When you’re thinking about selling your accounting firm, it is best to analyze the different time periods to do so as it correlates with your payment structure.
The best time to sell your accounting practise depends on the following key 3 variables.
Top 5 things to know when preparing your firm for sale
1-Who are the best buyers?
When selling an accounting firm, the best buyers tend to be experienced accounting professionals who work for someone else. They come to the realization that they are being paid 1/3rd the amount billed to their firm, and ultimately want to become independent.
The second best buyer is a small accounting firm owner who wants to buy an already existing practice while gaining new clientele on a referral basis, to contend with solo practitioners.
For firms valued under $2,000,000,
The best buyer for these firms is an individual. They are happy to pay at a fair market value while also having the time & mental fortitude to undergo the entire process. This also leaves the clients better-off as they go from talking to an individual staff accountant to talking directly with the owner of the firm.
In other words, the list of your buyers will include employees, competitors or a practitioner trying to buy a firm or they are relocating to a region.
– When evaluating these buyers, it is important to rank them in terms of suitability. In the case of an employee, they are likely to struggle financing the transaction. The income generated from the firm might not be enough to support the worker while he pays off the asking price.
– The more probable suitor is a competitor since they will benefit from the large economies of scale as a result of the big volume generating more income.
There is also a case of paying a premium when the buyers of the firm partake in smaller transactions.
One of the fundamental metrics when coming up with an accounting firm valuation is the ability of the firm to retain their clients post-purchase. The buyers smartly enough hesitate to pay the full principal amount as there are no guarantees that the clients will stay with the firm with this change of management. According to XERO, the better option for them would be to “pay yearly installments that are adjusted based on client retention.” There is a direct relationship between annual installments (AI) and firms losing clients. When the firm loses clients, AI will go down. When the firm gains clients, AI will go up. Due to this reason, loyalty needs to be strengthened through the confidence exerted by the expert staff. “The quality of your clients can be just as important as the quantity” (XERO) Some of the questions to ask yourself regarding clients Are you putting in the time and effort to gain new clients? Adding new accounts will lead to a high client growth rate resulting in the rise of the firm’s value. Are your clients accountable and do they provide timely payments? Accounts that fail to result in profits will diminish your selling price.
2- Which clients are you retaining
A firm’s revenue, cash flow, and client retention depend vastly on slow/fast cycles. Firms tend to be more busy during the tax season, while for some industries such as tourism they tend to be more seasonal, e.g. summers. It is necessary to truly be transparent with the buyer as to how earnings are related with your firm’s busy time frame so they invest in it accordingly. Another important thing to consider when selling your firm, is accounts recievable. This can play a role in the transaction process as it concerns the buyer when it comes to receiving the revenue for work that is already completed, and getting it after “closing the sale can put pressure on the buyer.” Like any investor, the buyers of the accounting firm want fast & positive returns on their investment, and it is not of their interest to look back and pay the seller more money right after the sale. To eliminate this problem, try to make it more favourable for the buyer by doing the following: Undergoing the transfer of ownership right before the most profitable season for the firm as a good gesture to assist the buyer in the early stages. Helping the buyer attain cash flow by loaning the A/R for the early stages. These recommendations could go a long way when it comes to indirectly justify your selling price for the firm. All these accommodations made by you result in a positive transaction between both the buyer and the seller.
3. When are the best time periods to sell?
4- Is your existing technology up to date with modern practices?
What technology you use in your firm will have a great impact on its value when you’re selling.
Refrain from using outdated software and tech and incorporate industry standards with cloud computing, and other management technology to multiply the value of the firm.
The better the tech, the faster the work, and faster to generate money.
Also make sure to emphasize how your staff is completely skilled with the updated tech and can work with the clients efficiently by showing templates of previous work.
To help decide what your sales pitch is going to be, evaluate your firm’s performance as well as your competitors’ and find where you excel. Start advertising those metrics while acknowledging the things you don’t do quite as well. It is reassuring for the buyer to not just learn about the profits based on historical data, but also what the future entails for the firms, whether it be newer clients or retaining current larger accounts. This gives them a sense of assurance and confidence to buy something resonating future value.
5- Be wary of your competitors while promoting your appropriate performance metrics