You’re building a successful practice. And while you may love what you do, at some point, you might consider selling your practice. Maybe you plan to sell it when you approach retirement. Or maybe you want to sell it to pursue a new endeavor. Whatever the reason, we can all agree that getting top dollar for what you’ve created is ideal. How do you position your practice to get the highest value offer you can? It starts with understanding how a prospective buyer will value a tax practice for sale.
How is a Tax Practice Valued?
When deciding on a sales price, the final price is often a multiple of annual billings. The multiple you’ll probably hear often is 1. That means for every $1 in annual billings your sales price will be $1. For a practice with annual billings of $100,000, an average sales price would be $100,000.
But it’s not that straightforward: some practices will have a higher multiple while others will have a lower one. Several things that can affect your price: the quality of the clients, the demand in the market for purchasing a tax practice, the realization rate, and the size of the practice.
There is one piece of the sales price puzzle that needs special consideration, and that’s retention.
After a tax practice is purchased, it’s usually not an instant deal. There is a period following the sale called the retention period, where the buyer’s final price is dependent on the dollar value of billings that are paid during that period.
For example, a buyer may agree to pay a percentage of billings for two years after the purchase, during the retention period. If a majority of your clients suddenly leave after the sale, your final sales price will plummet because the buyer is paying you a percentage of those billings during the retention period.
On the other hand, if your billings continue to increase during the retention period after the sale, your final price will increase.
So, client retention is a big deal for two reasons. The first, retention will help you grow your practice to a higher value during the years leading up to your sale. And second, it will help ensure your target sales price is met at the end of your retention period.
How do You Improve Retention?
When you’re taking the proactive approach to improving the value of your practice well before you sell it, you’re able to spend time improving retention rates year to year.
Understand why customers leave
The first step in improving retention is to understand why customers are leaving in the first place. Are they shopping around for a better deal? Are they unhappy with the service you provide? Consider using a survey to collect customer feedback and see where you can improve. You can also start the conversation with clients and ask them if they’ve had any experiences with your practice that could be improved.
Feedback can initially be challenging to hear, but it’s an important step in improving retention rates.
Keep in contact
Once tax season is over, it’s easy to move onto other parts of your practice (and life) and assume you’ll pick back up again with your clients in the next tax year. Instead of taking that approach, use a strategy to stay in regular contact with them during the year. An easy way to do this is with an email list.
During the year, send out reminders or tax tips to your clients. Provide them with any updates to taxes they’ll need to know or announcements from the IRS that will affect them. Keeping in touch regularly will help them to remember that when tax time rolls around again, they enjoy using your services.
Offer year-round services
Do you have any clients that would benefit from services outside of tax season? Maybe they need mid-year tax strategy meetings or bookkeeping or CFO services for their small business. Working with clients year-round can offer an easy way to both stay in touch during the year and make sure that your services remain top of mind every tax season.
Make booking and paying simple
If you haven’t made it easy for clients to book meetings with you, it’s time to re-think that process. Make it simple for clients to get in touch with you when they need to. Let them book online appointments during tax season by using simple appointment software. It’s not only easier and more convenient for your clients, but you’ll find that it’s easier for you as well.
Once services are rendered, it’s time to get paid. And it’s important to make that process as easy as possible. During the retention period after the sale, your final price will be based on a percentage of billings collected. Try out different payment options before you plan to sell, to ensure you have the best one in place.
Working on building a strong tax practice before you decide to sell can help you maximize your sales price and lead to a smoother transition. You don’t need to do this all at once, but start making small changes that will pay off when you decide to sell your practice.