Succession planning for solo business owners
When you're the sole employee of your own company, you are the company, from CEO to receptionist. While that keeps costs low and affords considerable operating flexibility, flying solo makes succession planning problematic at best. There is no "& Son" in the company name to suggest who will take the reins when you retire, and you have no employees to buy the business from you. When you leave your business, it may cease to exist.
That's not what you want to happen, of course. You'd like your company to have value beyond your involvement in it, so you can translate years of hard work into a sizeable asset for retirement and your estate. That's what succession planning can achieve. With a good plan in place, your business can give you (or your estate) one last payout. But, buyers may worry that your clients won't stick around—particularly if your business revolves around a personality-driven service relationship. With foresight, though, you may be able to sell for a good price.
In the professional services industries, single practitioner businesses are common. The problem of succession planning is therefore one that accountants face in their own practices and have to address for their clients as well.
Selling Your One-Person Business
Despite your fears and concerns, a single practitioner business does have value. According to Kevin Yeanoplos, valuation spokesman for the AICPA, in a recent phone interview, the sale of single practitioner businesses happens regularly. Determining the value of a business will depend on a number of factors, he cautions, including: the practitioner's field of practice, professional background, deal terms, and the size of the prospective buyer. In fact, the method by which you value the business will vary as well. Yeanoplos explains that healthcare practices, for example, tend to be valued as a multiple of net earnings, and that amount can vary widely in accordance with the specialty area.
Businesses such as dental practices, and accounting and tax preparation practices are typically valued as a percentage of gross revenues, with dental practices valued at 50 to 60 percent of gross revenues and accounting and tax practices valued at up to 100 percent of gross revenues.
Inside each field, the nature of the practitioner's clients will influence the sale price. Businesses with repeatable revenue streams tend to fetch higher prices and lead to easier sales. As a result, audit businesses (in the accounting field) are easier to sell and command higher percentages of gross revenues than tax prep practices, despite the fact that tax prep businesses tend to be more profitable. The reason, according to Yeanoplos, is that audit clients tend to be reliable sources of recurrent revenue. The buyer of an audit firm is purchasing an ongoing source of income
When your client sells his business (or you decide to sell yours), the seller should expect to stay with the company for a year after the sale – two years in some cases. The seller's goal during this period should be to transition clients to the new business owner. Essentially, you want to work yourself out of a job. If the sale contains an "earn out" provision, client retention may factor into the sale price. Insufficient client retention could lower the amount ultimately collected from the buyer. Unless the seller receives 100% of the sale price up front, he should make client transition the top priority.
Most sales, instead of yielding the entire sale price up front, involve a down payment and a note that the seller carries for up to five years. This provides an additional reason to transition the client base. The buyer's ability to repay may be based on the success of the business. If client attrition is too high, the buyer may default on the note. When evaluating a buyer, try to determine his ability to repay beyond the productivity of your business.
Selling to a large, established company or group mitigates the risk of non-payment, but it will lead to a lower price. Conversely, a small buyer, generally will pay more. Yeanoplos explains that the inflow of clients will be more meaningful to a small buyer, making your business more valuable to him than it is to a larger, established practice. The highest prices usually are paid by younger entrepreneurs who want to start a business but don't want to start from scratch. They pay a premium because without your business, they have nothing to operate.
You will need some lead time when selling your business. "You should be thinking about it the day you open your doors," Yeanoplos suggests. Every day, an owner/practitioner makes decisions that will influence the price for which the business someday will sell. Finding relationship-driven clients with the potential for ongoing, repeatable business helps, as does the caliber of client engaged by the firm. Larger, prestigious clients may increase the value of a company.
In addition to seeking the highest value clients from the day the doors open, Yeanoplos recommends minimizing the business's dependence on the founder. While a personal touch is important, any competent professional in a professional field should be able to take over another's business. It can be a difficult balance, but service has to be "just personal enough." Yeanoplos recognizes that few independent practitioners plan ahead to this extent. Accounting for the reality that most business owners don't think about the sale price until it is time to sell, he suggests planning at least two years in advance.
It is never too early to start planning the sale of a business. Use valuation techniques as a benchmark, and then fine-tune the business to increase the premium. Even if your business consists of only you, you can take specific action to push the price higher.
By Tom Johansmeyer
Tom Johansmeyer is a freelance writer in Manhattan. His work has appeared in CPA Magazine, Newsweek Europe, and Big4.com