How and when will I retire?

Now that summer holidays are upon us and many practitioners are struggling to manage just 2 weeks away from the office, many are also saying they can never see the time when they can permanently extract themselves form the business.

I am not attempting to go through the specific logistics of a sale here as there is enough written on that subject. What I want to set out here is a help sheet on how to ensure practitioners are planning ahead and preparing for succession in general. My experience has shown that the main criticism of any 'buyer' is that the outgoing partner had not spent time in planning for their exit and the practice is therefore worth less and is also less attractive to any buyer. Why sell yourself short when you have spent a lifetime in building your practice ?

If you were planning to sell your home you would both clean, tidy and do a bit of DIY to show it in its best light- so why not do the same when thinking of disposing of your own business ?

There are two main strategies to consider when planning for retirement or succession;

  • An outright sale to a third party or merger with a similar sized or larger firm.
  • A transfer of equity to an existing partner- whether it be someone who has been trained 'in house' or someone you have brought into the business with this purpose in mind.

Whichever is the best strategy for you, the principles below are relevant when planning for that point in time.

Many practitioners still falsely believe that someone will come along with a blank cheque book and wave them off into the sunset. This is never the case in reality.More so than ever before, practitioners now have to wake up to the reality that they will be paid for the value of their business over a period of time and gone are the days of premium goodwill valuations.

I have seen more than one case where a practitioner has ended up with very little after a potentially lucrative sale deal, once claw backs have been made and the practice stripped down in value for poor quality clients and practice management cash flow problems,poor gross margin and lockup that has to be written off. With proper planning this need never be the case.

Larger practices usually have a strategy in place whereby there is a business plan to allow new younger partners to 'buy in' over a period of time, thus releasing the older generation.

It is the smaller practitioner that tends to find retirement and succession planning most challenging. Below is a bullet point checklist to help any practitioner (whether in practice on their own or with other partners in their business) start planning for their future and succession effectively.

  • Don't wait until the point you hate getting up on a Monday and your business is performing under par to decide it is time for you to go ! It is common for practitioners to decide they want to sell when the going is tough, only to forget that at this point their practice will be as attractive to someone else as it is to them.
  • Any buyer ( whether a third party or 'in house' partner(s) in situ) wants to buy into a practice that is performing well, has growth potential, security of income generation and 'easy' to step into and manage.
  • People pay a premium for businesses that have been well groomed and are not owner dependent.
  • Think about your own personal goals- when do you want to retire, what will be your annual income needs etc.
  • Look at where you are now and the gap in both terms of time until your desired retirement date. What is your annual earnings now and value of your practice compared with what you need it to be on retirement. This 'gap' is the start point of your business plan and working out exactly what you need to do between now and then.
  • Once you have identified what you need to achieve then you have a clear vision of where you are going and what you need help with.
  • Look at your practice management and 'lockup' in particular. A successful and premium valued practice will have systems in place to ensure debtors are at a minimal (ideally zero !) and there are fixed fee payment plans in place for all clients on either direct debit or standing order. It is no longer unusual for even the smallest practice to have negative work in progress and positive cash flow at all times.
  • Look at your work in progress. This still tends to be a black hole for many practices. Any buyer will interrogate this figure rigorously to identify old balances that are neither billable or collectable. The same is true of debtors balances. Bite the bullet and do a clean up exercise. Painful as it may be, it will identify those clients who are not ideal and focus the mind on how to ensure you are paid proper value for work done.
  • Measure recovery and gross margin on all work. As well as focusing on winning new business you must also ensure you are making the best margin on work you actually complete.
  • Some practitioners become too focused on winning new business and can't then understand why it doesn't seem to be reflected in their bottom link and bank balance. This is often caused by a lack of practice management and looking at how the business production processes work.
  • A small amount of time looking at efficiency and job production systems will pay for itself many times over in increased gross margin.
  • Grade your clients and review these gains what you have identified as your ideal client profile. This will allow you to plan on who you may want to 'sack' as a client as and when you bring in new business within the right client profile that you have identified.
  • List your 'menu of services' and what help you can provide clients with. Perform a 'windows of opportunity' exercise to ensure you are maximising revenue from existing clients. A regular and systematic 'windows of opportunity' review is proven to add up to 20% on turnover when performed for the first time and this usually becomes gross recurring income in years to come. You need to maximise this potential growth area as it will increase your profitability and value of your business.
  • Set a marketing plan in place to win new business as it is unlikely that the growth you have identified as part of your business plan will come from reactive referrals and 'pot luck' alone. Even a sole practitioner can successfully outsource much of its marketing function to good effect.
  • Identify your recruitment needs as the practice grows and the ideal profile of new recruits. Review CVs on an ongoing basis and avoid the 'fire fighting' approach of only looking to recruit when you are desperate ! Fantastic candidates are hard to come by and I have seem firms taken on ideal candidates even when they haven't yet got a specific need.
  • A good partner will always find work to keep a good person busy and the partner time made free will mean that there is more time to work 'on' and not 'in' the business thereby speeding up the long term business plan goals and the time in which they can be achieved.
  • Look at your premises- do you have capacity to grow or is this something you need to factor in to your business plan?

The above is an overview only,designed to get you started and at the right point at which to start filling in the detail. Of course, everyone reading this will say 'I know, this is stating the obvious but the real challenge is finding the time to free myself up to work on these things and extract myself from doing so much basic compliance work.' My answer would be to initially block out 3 hours a week in the diary, treat this time as priority as if it were a client meeting; don't take phone calls, ignore the e-mails for a short time and start to work on the areas listed above. To make it happen effectively, consider bringing in outside help periodically to help you drive the plan forward.

Planning for the future is a rewarding exercise in itself and will help you feel more in control and increase the enjoyment you get from your business.

As always, I am happy to answer any specific questions by e-mail This e-mail address is being protected from spambots. You need JavaScript enabled to view it and there is more helpful information to read on www.practice-perfect.net

 

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