The other day I was on a call with a tax practice owner who asked me “when is the best time to sell a practice?” This is a question I could look at from many angles, so I chose to parse it into two separate but related questions: “when do most practice sales close?” and “when is the best time to put a practice on the market for sale?”
When Do Most Practice Sales Close?
The activity and deadline nature of the tax and accounting industry dictates a lot to the sales and acquisition market cycle. There is very little activity in the market from late January through mid-April for the obvious reason that most practitioners are rightfully focused on meeting their clients needs for tax consulting, preparation and filing. We also see a slowdown in dialog around quarter ends and around the September and October extension deadlines.
These extension deadlines tend to have the most significant impact on when practice sales close. We sometimes are striving to close by the first of September to get ahead of these deadlines so the buyer can capture the extension revenue or at least a portion of it. But more often we are closing after these deadlines for a few reasons:
- The seller feels an obligation to see the clients through the extensions and finish the year’s tax service prior to transferring the business.
- The buyer wishes to get closer to the next busy season to have that lion share of the tax revenue at hand as they begin paying down the acquisition debt.
As a result, the simple answer is that most practice sales close in the fourth quarter and some even slip into January because the seller wishes to have the income from the sale recognized in the following tax year.
However, our advice and approach remains to close the sale as soon as feasibly possible. It is true that time will kill a deal and we have seen it happen on too many occasions.
For a seller, one can close the sale and then transfer the business at a later date if the seller wishes to wrap up extension work or have an earlier transfer and simply agree that the seller will do the extension work and collect that revenue. As for delaying the close for tax considerations, I do not think any tax advisor would recommend putting a business sale at risk with any extensive delay simply to establish a better tax position.
For a buyer, wishing to wait until closer to the next tax season to close the sale, this needs to be weighed against the time needed to transition the business, get up to speed, and have everything settled so everyone can focus on providing service to clients without distraction. Waiting too long can be far more detrimental than the benefit of getting closer to the next busy season revenue.
When is the Best Time to Put a Practice in the Market for Sale?
Our belief is the best time to have your sale in the market is May 1st or thereabouts. We have a lot of buyer dialog from early May through mid-June with a reduction in dialog through July and into August as would-be-buyers take advantage of the Summer months to vacation, catch up on their CPE, and other distractions. This timing of early May provides the best odds and likelihood of finding a quality buyer who is a good fit and who is reasonable regarding price and terms. We have many clients who engage our service in January through March to get ahead of this timing so we can have them in the market on May 1.
As we move into September, we begin to do the deadline dance with disruptions to our dialog so progress tends to slow a bit. But the key consideration that begins to run up against the clock on our remaining time is the terms we can achieve. Most significantly, the ability of the buyer to secure bank financing in time to close before the next busy season. From the time a practice is listed for sale in the market, one needs to expect the sale to close at least 60 days and up to 90 to 120 days later if bank financing is involved. The odds of selling a practice with bank financing instead of a significant amount of seller financing are still high if a practice is put up for sale in September but drop considerably after October 15th and decline day by day thereafter.
The other issue we experience with a practice that is put in the market after September is the pool of prospective buyers begins to shrink. Some buyers will start to recognize it is just too late to get a sale negotiated, closed and fully transitioned prior to the next tax season as we move further into the fourth quarter and will just withdraw from the market. For most of our clients, whose primary goal is to find a buyer who is a good fit and is reasonable regarding price and terms, this can be a real issue. It is just a matter of statistics that some of the buyers who withdraw from the market may very well be the best buyer for a practice.
So, the simple answer to the question about the best time to put a practice for sale in the market is anytime between May 1st and the end of September, with your odds of finding the right buyer and getting the transaction closed being better the earlier you move forward in that timeframe.
That is a much longer answer than the one I provided on the call the other day, which I suspect that practice owner is thankful for, but there are always layers of information behind the simple answer that are important to understand if you are to make an informed decision.
In summary, putting your practice up for sale around May 1 could result in a closing as early as August or September, but more likely it will close in the fourth quarter. Waiting to put your practice up for sale later in the year and even toward the end of September, still provides you with good odds to find the right buyer and close the sale prior to the next busy season. Later in the year than this and you may still have a successful sale but your odds of getting it done and achieving the terms you desire are reduced day by day.
We are always happy to discuss these questions in more detail or to address other questions you may have. Do not hesitate to reach out if we can be of assistance.
