Who will buy a slightly used practice?

By Grant Robinson

While there are challenges to making your practice salable,it can be done and at a fair value to boot

As CAs in public practice looking to sell your practice, you may have some anxiety about the process. How do you find a buyer? Why would someone want to buy your practice? As a buyer, one is looking for a practice that offers a suitable lifestyle, provides a steady income stream, and of course, one must have an interest in the specific type of practice.

Generally, for CAs in small and medium-size practices, most of their clients are within 10 years of their age. In other words, for a 60-year-old CA, his or her clients will be 50 to 70 years old and moving through the life stages in a similar pattern. So as a client moves through the life cycle, the practice value will decline as the client base ages. If a CA waits until 70 to pass on his or her practice and the clients are 60 to 80 years old, a buyer may ask why pay for income to be generated from this practice if within the next 10 to 15 years key clients will no longer have active businesses and won’t generate significant service needs. As a potential seller, you must ensure a relationship with another generation of clients or have people in the firm creating relationships with the next generation of clients.

So who is going to buy your practice? The Institute of Chartered Accountants of Ontario website (www.icao.on.ca/Institute/MemberDemographics/AR2006Chart09) has a chart (please see table above) based on members in public practice by size of firm as at February 28, 2006.

Of the approximately 31,000 members, the number in public practice is 9,406. National firms have a ratio of more than two employees to each partner or associate, regional firms are not quite one to one, and local firms have twice as many partners and associates as employees. If someone is going to buy a practice, it’s going to be either an external sale or an internal sale. Sole practitioners have no one in their system, so in this case there is no option for an internal sale, only an external sale. For an external buyer, the risk related to the transition and the profitability of the client base is significant. To an internal buyer, the risk is known. Outside of national firms, the numbers say there are few internal buyers — there are limited chances.

An internal buyer will have to exist. Demographics on page 3 of the 2006 — 2010 Strategic Directions document found on the Quebec Ordre's website (www.ocaq.qc.ca) quotes the “size of the CA profession in Canada is expected to decrease between 2012 and 2016. In the next few years in Quebec, there will be enough new members to replace those leaving the profession each year. However, in 15 years or so, if we do not significantly step up recruitment, membership growth will no longer be assured and the total number of Ordre members will decrease.”

The Institute of Chartered Accountants of Alberta website (www.icaa.ab.ca) calculates the total members in small and medium-size firms and sole practitioners are approximately 1,575 CAs from a total of 2,608 who are in public practice. You could conclude that about half the membership will be over 55 in the next 10 years. Who will take over their ownership and roles.

Finally, on Page 48 of the 2004 Strategic Crossroads for the CA Profession there is an analysis (see table on p. 46).

Suffice to say, in the general population there will be more people retiring than entering the workforce over the next 10 to20 years. It’s also fair to say that any CA practitioner who is a sole practitioner or is in a small to medium-size office will be faced with the challenge of finding someone interested in it. If there are a significant number of practices for sale and very few buyers, the value of practices will come down.
All provincial institutes, as well as the CICA, provide information or guidance to the demographic crisis coming within the profession.

If a practice has value and is current in terms of the technology and services offered, someone will buy the practice. These statements are true but let’s look at how much the profession has changed in the last 10 years in terms of the technology impact in preparing personal and corporate tax returns. Whether I read The World is Flat by Thomas Friedman or listen to speaker and author Daniel Pink (A Whole New Mind) everything that can be standardized is going to be moved to the lowest cost location.

How many of your files have standard processes involved? Many clients are looking for creative thinking around planning their business, determining what is needed for the future and managing taxes. If your practice focuses on this area and the client base is young, the practice is likely salable. If, on the other hand, it is focused on the preparation of personal and corporate tax returns and the preparation of financial statements as notice to readers, there is likely a technology risk — that being these core services will be handled in different ways by the time one is ready to sell the practice.

A buyer may ask why buy when he or she can start a practice and not pay for clients. If there are more accounting practices for sale than buyers, there is a case to be made to wait until the CA practitioner stops practicing. If a CA starting a practice has a unique point that will attract clients, why should he or she pay for a client base?

So what should one do? We need to acknowledge there is a difference between a branded shop whose value is in international roots and in delivery of highly technical solutions and the small to medium-size accounting practices whose value is based on relationships, problem solving and in being a strong support network for clients.

If you want the choice to keep or sell your practice, look seriously at developing an internal-sale option. Have discussions with the team about opportunities to buy into a practice looking out over the next one to three car leases. Reflect on the value of your practice. Most future sales will be based on the value of the return the practice is generating after compensation is paid to the buyer for the job he or she does. The value of the practice will be based on the years of return the practice can generate. A seller will have to explain to an internal buyer why the value of the practice is fair and affordable to both buyer and seller.

There are challenges to making a practice salable. To have a salable practice, you must ensure there is a future for the client businesses and the option of an internal sale. If those two possibilities are there, you can sell a practice and get fair value, although in the future fair value will not be dependent on the fees the practice generates but on profitability and the ability of the firm to adapt to the future.

Grant C. Robinson, FCA, is a partner with Robinson & Co. LLP in Guelph, Ont. He is also Technical editor for Business adviser