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How and when will you retire?

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20th Jun 2011
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Now that summer holidays are upon us and many practitioners are struggling to manage even two weeks away from the office, many may be asking themselves whether they can ever permanently extract themselves form the business.
 
This article isn’t about the specific logistics of going through a sale here as there is enough written on that subject. Instead, I want to set out a help sheet to ensure practitioners are planning ahead and preparing for succession in general. My experience has shown that the main criticism of any “buyer” is that the outgoing partner had not spent time planning their exit, so the practice is worth less and not so attractive to any buyer. Why sell yourself short when you have spent a lifetime building your firm?
 
If you were planning to sell your home you would clean it up and do a bit of DIY to show it in its best light. So why not do the same when thinking of disposing of your own business ?
 
There are two main strategies to consider when planning for retirement or succession;

  • An outright sale to a third party or merger with a similar sized or larger firm
  • A transfer of equity to an existing partner- whether it be someone who has been trained ‘in house’ or someone you have brought into the business with this purpose in mind.

Whichever is the best strategy for you, the principles below are relevant when planning for that point in time.
 
Many practitioners still falsely believe that someone will come along with a blank cheque book and wave them off into the sunset. This is never the case in reality. More than ever before, practitioners now have to wake up to the reality that they will be paid for the value of their business over a period of time. The days of premium goodwill valuations are long gone.
 
I have seen more than one case where a practitioner has ended up with very little after a potentially lucrative sale deal, once clawbacks have been made and the practice stripped down in value for poor quality clients and practice management, cash flow problems, poor gross margin and lockup that has to be written off. With proper planning this need never be the case.
 
Larger practices usually have a strategy in place to let new younger partners “buy in” over a period of time, thus releasing the older generation.
 
Smaller practitioners tend to find retirement and succession planning most challenging. Below is a checklist to help any practitioner (whether in practice on their own or with other partners in their business) start planning for their future and succession effectively.

  • Don’t wait until the point where you hate getting up on a Monday and your business is performing under par to decide it is time for you to go! It is common for practitioners to decide they want to sell when the going is tough, only to forget that at this point their practice will be as attractive to someone else as it is to them.
  • Any buyer (whether a third party or in house) wants to buy into a practice that is performing well, has growth potential, security of income generation and is easy to step into and manage.
  • People pay a premium for businesses that have been well groomed and are not owner dependent.
  • Think about your own personal goals - when do you want to retire, what will be your annual income needs etc?
  • Look at where you are now and the gap in both terms of time until your desired retirement date. What are your annual earnings now and the value of your practice compared with what you need on retirement. This gap is the start point of your business plan and working out exactly what you need to do between now and then.
  • Once you have identified what you need to achieve, then you have a clear vision of where you are going and what you need help with.
  • Look at your practice management and lockup in particular. A successful and premium valued practice will have systems in place to ensure debtors are at a minimal (ideally zero) and there are fixed fee payment plans in place for all clients on either direct debit or standing order. It is no longer unusual for even the smallest practice to have negative work in progress and positive cash flow at all times.
  • Look at your work in progress. This still tends to be a black hole for many practices. Any buyer will interrogate this figure rigorously to identify old balances that are neither billable nor collectable. The same is true of debtors’ balances. Bite the bullet and do a clean-up exercise. Painful as it may be, it will identify those clients who are not ideal and focus the mind on how to ensure you are paid proper value for work done.
  • Measure recovery and gross margin on all work. As well as focusing on winning new business you must also ensure you are making the best margin on work you actually complete.
  • Some practitioners become too focused on winning new business and can’t then understand why it doesn’t seem to be reflected in their bottom link and bank balance. This is often caused by a lack of practice management and looking at how the business production processes work.
  • A small amount of time looking at efficiency and job production systems will pay for itself many times over in increased gross margin.
  • Grade your clients and review these gains what you have identified as your ideal client profile. This will allow you to plan on who you may want to ‘sack’ as a client as and when you bring in new business within the right client profile that you have identified.
  • List your menu of services and what help you can provide clients with. Perform a “windows of opportunity” exercise to ensure you are maximising revenue from existing clients. Systematic reviews of this type are proven to add up to 20% on turnover when performed for the first time. The fees generated usually become gross recurring income  in following years. You need to maximise this potential growth area as it will increase your profitability and value of your business.
  • Put a marketing plan in place to win new business as the growth you have identified as part of your business plan is unlikely to come from reactive referrals and “pot luck” alone. Even sole practitioners can successfully outsource much of their marketing function to good effect.
  • Identify your recruitment needs as the practice grows and the ideal profile of new recruits. Review CVs on an ongoing basis and avoid the fire fighting approach of only looking to recruit when you are desperate! Fantastic candidates are hard to come by and I have seen firms take on ideal candidates even when they haven’t yet got a specific need.
  • A good partner will always find work to keep a good person busy and the partner time made free will mean more time for work “on” and not “in” the business, thereby speeding up the long term business plan goals and the time in which they can be achieved.
  • Look at your premises - do you have capacity to grow or is this something you need to factor in to your business plan?

