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Practice succession: X marks the spot

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24th Nov 2015
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For baby boomers in practice, their fruitful careers culminating sooner rather than later, a misunderstanding of Generation X threatens to frustrate practice succession efforts.

“A lot of baby boomers are expecting the younger generations to behave like they did, to respond to the same things – and they don’t,” says Mike Sturgess, chairman of SWAT UK.

At the moment, explains Sturgess, there are still enough boomers out there buying fees. “But there is going to be a problem coming where ultimately it’s not just going to be baby boomers running businesses, there’s going to be lots of Gen Xers as principals now coming in.”

Sturgess has noticed that these younger buyers are far less willing to accept practice succession concepts traditionally accepted as a given. “A few times I’ve experienced firms saying ‘I don’t need to pay goodwill, I can join that other firm – they don’t charge goodwill. My contemporaries are partners in firms; they haven’t had to pay goodwill, why do I?’”

According to Sturgess, the change in attitude is also caused by a generational divide in access to financing. Even if a younger person was willing to pay for goodwill, their attempt could be scuppered by parsimonious banks. “In London, they’ll struggle to get a mortgage, let alone get a loan for goodwill,” says Sturgess.

Given these challenges, an alternative is what Sturgess terms “self-financing deals”.  “The traditional approach would be a third of cash up front, another third after a year and then the final third after two years,” explains Sturgess. “What’s happening now, because of the financing problems, we’re seeing more self-financing deals where the seller is actually being paid monthly.”

It might be daunting for the more risk averse, though. As Sturgess says: “If I’ve got the money in my bank, it stays in my bank”. If you’re getting paid monthly and after six months it all goes belly up, all is lost.

“The seller absolutely needs to exercise due diligence. How established is this practice? I would be more nervous doing that with someone who has never run a business before than if I was selling out to a large firm that’s been operational for years.”

But, says Sturgess, it also means a greater likelihood of attaining a better price because of its self-financing nature. “After three or four months, you’re on positive cash flow, so you only need to borrow to sustain the practice for three or four months”.

Grooming your own successor from within the firm is still possible, but even this is hampered by a shift in generational tendencies. Particularly tricky is Generation X’s more nomadic inclinations. “Grooming someone is great but: a) will they be any good? b) will they stay? And c) will they meet your expectations about the value of the practice?” asks Sturgess. “That’s where the generational misunderstanding comes in. You have the partner saying ‘I would’ve jumped at the chance! I don’t understand…’

“The best option, for a small practice in particular, remains selling out to a larger practice.”

Given this more precarious market, increasingly populated by Gen X’ers, it’s vital that accountants start planning their exit from day one. “I’ve literally had people saying ‘Oh, I want to retire in the summer because I don’t want to renew my lease’. And they’d say this to me in December,” says Sturgess. “The moment you go into business, you should be thinking: what’s my exit strategy? If I’m just waiting for someone with a cheque and no want appears, I can’t retire.”

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