Smart Succession Planning
How to put dollars in your pocket today.
It may seem strange, but the best way to grow your business today is to start thinking about how to sell it in the future. Build it into such a gem, that everyone will want to buy it.
Think about it. Some day, you'll sell your practice and the price will largely be determined by a multiple of your firm's earnings. According to Joel Sinkin, Senior Partner of Accounting Transition Advisors, LLC, those multiples vary from a lowly 0.4-times annual earnings to a rich two times yearly earnings. That means if your practice produces $1 million in gross revenue when you sell it, the selling price can vary between $400,000 and $2,000,000. I don't know about you, but I can buy a lot more bananas for $2,000,000 than I can for $400,000. Does this sound appealing to you? Let's do what we can TODAY to make sure you sell your practice for a higher multiple in the future, shall we?
Determining Valuation Multiples
So, what are the factors impacting the selling multiple for your CPA practice? There are many considerations.
First, what type of practice have you built? Serving clients year round translates into higher fees earned per client. These practices are more attractive to buyers than practices largely 1040 client based. Try to build your practice into one that produces consistent year-round revenue.
Of course, profitability is what I really want to focus on in this article. Buyers are looking for high net margins. Are you building a practice that delivers high margins? One way to enhance profitability is to improve efficiency in your office. When you enhance efficiency, you increase the value of your business for a future sale. You also put more dollars in your pocket today and can significantly decrease the stress associated with running your business. One of the most important steps I took to increase the efficiency of my financial planning practice was to create a detailed system's manual. Let me be crystal clear; it's the smartest thing I ever did to create a better life and a more profitable business.
I took every recurring activity and detailed how to execute it in my manual. The results have been nothing short of phenomenal.
Before I did this, I was dependent on my staff. I had to assume they knew what to do and I prayed they actually did it. I'm a bit embarrassed to admit this, but I didn't even know if certain things were getting done. I was lucky because I had great staff, but I didn't want to run my business based on luck — and I suggest you take my lead. If someone called in sick or heaven forbid quit — I was in deep doo doo. What would happen to you if a key staff person left your firm?
I know, I know, you don't want to think about it. Well my friend, you better think about it for two reasons! First, it will happen someday; it's just a question of when. Second, your buyer will be thinking about it before they make an offer. If the value of the business is dependent on individual staff personnel, the price will go down. Solve this problem now by creating your own manual.
The key benefit of having a manual is not only losing your dependence on any individual staff member, but your office will execute operations quicker and cheaper. That, my friend, translates into more free time for you, greater earnings and a business that is much more attractive to potential buyers.
Let me share my experiences since creating the manual. I now have full instructions and checklists for every task. I also receive weekly progress reports, so I know if something was not completed. I also tied staff bonus money to office efficiency.
Creating a Manual
What is the best way to create your manual? First, you have to understand that it will take time. You'll actually work harder because on top of all the other tasks you perform, you'll be adding additional responsibilities. That's why it's important to start planning before things get too busy in your office.
Make sure to include content on Office Procedures, Computers (including backup procedures), Billing, Client Appreciation, Client Service, Human Resources, New Client Process, Marketing and New Client Development. You should focus on one area at a time. Have your staff help document the tasks they currently perform. You won't get it right the first time, so be prepared to make corrections over time. Each area should include checklists as well as detailed instructions.
A systems manual is a work in progress. As technology changes, as you get smarter, you'll find new and easier ways to get things done. Each change must be documented in the manual.
Although it does require a time investment, your manual should be a priority over the next 12 months. Your manual will enhance your firm's profitability immediately and attractiveness to potential buyers down the road.