicious. Instead try a different approach. Ask if they are interested in discussing the possibility of developing an alliance. This could be a merger, a sale or an informal arrangement to help both firms win more business. Leave it open. This provides the recipient the opportunity to ask what type of alliance you have in mind.

How does a small practice find the right firm to transition into? Reverse the process. Get a list of CPA firms in your area you think are the right size to approach. Call, tell them what you are interested in doing, and see who wants to talk with you. Be prepared to share information on rates, revenues, and how long you want to work; and be ready to ask details about their practice. You will find a lot of interest, but be careful. Many firms want to acquire a practice and then discard the poor fits. Your $200,000 practice may end up being paid out on $125,000. Also, be honest. If you have low-paying clients they need to be disclosed.

There are certain factors that increase the success rate of the match. The first is rates. It doesn’t make a difference if there is a great personality fit if you are transitioning an $80 average rate practice into a $125 an hour average firm. It will not work. The second is business approach. If you like to push the envelope and use aggressive tax strategies, and your potential acquisition/merger/alliance likes a conservative, risk-free approach, those styles do not match. Finally, it comes down to personality. If you don’t like the person who you are acquiring clients from or transitioning your clients to, there is a really strong chance the clients won’t like them either. Instinct is a vital component in the match.

How do you test the fit? Do a financial test first. If the practice does $150,000 with 1.5 people, but charges and hourly average rate of $100, something is not adding up. One-and-a-half people would be equivalent to 3,000 hours. Assume only 75 percent of the time is billable. That’s 2,250 hours. At $100 an hour, that would be $225,000. Where’s the other $75,000?

Likely, they bill $100 an hour, but only realize $75 because of inefficiency, or they oversell what can be done for a fixed price. A practice with a lot of fixed-price monthly services can be a goldmine or a death trap. If you are not sure, err on the side of deathtrap (most practices have a tendency to promise more than they can deliver in order to get the sale).

If the financial test passes, it really becomes a question of writing down the exact terms of the agreement. Samples of items to include in the agreement are how much is paid out when, what are the start and end dates of the transition, and what is the dispute process?

Cash-up-front purchase is risky. For the seller, cash up front is a great out. Unfortunately there are very few buyers willing to pay cash up front unless there is a significant discount involved. From a buyer’s perspective, the risk of paying all cash or financing a deal may be too high on unproven accounts. Few sellers will find a buyer willing to make a 100 percent commitment without some assurance of the longevity of the clients. A good deal finds a balance for the buyer, the seller and the clients involved.

The best way to conduct a search is to hire a professional third party. A third party may be easier to talk to and may provide a perceived wall of protection. The biggest downside of making the calls yourself is the image it projects. Would you be suspicious if a CPA had the time to make cold calls? If you want to acquire a small practice, spend the money to do it properly. If you are looking to transition your practice after all of your years of hard work, spend the time to do it right.

About the Author

Bob Lewis is the founder of Visionary Marketing – a firm that helps CPA firms develop marketing strategies to target new clients, increase existing client revenues, and build referral partner networks. Mr. Lewis can be reached at 800.995.9186 or at blewis@ThinkVisionary.com.

Top