This checklist is an overview only, designed to get you started and take you to the point where you can start filling in the detail. Many people reading this will have seen it all before, but the real challenge is finding the time to free yourself up to work on these things and extract yourself from doing so much basic compliance work.

My suggestion would be to initially block out three hours a week in the diary, and treat it with the same priority as as a client meeting; don’t take phone calls, ignore the e-mails for a short time and start to work on the areas listed above. To make it happen effectively, consider bringing in outside help periodically to help you drive the plan forward.
 
Planning for the future is a rewarding exercise in itself and will help you feel more in control and increase the enjoyment you get from your business.
 
As always, I am happy to answer any specific questions by e-mail at [email protected] and on the Practice-perfect.net website.

Finola McManus is a chartered accountant and former senior partner, who now runs her own consultancy service, Practice Perfect.

Replies (4)

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By Bob Harper
20th Jun 2011 14:22

Put yourself first

@Finola - excellent article.

I was recommended a book by a leading Financial Adviser called The Number. It’s about how much money you need to live out the rest of your life but touches on non-monetary topics.

I’d highly recommend this to accountants. Get personal goals sorted, complete a detailed financial model (with different assumptions) and then look at the practice. Maybe you don’t need to do anything, maybe you need to pull your finger out or perhaps it is a case of tweaking your expenditure profile.

By the way, this type of advanced number crunching is something I feel accountants could do for their clients. At the end of the day, clients are looking for exit and their business is a key financial instrument in their planning.

Bob Harper

Marketing Consultant

 

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By carnmores
24th Jun 2011 11:57

this is so profoundly depressing

i shall just have to up my medication - we all know now where thats leading - and one unit a week - i cant go on 

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By dgowens
24th Jun 2011 14:57

Retirement planning

I’m not planning to retire, however, I do have a continuity agreement with another firm of accountants to take over my clients if I’m unable to continue.

 

http://www.linkedin.com/pub/don-owens/6/908/840

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By jbayman
24th Jun 2011 17:54

Retirement

Good article but your sale plans need an underpin of pension and other provision. Selling your business assumes a lot of things, some of which you may not have control over. Maximising your sale value means you are on top of your job with good quality clients who stay loyal - as we get older the energy and drive to be on top of those often demanding clients can't be guaranteed. In a practice of four partners there is a 68% chance one will suffer a critical illness during their working life, do you have contingency plans for this, partnership buy out insurance perhaps?

The economic climate might not be conducive to a sale, potential purchasers may be scarce, capital may be difficult to raise. How easier was it to sell a practice pre credit crunch compared to today? Timing is important.

I am semi retiring at the end of the year - I will be 60 but I am fortunate to have salted away enough cash during the good years to give me a good pension despite Gordon Brown's stealth taxes. The choice and timing is mine. I will continue to work part time - not because I have to but because I want to, and fortunately my health is good so Mrs B and I shall enjoying some quality time en France checking out next years vintage and spending some more quality time with my new grandson. 

 

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