Growing or Phasing Out Your Small Firm
Many small-firm owners — both sole practitioners and partners — start to become concerned about organizing their practices for a sale as they get closer to retirement age.
There are three clear alternatives for small-firm owners approaching retirement:
- Prepare the practice for a sale
- Organize the practice to have staff acquire it
- Do nothing
Preparing the Practice for a Sale
There is not much you need to do to prepare your practice for sale other than not dropping any clients since purchase prices are primarily based on gross revenues not net profits. If you have low-profit clients, people acquiring the practice might not care if their motive is to sell the clients annuities and similar investment products. However, buyers interested in maintaining the practice will take the profitability into account when making the offer, so too many low-profit clients might result in a lower offer. Further, hanging on to unfavorable clients for an eventual sale might not make sense from a practice management standpoint.
When ready, you can sell the practice outright and stick around just long enough to introduce the buyer to your clients; you can come back and work tax season; or you can work full time for a fixed period such as two, three or four years after which time you will retire. If the buyer will get an SBA-guaranteed loan, then the seller would be precluded from working for the practice for more than a short period. Selling means retiring, so you would sell when you want to stop working. Until then, it should be business as usual.
The reality is that working until you drop will result in the most dollars for you. Your time would be spent in the practice, but the dollars are maximized this way. While there will be an erosion of the ultimate value, you will be pulling funds out of the practice for as long as you work, and this could be for many more years than the buyer’s payout. The choice is working or time to do other things.
Organizing for a Sale to a Successor
There is often a conflict between wanting the best deal when you exit and wanting the best arrangement during the time you are working. Most people generally cannot have both. Accepting that, the practitioner should decide whether to set up their business in the manner that best fits their personal desires, work styles and maximizes their present income, or in a way that potentially maximizes the back-end value.
For example, if you were to “build” the practice in a way that maximizes your exit price, it would most likely cost you more currently and inhibit the way you might want to work. You would need staff suitable to buying you out which are usually more-experienced and high-er-salaried people qualified to become partners at some time in the future. With a current strategy, you and the staff work within an overhead structure you are comfortable with. Your choice of staff would suit your work habits, lifestyle and desire to optimize your current income. If you let an exit strategy drive the decisions, you might end up working under less-than-ideal conditions while waiting for your exit to kick in.
With the exit strategy, you need to spend time evaluating staff on how well they can bring in business, carry on in your absence and grow into being an owner, as well as how able they would be to make payments to you when they buy you out. There are also increased costs to all of this that likely would not be recouped in a transfer to the successors as well as no guarantee that it would work out. You would also be making the big assumption that the right people are available and just waiting to come to work for you for five to 10 years and then want and be able to buy you out when you decide to retire.
Assuming you have the right person or people, wouldn’t they be trying to push you into making them a partner sooner and having you commit to an exit time? Employing an exit strategy in some manner puts a ceiling on the length of time you could work.
Don’t do anything special. Work the way you want and how you want. When it comes time to set aside your pencil, see what opportunities are available. Probably the best course then will be selling the practice.
Retiring or phasing out is a personal lifestyle decision and only you, or possibly you and your spouse, can make that decision. Because of this, I suggest the money be a secondary concern. However, opportunities always pop up so be aware if they do. It’s best if you contemplate what you really want to do, make a clear decision and then take steps to either implement it or just carry on as usual if that is your decision. And if you want, work until you drop!
Edward Mendlowitz, CPA, ABV, PFS, CFF, is a partner at Withum. He is a member of the NJCPA Forensic & Valuation Services Interest Group and can be reached at firstname.lastname@example.org.
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This article appeared in the November/December 2018 issue of New Jersey CPA magazine. Read the full issue.