Practices are terminated regularly. Some are sold in their entirety, some piecemeal, some are merged, some abandoned and some “stolen.” No one can stay in their practice forever, although some accountants think that is the case and make no arrangements whatsoever while others plan with as much detail as they can think of. Here are some alternatives.
Sale in entirety
This can occur when a practitioner decides their pencil can’t be sharpened anymore. Right now there are many buyers. Some can be identified through personal contacts at society meetings or through relationships when you either lost or acquired a new client and interacted with the new or former accountant. Without those relationships I believe working with a broker is an effective way to find a buyer. They usually charge a nominal upfront fee and then a commission on completed transactions. I know many accountants who have been on both sides of transactions that used brokers, and everyone was satisfied with the process and result.
Some of these sales take place where the seller fully stops working after a short transitional period, and in other situations where they remain and continue working. I covered this somewhat in last week’s column.
Practices can also be sold in their entirety if there is a death or sudden disability. If there was a practice continuation agreement, the sale can take place pretty quickly without a significant loss of clients. If there was no continuation agreement, then there is usually a large fallout of clients with low retention and less revenue for the practitioner’s family. This makes it important to have such agreements.
Piecemeal sales
Some practices are not sold in their entirety, but only parts, for several reasons. Maybe the practitioner does not want to fully retire and divests only a group of clients; or perhaps the practice is too large for a single local buyer; or maybe staff would acquire some of the practice but not very large or specialized clients; or the owner wants to retain one or two pet clients or a client with “no brainer” type of work so they would have something to do without taking on much pressure. Where staff purchase clients to start their own practices, they could do it by themselves or in partnership with other staff.
Mergers
Some practices grow quicker or in different directions than anticipated, and the sole practitioner or partners who start them see a different type of business developing that would need a wider range of expertise than they have or care to grow into. In other situations, the practice could be developing right on target, but some of the clients are growing more rapidly than the accountant’s ability to keep up or maintain the needed services. Merging the practice is a way to retain the clients and provide the services they will need. This also occurs where a smaller practice ends up with a concentration of clients in a particular niche that is attractive to a larger practice that is able to commit greater resources to those clients. A merger can forestall an inevitable loss of those clients. Other reasons for mergers include practitioner expertise that is underutilized in their own smaller practices, a synergy with another firm’s partners that makes the fit appear logical, or as a prelude to retirement.
Working until you drop
Some practitioners never want to stop working. “Retire” is a bad word to them. For them, working until they drop is a strategy, and it works for them. In some cases there is not much of a practice left as their clients are their contemporaries also preferring to work until they drop. There might not be much residual value when they pass on, but a practice continuation agreement would still provide some transfer of the client relationships. Otherwise, these clients are simply abandoned, and there is no residual payment to the family. However, the family will still need to field phone calls, release files and perhaps deal with notices sent to clients for work done by the deceased, close the office but still be obligated for rent payments, and need the business’ information for a final income tax return. It is never smooth when there are no plans.
“Stolen” clients
Occasionally I’ve heard of instances where an employee decides to leave and start their own practice, taking some of their bosses’ clients. There might not be anything illegal about this, but it might be immoral. If the practitioner died with no plans, an employee might continue working, hoping the successor would keep them on. If the employee sees nothing happening, they might, as a defensive measure, take some of the clients to start their own practice. If the employee simply wants to leave to start their own practice, they might take a few clients they work on and are close to as the base to get started. If the employer sees they will lose the client and not be compensated in any manner, they could contact the client and cause such a ruckus that neither they nor the former employee would keep the client. In that situation, they both will lose. It is usually to the benefit of the employee to work out a “reasonable” payment arrangement. Sometimes tempers will flare, but this is business, and a monetary plan should be agreed to. It will also be in the client’s benefit since the transition would be smoother.
Practice continuation or buy-sell agreements
Sole practitioners should have a practice continuation agreement and partners a buy-sell agreement. These are actually wills for a business. Do not delay getting these done because sometimes it becomes too late to get it done.
Do not hesitate to contact me at emendlowitz@withum.com with your practice management questions or about engagements you might not be able to perform.
Edward Mendlowitz, CPA, is partner at WithumSmith+Brown, PC, CPAs. He is on the Accounting Today Top 100 Influential People list. He is the author of 24 books, including “How to Review Tax Returns,” co-written with Andrew D. Mendlowitz, and “Managing Your Tax Season, Third Edition.” He also writes a twice-a-week blog addressing issues that clients have at www.partners-network.com along with the Pay-Less-Tax Man blog for Bottom Line. He is an adjunct professor in the MBA program at Fairleigh Dickinson University teaching end user applications of financial statements. Art of Accounting is a continuing series where he shares autobiographical experiences with tips that he hopes can be adopted by his colleagues. He welcomes practice management questions and can be reached at (732) 743-4582 or emendlowitz@withum.com.
