Looking down the road

Planning for succession lets you put steps in place to protect the business you’ve spent a lifetime building. It’s also a vital aspect of retirement planning that allows you to exit the business successfully when you want to.

True story: a sole proprietor accountant in his early 60s died unexpectedly during the past tax season — the bread and butter of the practice’s $360,000 annual gross billings. He had no succession plan in place. "This could have left his family in financial straits at a time when they were dealing with a tragic, sudden loss of a loved one," says Robert Gold, FCPA, FCA, managing partner, Bennett Gold LLP in Toronto. Thankfully, a colleague who was also an accountant stepped in. He helped put together a list of potential buyers for the practice and within two weeks the family accepted an offer. "But what if this practitioner hadn’t had a golfing buddy with the same connections to private-practice practitioners?" asks Gold, whose firm was one of those approached to purchase the practice.

An independent consultant to the public accounting profession and author of CPA Canada’s Succession Planning Toolkit for Practitioners, Steve McIntyre-Smith has seen the fallout of a lack of planning and it’s not pretty. Fearful clients leaving en masse; grieving families having to conduct a fire sale to get whatever they can for the business; sudden illness leaving sole proprietors unable to work and meet their financial obligations. It’s an all-too-common reality for many sole proprietors who don’t want to think about succession, McIntyre-Smith says. "The problem is partly one of human nature. No one thinks they are going to die prematurely or be unable to function at full capacity but life doesn’t always work out the way we think it will."

Planning for succession lets you put steps in place to protect the business you’ve spent a lifetime building so that your family is taken care of should something happen to you. It’s also a vital aspect of retirement planning that allows you to exit the business successfully when you want to. Here are a few key steps to help ensure a smooth transition of the business on your terms.

Get your own financial house in order. Look five years ahead and do what’s necessary today to make your practice attractive to potential buyers down the road, says McIntyre-Smith. "You have to be building your business, running it as efficiently as possible so you will be able to get top dollar when you are ready to retire. Buyers want to see a history of at least three to five years of 40% to 50% net profit based on gross billings."

Reach out to other practitioners in your community. "Let them know you are doing advance planning and discuss what an acquisition of your firm would look like," says Gold. "If you die suddenly, this type of planning serves as an insurance policy to your family, who won’t be left scrambling to find a potential buyer." McIntyre-Smith also suggests networking at the monthly district association meetings. "Develop relationships with younger practitioners/potential buyers."

Create an agreement in principle. This type of locum arrangement is for all intents and purposes a succession agreement with pre-agreed buy-and-sell terms. "Valuation is typically one times billing paid out over three to five years less client dropoff," says Gold. "In the case of a sudden death, discounts can be applied because the same opportunity to ensure a smooth transition is gone." While this is the norm, there is no cookie-cutter solution, says McIntyre-Smith. "Everything is negotiable. Think clearly about the terms and wording. For example, if the agreement is part of a retirement plan it may be more beneficial to you as a seller to take 20% of billings over five years rather than a more traditional buyout. You don’t get what you deserve; you get what you negotiate." The agreement should include a jointly drafted communication to clients to facilitate the transition and client retention.

"For many practitioners, outside of the family home, the practice is the biggest asset the estate has," says Gold. "It is a life’s work, but it won’t last for months waiting for someone to come along. A succession plan is critical."

About the Author

Andree Lavigne


Andrée Lavigne, CPA, CA, is a principal at CPA Canada leading the organization’s programs for practitioner support.

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