I recently had to tell an accounting practitioner that the value of their equity within the firm was worth less than ten cents in the dollar. Unsavoury of course, but it needn’t be this way. I advised three options that provided a better outcome.
Two of these required additional time pre-transaction. This is essential. Taking time to understand what the value of the practice would be prior to setting their succession would have avoided the scenario entirely.
Here are a couple of basic principles to be aware of during periods of negotiation or value determination.
- Just because you bought in at ‘x’ dollars, however many years ago, does not mean that value does, or should, remain relevant or accurate today. I’ve never seen any other asset remain consistent into perpetuity so why would this apply to the practice values? As with all assets, value fluctuates based on a number of both internal and external factors.
- Just because you don’t like what an independent third party may value or price your practice or equity at, it doesn’t mean the value is wrong. If you’ve engaged an experienced and unbiased advisor to assist with value or pricing, they’ll know what the fee base or practice is really worth.
All too often we are engaged to advise on value or price once a succession option has already been settled.
Sometimes, this is for the introduction of another equity holder from within the firm. Internal succession is one of the most successful approaches to transitioning equity, but there are key criteria for whether that is the most desirable approach to implement.
Often, because of the size of the firm and the number of current and future equity holders proposed within the firm, the benefit after a reasonable salary that is available to equity holders is so low it either results in a very low valuation or in the recent or imminent purchaser paying way too much and having an inflated payback period.
Many parties looking to divest themselves of equity plan the approach without consideration of its impact on value. The basis of strong succession planning involves performing an initial analysis of the current value of a practitioner’s wealth, assets, liabilities, and the like, against what is projected to be required to live the lifestyle they wish to follow post-business ownership, and then selecting the appropriate succession approaches.
Some business and practice owners are poor succession planners. They often skip this step, simply thinking that they will be able to realise whatever value they need upon the sale of their firm or equity.
At Rob Knights & Co we know and understand the importance of strong succession planning.