Six Steps to Selling Your Practice Cont....

4. Value Your Practice
There are five main variables to consider when preparing a valuation of your practice. These variables will provide you with a very basic understanding of the initial process.

Cash Up front. Very rarely is an accounting or tax practice acquired with 100% of the purchase price paid at the closing. Most deals have from zero to 33% of the anticipated purchase price paid at closing. Many items can impact the down payment, such as the accounts receivable a seller has and the time of year the buyer is acquiring. For example, if a buyer is acquiring a tax practice in May and is 9-10 months away from collections, the down payment will suffer.

Length of Retention Period. The overwhelming majority of practices sold include a retention period where lost clients, as well as fee increases from clients, impact the purchase price. These retention periods can be as short as one tax season or can run the entire duration of the payout period.

Profitability of Sale. This subject is not limited to what your net profit will be. Unless the buyer is taking over your actual location and running the practice exactly the same as you did (including the staff), your net profit may have little to do with the buyer's. The buyer needs to address what his profitability will be. This includes the tax ramifications of the deal. Now that items such as goodwill, restrictive covenant, client list, etc. are all 15-year deductions, you must consider how the purchase price will be treated from a tax standpoint. Making someone take on overhead they did not need will ultimately reduce the profitability of the deal as well.

Duration of Payout Period. How long the buyer has to pay off the balance owed to the seller is another important variable. Most deals typically provide three to ten years for payout periods.

Multiple Billings. Most practices are sold as a multiple of billings. For example, if you have a practice that generates $100,000 annually and are seeking a 1.25 multiple, your anticipated buyout is $125,000. Of course as earlier mentioned, the retention period most likely will mean an adjustment must be made in the balance owed, but the multiple is typically the formula that ultimately establishes the purchase price prior to any adjustments. The formula: the more money up front, the shorter the retention and payout period; the less profitable the acquisition, the lower the multiple. The less money up front, the longer the retention and payout period; the more profitable the acquisition, the higher the multiple.

5. Prepare a Proper Transition
Philosophy. Very few clients have sufficient knowledge to determine the skill level of their tax professional. Because of this, clients have many choices. Why do they choose and stay with a particular practice? They may do so because of the location or the fee structure. But, perhaps the number one reason is because of the owner or people who service them. To make sure a transition goes well, you must realize that your clients enjoy a certain comfort level with you. Maintaining this comfort level is paramount in client retention. Change is unsettling; additional talent and services are welcome. Always seek to offer continuity to the clients. Where reasonable retain staff, locations, fee structures, and methods of servicing clients.

Announcing the Deal. Most deals are held out to the client base as a merger – not the loss of the people they trusted, but the addition of the new talent and firm. Larger clients are typically notified of the impending change in person or by phone. You can notify others by mailing an announcement letter or telling them during their tax appointment.

Continuity. A reoccurring theme throughout this article has been continuity. Continuity of names, location, fees, staff, and other items are the keys to long-term client retention. Make your changes slowly and let the clients get comfortable with the buyer before wholesale changes are installed. Remember, if chemistry is a key in choosing whom to sell too, offering continuity is the key to the deal's success. Most sellers stay on with their successor for months or even years in a reduced capacity to help clients through the transition.