Why many practices are grappling with issues around their future.
It’s not uncommon to hear accounting practices described as great at looking after clients, not so great at looking after themselves.
On that theme, a big topic of discussion among ACCA members during our practice roundtables last year was succession planning.
Bringing together practice owners and stakeholders with the next generation of leaders – be they from within the practice or from outside - has proved a difficult task for many. An evolution in working patterns, seemingly less desire to take an equity stake in a practice, along with digitisation and automation of traditional number-crunching work, are contributing to difficulties in moving new owners into the practice.
And when the endgame is a sale process, gauging valuation and finding a suitable merger partner is fraught with difficulty.
Many accountants’ clients go through similar issues, of course. Andrew Gray FCCA, chairman of accountants and business advisers Kirkpatrick & Hopes, decided to set out his thoughts on succession planning in a book: Do More of What You Love, and a blog covering its key aspects.
The book sets out, in Gray’s words, to help do the things they really want to do, whether in business or their personal life. This is achieved through income and share ownership planning (ISOP). The aim of ISOP is to go ‘deeper into the psychology of succession planning, helping business-owners face up to the need to plan for the future and their ultimate exit from the business’.
First, let’s hear what Gray has to say about ISOP.
There are four key stages that a business owner will have to push through to achieve their goal. These are:
The first stage is, effectively, gaining an understanding of where you are, and where you want to head. This includes setting out your financial position and reviewing business performance. Then, personal goals must be understood – it is crucial to do this early on, as it will shape and define the next stage: setting your business goals. ‘For example, there is no point killing yourself to create a company valued at £10m if your personal income needs are very modest,’ states Gray in his blog.
‘Meaningful targets’ for a business will not be rocket science to an accountant – but that doesn’t mean it’s always undertaken with diligence, or performance analysed. But understanding your personal goals and ambitions will make this process more straightforward: ‘You can then strive for these targets knowing that they are meaningful; they are capable of delivering the financial means to meet your personal goals,’ explains Gray.
The second stage sets out the strategy for success, and how it will be followed through. This involves more technical discussions: namely, how can the business be structured and how will income be extracted. Gray says that an important part of this discussion will be identifying and analysing potential tax-efficient ways of making the business work.
The final aspects of planning include aligning business development with the succession planning process, and then setting out financial reporting systems and processes.
‘Every business should do forecasts of profit and loss and cash flow, but when going through a period of change like ISOP, it is even more important to have a firm grip on your finances,’ says Gray.
The third stage involves implementing the plan – in other words, reconfiguring the business. ‘Having worked through the clarification and planning processes above, we then create a recommendation for the detailed steps that need to be taken next,’ says Gray.
‘The most common method here is to create a new company, owned by shareholder employees, and to pass the shares in the old company to the new one.’
The complexities of change invariably mean other professionals are required to help, and this is the point at which they are brought in to help. For an accountancy practice helping clients through this process, the practice remains in situ as ‘lead adviser’ or project manager.
The fourth and final stage focuses on managing and running the business. Importantly, it involves the adviser working closely with their client to make sure they stay on track, and to be able to flex as circumstances change and evolve. This will include keeping pace with tax, accounting and legal developments.
‘Because a typical ISOP project takes five years to see through, during that time, we need to closely monitor the changing circumstances of the business and the relevant tax, accounting and legal changes that may affect the original ISOP plans,’ says Gray.
Related issues: employee ownership
‘If you’re new to the concept of employee ownership, I realise it may all sound a bit utopian,’ says Andrew Gray. In another of his blogs, Gray outlines the advantages of the employee ownership model.
Employees who have a stake in the business are more engaged and more productive, he believes. They are also more likely to help drive innovation and more entrepreneurial.
‘Employees who feel like they are an integral part of the business are the best possible ambassadors for a brand or business,’ states Andrew Gray.
He points to the Esop Index, which has tracked employee-owned companies since 2003, and has shown they consistently outperform their competitors.
‘Employee ownership provides a smooth exit route for the business owner,’ he says.
‘With an outright sale, if certain performance conditions are not met, you may not receive the full value of the business. But, in this method, employees buy into the company with cash or by sacrificing future income to buy out the shares – meaning you’re more likely to receive the full, fair value of the business (albeit over a longer period of time, rather than in a lump sum).’
Related issue: valuation
When considering how much a business is worth, Andrew Gray suggests asking yourself ‘what does it need to be worth?’ Whether considering an external or internal sale (employee ownership), these questions must be answered before undertaking any calculations.
Gray sets outs gauging profits by adjusting for non-commercial and exceptional items. Next is the tricky bit – multiplying that profit by a price/earning (P/E) ratio.
‘The P/E for most small businesses is typically between three and seven, depending on factors like how independent it is of the business owner, the quality of the systems, and the lifespan of its products or services. A P/E of five is typical for good, small, privately owned businesses,’ he explains.
‘The answer you arrive at is the theoretical value of your business. I emphasise theoretical because, just because that’s what it’s worth on paper, doesn’t mean that’s what buyers will be willing to pay!’