Eventually, you’ll come to the day when it’s time to hang up your accounting hat and settle into retirement bliss. And while you’ve probably helped many clients develop tax-efficient succession strategies, have you ever considered your own, especially regarding your retirement goals?
This article lays out some of your options as the owner of an accounting practice and how they may impact your post-exit finances.
Selling Your CPA Practice
This is perhaps one of the most obvious moves you can make. You neatly wipe your hands clean from your business and start a new life, free from the stresses (and successes) of running your own firm. There are plenty of nuances to consider to help ensure you get the most out of your sale.
A lump sum may seem difficult to pass up, but receiving a series of payments spread out over several years may make more financial sense. Doing so can be beneficial in managing your tax brackets and may positively impact your Medicare premiums and retirement withdrawal strategy.
You may also want to consider using the gains from your sale to purchase other investments or financial products, such as insurance, annuities, stocks, bonds, or even another business. Alternatively, you could use your profit to purchase a home or investment property. Your options are nearly limitless – which is why a professional is necessary to help determine purchases that make sense.
Other Considerations:
- Tax Planning for Sale Proceeds: Structuring the sale to optimize for long-term capital gains can significantly affect your tax liability.
- Identifying the Right Buyer: Finding a buyer who aligns with your firm’s values and client expectations is essential.
- Sale Timeline: When does it make sense to sell? You may not be ready for retirement, but if you wait too long, your business may begin to falter, reducing your exit options.
- Evaluate Early: A solid valuation of the firm can significantly impact the financial outcome.
Merging your CPA Firm
If you’d like to remain more involved in your business before making a final goodbye, a merger may be the right decision. Instead of handing over the keys, you join forces with another company and build something even better with your combined skills and resources.
When you merge with another practice, your firm gains access to fresh talent, a new customer and prospect base, and potentially new capital. The optimal scenario is that your overall net worth will increase over the years until you decide to cash out your shares, leaving you with more money overall than had you sold your firm outright – and you’ll be better set for retirement as a result.
You also get the benefit of leading the transition of your existing customers and employees into a new company. People like a familiar face, one they can relate to and trust. Client and employee retention rates may be better if you remain until the transition is complete.
There are downsides though – a new house is only so big. You may discover that you’ll have to cut key team members if there isn’t room for more than one person in their role. Your existing clients may not like the new systems put into place and opt for greener pastures. The same goes for employees!
A merger may also take considerable time, considering the potential legal and regulatory hurdles you may have to overcome. Plus, the merger may ultimately be unsuccessful or even lead to failure. In that case, you’ll wish you had just sold your firm instead of attempting to merge it.
Other Considerations:
- Transition Commitment: Be ready to work with the new company for at least two years to ensure smooth client relationship transitions.
- Emergency Preparedness: A Practice Continuation Agreement can safeguard your firm during unexpected situations as you explore merger options.
- Prioritizing Cultural Fit: Finding a merger candidate whose culture aligns with yours is crucial for a successful integration.
Internal Succession
Merging or selling may be a moot point if you already have a strong team below you that can gradually take over your firm. And with a successful internal succession, you can be sure that your legacy will be cemented and your firm’s culture left intact with trusted talent.
One method of doing so is to establish an Employee Stock Purchase Plan (ESOP). An ESOP allows you to maintain more control over your firm as you gradually transition into retirement. You can sell portions of your company to the ESOP as you see fit over time, allowing you to time the sales as necessary to fit into your tax plan or liquidity needs.
An ESOP also gives employees a financial incentive for the firm to succeed, helping to retain key talent and minimize staff turnover.
An ESOP also comes with tax benefits, depending on the corporate structure.
C-Corporations: As the owner of a C-Corporation, you can potentially defer the capital gains on your sales via a 1042 rollover – a potential boon for your tax situation. However, you’ll have to have held your shares for three years before being eligible for a 1042 rollover, meaning you’ll have to incorporate well in advance.
S-Corporations: The income corresponding to the ESOP’s ownership is not subject to federal income tax. So, if the ESOP owns 30% of the S-Corp, then 30% of the S-Corp’s income would not be subject to federal income tax. This can lead to considerable tax savings for the company as a whole, which indirectly benefits all shareholders as there will be more funds for distributions, reinvestment, or other purposes.
Key Factors:
- Early Identification of Leaders: Identifying potential successors allows for plenty of training. Once it’s time to retire, you’ll know your firm is in good hands – you trained them precisely for this moment!
- Smooth Client Transition: You’ll have plenty of time to introduce your clients to future leaders, helping ensure a seamless transition.
Shut Your Firm Down
Of course, as the owner of your CPA practice, you can always just turn off the lights and close the doors. Unfortunately, this may be your only choice if you can’t find a buyer or firm to merge with and employees, family members, or anyone else are unwilling to take on the burden of running your practice.
To prevent such a scenario, it’s essential to keep your firm competitive and attractive in the eyes of potential buyers, your employees, and your clients.
Final Thoughts
Whether you choose to sell, merge, implement an internal succession plan, or even shut down, each option carries significant financial implications. Your decision will heavily shape your retirement, affecting everything from your tax situation to your income streams and estate planning.
However, your ultimate succession strategy should consider other factors beyond your immediate personal financial gain: How do you want to be remembered? How will your decision affect those who rely on your expertise? Finally, and perhaps most crucially, what implications will your choice have on your family’s well-being and financial security?
We invite you to reach out and schedule a consultation with us. Let’s work together to tailor a succession strategy that aligns with your retirement goals, optimizes your financial situation, and secures the legacy of the practice you’ve dedicated your life to building.
