Moving on from your practice is never easy. It’s an endeavour that you devoted countless hours to, diligently cultivating your client base and your professional reputation. But it is an inevitable stage in your professional journey.
There are certain things you need to remember when you start the process of succession planning. In this article, the first in a series of three, Finola McManus, founder of Practice Perfect, examines the key questions and initial planning tips that will make your exit as graceful and seamless as possible. Part two will examine, in greater detail, the practicalities and how to complete that pre-sale grooming and preparation exercise.
Key questions before planning your succession and exit strategy:
- Be sure of the reasons why you want to sell your practice – Is it motivated by emotional factors due to issues like stress, workload, long hours, staff issues and difficult trading period?
- Options available to you – What’s your succession game plan? External sale/merger? Or perhaps an internal buy out over a period of time?
- Realistic timeframe – Do you have the time needed to devote to the process?
- Set a realistic price – What amount do you need to retire in view of personal financial and future plans?
- Examine your existing business as if you were a buyer – What is your practice’s weaknesses and how can you eliminate them?
So, you have asked the questions. Where to from here? Well, many practitioners are finding it tough at present with pressure on fees and service levels and finding and retaining the right staff. If your decision to look for an exit plan is driven by these factors then there are things you can do to manage your practice better. Ask yourself, “If I was working less hours and making more profit would I still want to sell?” If the answer is ‘yes’ then you know you are making the decision for the right reasons. This may be a very obvious point, but it’s one worth thinking about.
Look at an objective realistic value for your business. Take a step back and be cold and critical. Then do the sums: What will give you the best return? A sale/merger with a third party or an ‘internal’ retirement succession plan over a defined period of time? The obvious challenge will be finding the right successor should you chose the latter option.
Selling/merging/going the internal succession route takes time – your time. Be realistic about what exactly you need to do to ‘groom’ and prepare the business for either scenario. You have to do your housekeeping first.
Make a clear ‘to do list’ and book out blocks of time in your weekly diary to deal with each issue. The starting point is managing ‘lock up’ and sorting out your work in progress and debtors.
Then look hard at your client base to identify ‘clients at risk’ who may leave the practice in the next 3 years. Iron out poor service issues. Critically appraise your gross margin and manage areas under recovery. Look at your partner time being spent on clients and assess how dependent the business is on you as this is an issue for any retiring partner and not attractive to a buyer.
The pre-sale planning process is intricate and will vary enormously depending on the firm you have. It is essential to plan properly and get your business ready just as you would do if you were selling your home. You are going to enter into this process and transaction only once, so spend the time preparing to get it right.
Prepare a personal balance sheet. What is your ‘magic number’ that will leave you where you want to be post succession? What annual income stream do you need long term? Take into account tax liabilities and timing of cash flow required.
This exercise often helps identify which succession option will work best for you and give you the income you need. There will be a trade-off between continuing to work, perhaps in a reduced capacity for a short period of time, and walking away from the practice completely or remaining involved for a longer period if there is an ‘internal’ succession route to follow.
A good old fashioned SWAT analysis is a sensible idea. Commit your findings to paper and be objective. This is what any buyer or incoming successor will do. Draw up an action plan on how to manage the weaknesses and threats and use the opportunities to your advantage in making the practice more attractive.
No one will expect you to have the perfect practice, but will be impressed that you know your business and have robust financial management information to hand. Know your clients and what services you offer and where the windows of opportunity are. Have data of fees by client and for what services for the last three years. Identify exceptional fee income that isn’t recurring. Appraise your 80/20 rule, i.e. 80% of your turnover is likely to be generated from 20% of clients. Is this a risk?
My personal experience has shown that preparation to exit or sell, when done properly, increases the ultimate ‘sale figure’ by at least 100%.
Finola McManus is a chartered accountant and the founder of Perfect Practice.