We are in a seller’s market for CPA practices, but there are factors that shift the balance to the buyer’s market. Sellers have the option to merge or sell their practices.
According to the latest stats from the CPA Canada, our profession is 217,000 members strong, with about one third of members working in public practice. We are living an unprecedented “revolution” where disrupting technologies and ever-changing regulatory environment are redefining the landscape of the profession. As the baby boomers are looking to retire, practice transition becomes one of most important trends in the profession.
Current trends – merger or direct sale
In general, practitioners have the choice to merge their practice with another firm or sell it. Mergers are definitely a dominant trend as it requires less planning for the retiring practitioner. Large firms have the ability to merge small firms without incurring significant additional costs. This makes the small firms with revenues of one million dollars or less an ideal target for larger operations and puts an upward pressure on the practice valuations.
Mergers may also be favoured by firms with a few practicing partners that do not have an internal transition program in place. In cases where all the partners are at retirement age, they may consider transitioning the entire practice to another firm. In some cases, one or two partners will retire first, while the others will continue with the new firm for several years. It is our experience that the partners will agree in advance about the value of the individual contributions, so the payouts are segregated accordingly.
In a merger, there is usually a phase-down period for the retiring practitioner. After the practice is fully transitioned to the other firm, the partner will receive a retirement payout. For example, he or she may receive a payout over a ten-year period or a fixed income for life. The latter form of compensation is very rarely used as the amount cannot be accurately measured and requires a long-term financial commitment from the acquiring firm.
The alternative to merger is to sell the practice to another practitioner who will continue the current operations. The advantage of this approach is the transition is less disruptive for existing clients and the business continues largely unchanged. The incoming practitioner has the opportunity to build upon the existing practice without a serious investment in marketing or advertising.
Usually a direct sale to another practitioner may generate the most cash-flow for the retiring practitioner. While the merger with a larger firm is usually subject to some restrictions when it comes to negotiations, a direct sale is quite the opposite. The retiring practitioner can dictate the terms of the transaction and maintain control over negotiations. However, a direct sale is usually subject to an increase in due diligence process from the buyer. The seller may have to present the information regarding his or her practice to multiple potential buyers and follow through with the sale process.
Location, location, location
Firms located in larger centers such as Toronto, Vancouver, or Calgary are still operating in a seller’s market. Due to the exposure to densely populated markets and the potential to grow, these firms are the ideal target for either mergers or acquisitions. Practices specialized in niche markets such as agriculture clients or located in remote areas are less likely to be targeted by potential buyers. It is our experience that as part of the transition planning process, practitioners should avoid renewing their leases long-term prior to the sale of practice. An annual renewal (even at a higher rates) is better than a five-year lease term. This would offer flexibility to the buyer to decide if they want to keep the location or if they will move out without incurring significant unneeded lease costs.
Sometimes, the retiring practitioner owns the real estate used by the practice. As part of the negotiation process, the buyer should consider if they want to rent or buy the location. Owning the location is obviously an investment on its own; however, the buyer may not be able to obtain the additional financing to make the purchase.
This article was prepared by Dorin Bogdan Mihalache, (firstname.lastname@example.org), Founder, and Georgiana Mihalache, (email@example.com), Co-founder, of www.PracticeForSale.ca, a Canadian practice transition advisory firm.