One of our new clients is an Accounting Business located in South Carolina. The owner (let’s call her “Pam”) started the business 15 years ago and revenues have grown to $1 million per annum. However, after a challenging tax season, Pam said she was ‘tired’… and asked about preparing her business for sale.
We needed to dig deeper… and here’s a summary of our conversation:
Panalitix: Pam, let’s start with exactly where your business is today. And what are you looking to change?
Pam: The short answer is ‘dependence’. My business cannot run without me. I still manage the important client relationships, I finalize sales proposals and even do some admin work like the payroll. Honestly, I feel like a ‘prisoner’ in the business. If I want more free time or cash, I need to do more work. And there’s no way out.
Panalitix: So what options are you considering?
Pam: Well for years, I thought things would just get better, perhaps as we grew. But that hasn’t happened so something has to change. That’s why I’m thinking about selling.
Panalitix: Selling may be an option… but have you thought about your financial needs after you sell?
Pam: Not in great detail. I used to think of living on $80K per year in retirement but that doesn’t seem plausible now.
Panalitix: We’ll need to get REALLY clear on this. If we take a ‘rule of thumb’ valuation of your business – call it $1 million – and you invest those proceeds, you are unlikely to yield more than 3 – 5% in annual income. That’s before we consider tax and various deal terms like the timing of payment and contingencies. You may need to dip into the capital or find other sources of income.
Pam: Maybe I could continue working in the business for a wage… though that is exactly what I am trying to avoid!!
Panalitix: Let’s consider this from a completely different angle. Can we make the business less dependent on you? In that way, we would create a more valuable business, which could generate an income for you that’s not dependent on your input; a passive income. This gives you an option to sell the business OR keep it as an earner, but on your terms.
Pam: I’ve never thought about ‘passive income’. And I’m not sure it’s possible.
Panalitix: Most Accountants don’t think this way. It requires a completely different mindset. You would no longer be building the business around yourself. You’d look at your business like an investor who wants to put people in place to deliver value to clients. You’d ensure people are playing to their strengths and you’d develop processes to increase value. Over time, you’d remove yourself entirely from the business… if you wanted to.
Pam: What kind of passive income is achievable in a firm like mine?
Panalitix: Well, many firms achieve a net income of 25% of revenues. We’ve worked with businesses who’ve developed processes, teams and client portfolios and so the owners play no role in the business but enjoy the profits. In your case, that means $250K per annum, or 25% of your annual revenues. That’s way more than the typical yield from selling and investing the proceeds.
Pam: Sounds interesting… and challenging. And I’d never thought about it this way.
Panalitix: Honestly, Pam, it IS challenging. It involves undoing a lot of habits. One of my clients went through this over the past 2 years. With sales of $1.2 million, their COGS were around 42% ($504K). Overheads were 37% (or $444K) which left $252K for the owner, his passive income. He also draws a small wage as an ‘advisor’, a role he enjoys. With his income goals now taken care of, he’s pursuing other business ventures.
Pam: How did he do this?
Panalitix: The first thing is to establish the right mindset. That means to transition from someone who believes they work to prepare tax returns to one who works to build a business. Not surprisingly, much of the focus is around developing teams which are self-sufficient, accountable, playing to their strengths, energized, motivated and working under strong leadership. Well-designed business processes are essential as is a dedicated effort in marketing and sales to attract the ‘right’ clients.
If the owner is clear and committed to their goals, they have a good chance of achieving the outcomes they want. Implementation is the most important thing.
Pam: How are you qualified to help me with this?
Panalitix: We’ve been involved in the accounting industry for over two decades. That said, we see this as a BUSINESS challenge, not a challenge that’s unique to Accountants. Our owners have traveled their own paths in building valuable businesses NOT dependent on them.
So Pam is in the early stages of her journey, building a business which works for her, rather than one that is entirely dependent on her. If you’d like to learn more about this pathway, please get in touch.