The Small Practitioner’s Guide to Retirement
As many Baby Boomers start to reach retirement age, an important question emerges: How do you make the most out of the retirement process before stepping out the office door for the last time? There seem to be more questions than ever about how to maximize your retirement process, leaving no stone unturned to ensure that you can stay truly retired.
In this feature, we’ll focus on the retirement process for sole practitioners and small-firm owners, who face a very different set of issues than partners and owners at larger firms, and may not have the same sort of resources available to them.
With any good decision, more time devoted to preparation will yield a better outcome. So when the sole practitioner is starting to consider retirement, it’s vital to take the time to look around and make sure a great product is being left behind.
“Failure to plan for succession is the greatest current threat to the future of sole practitioners and small accounting firms,” said August Aquila, chief executive of Aquila Global Advisors, which specializes in succession planning and mergers and acquisitions. “For a sole practitioner, it is as much a personal issue as the firm’s most important strategic issue.”
“Start early and don’t procrastinate,” echoed Gary Adamson, CEO of CPA practice management consulting firm Adamson Advisory. “The natural tendency is to wait too long; the huge number of Baby Boomers nearing retirement will create more supply than demand.”
“The best way to avoid a problem is to not let it happen in the first place,” advised Marc Rosenberg, consultant, author and speaker on firm management and strategy at Rosenberg Associates. “In the context of [retirement], this means developing a practice, over time, that will ultimately be attractive to a buyer. Sole practitioners have a tendency to build their practice by doing work they want to do — instead of what they should be doing — which may hold back the value of their practice in the eyes of buyers.”
“If the plan is to sell, the most important first step is to understand the market you are selling into,” said Terry Putney, CEO at M&A consultancy Transition Advisors. “Who are the likely buyers, what are they looking for and placing value on? The market for a firm in a small town is dramatically different than a large metro area. Every practice has the potential for maximum value if you are talking to the right buyers. A practice that might be shunned by one buyer might be coveted by another one.”
LIST OF DEMANDS
If the sole practitioner wishes to sell their business, it’s vital to ask what they’re hoping to ultimately get out of their deal. It can be all too easy to simply do what they think is generally right, instead of what is ultimately right for them individually.
“Sellers should realistically assess what they really want for themselves,” stressed Rosenberg. “Why does the seller want to sell? This may sound obvious, but many sellers don’t think this out. A classic reason for selling is that the sellers have reached 65 or older, have grown tired of the work grind, and feel it’s time to retire while young enough to do ‘other things.’ But the key question is, ‘What are those other things?’ What will sellers do with themselves after they stop working?”
“A key goal for a sale is to allow enough time to find the right buyer and execute a joint plan with the buyer to make sure the business successfully changes hands,” said Putney. “Too many sellers wait until the last minute because they fear being involved in the changes that are likely to occur under the buyer’s watch. This leads to rushed decisions and a lack of involvement in the transition, which can lead to poor outcomes and can affect the value of the practice/small business.”
“Sellers should decide on their major deal-breakers and non-negotiables,” urged Rosenberg. “This is a critical stage that is often abused by greedy sellers. The longer the seller’s list of must-haves, the less attractive the firm will be to buyers. Must-haves pertain to financial as well as intangible terms. Active buyers have lots of merger opportunities. For every deal they do, 10 are considered. Simply being a profitable, desirable firm with ‘good metrics’ is not enough to get the deal done. Sellers must be careful to avoid throwing so many obstacles before buyers that the latter lose patience and go on to the next merger opportunity.”
And, of course, there are always alternatives to a sale.
“Future retirees seeking an internal solution need to make a realistic assessment of their firm’s readiness,” said Putney. “Do they really have the necessary talent on board; are the terms of their owner agreement reasonable; and do they have a plan in place to transition all of the duties of the retiring owner so the firm can not only survive but thrive after they leave?”
“I am having more and more sole practitioners tell me that they intend to work until they have no more clients,” added Aquila. “While some may think this is not a succession plan, it is. These practitioners know that they can continue to make a good living. Economically, they are better off than selling their practice. A small firm — say $500,000 — can generate $300,000 or so for the owner. If the owner sells for one times revenue, he or she will only have to work for 1.5 years more to come out the same.”
As the current class of retirees belong to a unique demographic in the U.S. — the Baby Boomer generation — it’s worth recognizing that this will be a distinctive environment to retire into: “So many more practices will be for sale, it may outstrip demand at some point,” Adamson warned.
“The overall biggest thing that is occurring is the flood of Baby Boomer sellers into the market seeking a solution to their need to monetize their investment in their firms,” said Putney. “Small businesses in the U.S. are overwhelmingly owned by Baby Boomers who are all reaching retirement in a relatively small window. This flood of sellers is turning many markets from markets that favor the seller to those that favor the buyer. There are generally more buyers available than ever, but the growth of sellers has accelerated more rapidly. Whereas the availability of clients and top-line revenue was a primary objective for buyers five years ago, many buyers are now favoring acquisitions that have strong staff. We see buyers becoming much more selective because, quite frankly, they have more opportunities to consider.”
“If current trends continue, it could be increasingly difficult for some sellers to find buyers, and when they do, the deal terms could be less attractive than hoped for,” said Rosenberg. “So, small-firm owners in their late 40s and 50s should strategically shape their firm into one that buyers will find desirable, instead of creating a firm that puts dinner on the table during the seller’s lifetime, but fetches a disappointing value when the firm is offered for sale.”
YOUR OWN PATH
No matter your exit strategy, there’s one thing all soon-to-be retirees need to do: Start planning now.
“I think that with the tendency to procrastinate, many sole practitioners may be faced with the proposition of ‘turning the lights off’ with no successor or firm to take their practice,” said Adamson. “Don’t wait! Start now!”