Common Misconceptions in Selling a Practice
Selling an accounting practice is a once-in-a-lifetime experience for most practice owners. Because it is such a rare event, sellers need to be aware of the key misconceptions about the process.
Misconception #1 ” The seller needs to stay around for months or years to assist the buyer in the transition.”
Experience with countless practice sales has shown us that a shorter transition, typically no longer than two or three weeks, is much more effective for both parties. One reason for this is that the seller is not needed nearly as much to help as intuition tells us. In fact, the seller can even be a hindrance to the transition if he or she is around for long after the buyer takes over the practice. It is a common belief that the best scenario is for the seller to engage in extended and/or repeated meetings between the buyer and the clients. However, experienced buyers know that the tendency in such meetings is for the former owner and client to do all of the talking and for the buyer to be an outsider. Similarly, if the seller stays around the office clients will want to talk to the seller rather than to the new buyer. However, if the buyer meets the clients without the seller, there will actually be a better chance for the buyer to get to know the clients and to establish good relationships. The only way to avoid the issues of a long transition completely is to get the seller out of the office and preferably out of town.
Another reason it does not work to have the seller stay on for an extended transition is that there is not sufficient work or money to go around. In the typical sale of a small to medium sized practice, the buyer wants to retain all of the staff. The buyer is energetic, hard working and fully capable of stepping into the shoes of the seller and doing all of the work the seller has been doing. This leaves nothing for the seller to do. Worse yet, there is no money to pay the seller for his or her work. Money which had gone solely to the seller in the past now must be used to pay the seller, pay the buyer AND service the debt.
The seller has one big job and one little job. The big job is to quit. The little job is to notify the clients of the retirement and to introduce someone new who will be taking over. The former owner should endorse the new owner as a wonderful accountant with whom the clients will enjoy working and then leave the buyer alone to service them.
Misconception #2 ” The best buyer for an accounting practice is another accounting firm.”
It is true that many accounting firms see themselves as willing to purchase another practice and often seek such acquisitions. However, in many instances, an existing firm is not the ideal buyer of a practice. This is true for a couple of reasons. Firstly, existing firms often do not have the time to take on another practice. In a typical sale situation, the seller is ready to retire. The buyer must be willing to assume the work load of an experienced owner as well as do all the extra things involved in a transition. A typical buying firm does not have such an individual available who can fill the shoes of the seller.
This lack of time ties into the second reason why firms are sometimes not the best buyers for practices. Firms are often only marginally motivated to buy a practice. Of course, all firms are motivated if a seller offers generous terms and agrees to continue working at a reduced rate of pay. Compare this to a potential buyer who is an individual with several years of experience who has dreamed of owning a practice. That buyer brings to the table the willingness to devote much time and energy to taking over the workload and making the practice work. Such an individual is much more motivated than the typical firm buyer.
Misconception #3 ” The average selling price for practices determines the value of a specific practice.”
Practice owners often ask, What are practices selling for? But knowing the average selling price for accounting practices nationwide can be misleading. Assume that a person lives in Chicago and has a house to sell. Would that homeowner go to a real estate source and inquire as to the average selling price for houses in Chicago? Would he or she be interested in the average sales price per square foot for all houses in Chicago? This information would be useless. Averages such as that tell nothing important about the value of a specific house in its specific location. The same is true of accounting practices. While accountants might have the perception that practices sell for around one times annual gross, the reality is that in some locations such a price would be too high and in other locations too low. When considering the value of a practice realize it has many unique characteristics including location, client mix, staffing, profitability and others. These specific qualities of a practice must be addressed to determine value, not averages.
Misconception #4 ” Accounting practices have some intrinsic value which all potential buyers recognize and with which all agree.”
If one is selling a gallon of gasoline this might be true. But most people need gasoline, purchase it regularly and have a good idea of what it costs. This is not true of accounting practices. Many people in the world would not purchase a practice if it were offered to them for a dollar. In a metropolitan area of millions, there might only be a couple of hundred potential buyers for a particular practice. In other areas, there might be considerably less.
Suppose there are one hundred interested, potential buyers for a specific practice. Would all these buyers agree as to what it was worth? Of course not! They would not come close to agreement. If a practice is offered at a certain price, all potential buyers might step up to the plate with check in hand. On the other hand, it could be priced where only one or two would agree to purchase. This is because buyers have quite different ideas as to value and possess different degrees of motivation and interest. Sometimes a seller turns away a very motivated and capable buyer because, for one reason or another, the seller decides the buyer is not quite perfect. His or her misconception is that there are a large number of buyers and that all buyers are equally motivated and equally willing to pay some known price. That misconception could be costly.
This same misconception comes into play when sellers think that the only trick is finding a buyer. Practice owners routinely say, Oh, I have a buyer or I have someone interested in buying my practice. The implication is that finding a buyer is the hard part. Their assumption, again, is that all buyers are fully willing to pay the same price and terms. If an owner has a buyer it is possible he or she has the one willing to pay the best price and terms, but that is highly improbable. Just as likely he or she might have found the one willing to pay the least. The object in selling a practice (unlike in selling gasoline) is to first locate all potential buyers for the practice and from that group determine the top five or ten percent in terms of motivation and ability. It is from this group one must find the buyer if one is interested in finding the true value of the firm.
At Accounting Practice Sales we put our long experience at work in getting past all of the myths and misconceptions that are out there. We understand the realities of valuations, transitions and buyers as they exist now and not how it was twenty years ago. We know how to get you maximum value and how to help make the whole process as smooth as possible.