How can Accountants exit their business and fund their retirement?

Baby-boomer business owners are increasingly contemplating their plans to exit full-time work. It is this same group which are also increasingly seeking guidance in how they might address the associated financial challenges which lie ahead. In a difficult business environment, business owners are relying more and more on the sale of their business, to fund retirement or investment in a new business venture. In an accounting firm context, many partners now feel that they cannot afford to retire or realise sufficient value via a sale of their business.

Bstar’s 2015 Accountants Research Report confirmed that accounting firm partners approaching succession and retirement are now more prepared than previously to take action in respect of the future performance and value of their firm.

However 69% of accountants still do not have a formal succession strategy in place, according to the 2015 report, which also identified a low degree of relationship connectivity or trust with prospective internal generational successors.

Interestingly, the Report also revealed that client demand in relation to the same considerations, i.e. planning for sale, business valuations, succession planning and implementation, estate planning and sounding board or mentoring services (e.g. board advisory, virtual CFO) will continue to grow, with increased needs related to management and ownership succession.

Due diligence, transaction readiness, business education, management courses and CFO analysis roles will also be in high demand from future SME business owners, as will wealth management services as business owners continually assess whether they will have enough to retire – and/or contemplate how to invest proceeds from the sale of their business interests.

No differently, when a 65-year-old accounting firm professional wishes to retire from practice, they must establish how they propose to sell their equity in the firm to the next person. This said, younger professionals are now questioning more than ever whether they actually wish to become future partners in these accounting firms – thereby limiting exit options and valuations.

Uncomfortable conversations

At Prime, we would observe that more accounting firms appear to now be thinking about transactions and wishing to understand the valuation of their firm. It can be a topic which a lot of partners do not talk about – or know how to approach. Perhaps two partners want to continue and two want to exit. An issue like this can spark all sorts of discussions people are not accustomed to having. Perceptions of conflict and competing market dynamics are leading people to increasingly think carefully about the transaction approach. While these may be uncomfortable conversations, they are essential to the future and longevity of the firm and when proactively addressed, can ultimately result in a clearer future pathway for everyone.

When a portion (or all) of your wealth is tied up in your accounting firm, your options may not seem hugely diverse. Traditionally, you can either sell your equity to existing partners or new partners coming through the ranks, or from outside, or sell the entire firm. But as these options become less certain, other non-traditional approaches are now also available, such as Prime’s equity solutions, where we take a long-term partnered approach with accounting firm principals.

In all of these instances, accounting firm partners must ask, do those parties that could buy my equity, want to? Are they financially able to? Do they underpin the long-term sustainability and growth of the firm?

For most accounting firm partners, funding their retirement means selling their equity in the firm. However, up to 65% of accountants believe the proceeds from the sale of their firm or firm interest won’t be enough to fund their next business venture or desired retirement – optimising valuation is a critical concern.

Equity Valuations and Supply Dynamics

Whether it’s the financial impact of the GFC, more difficult business conditions, low investment returns and generally lower retirement savings, or the increasing cost of living, economic issues have all impacted business owners’ and accounting firm partners’ plans to retire. Although completely understandable, this scenario is creating an interesting supply dynamic, which when coupled with margin compression for less proactive, “future-orientated” firms, could see a long-term (downward) impact for equity valuations.

Accountants have traditionally been in one of the strongest positions to provide additional advice services and assistance. They already own and maintain the primary client relationship in many instances, so it makes complete sense to extend their offering further in areas of high demand from clients, such as wealth management, corporate development and other advisory services. Accountants are facing increased competition, and understand that if they do not grasp the opportunity now, other providers will and thereby change the relationship dynamic.

Increasing a firm’s service offering can not only enhance and insure the value of an accounting firm, but also serve to attract and increase the universe of future investors and buyers.

Accountants should proactively focus on succession planning as a strategic imperative and priority. This includes understanding how an equity investor such as Prime is able to tailor solutions to assist accountants manage this process.

Related Post: How wealth management can increase value for clients and for Accounting Firms?

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