How to Retire from a Professional Services Practice

An estimated 66% of businesses in the US will transfer ownership over the next ten years, whether or not the owners have planned for it.  Very few professional practices have given much thought to how and when senior partners will transition out of the firm.  Unless the plan is to die at your desk, which we don’t recommend, you’ll want to devote some time and energy to mapping out a retirement strategy.  

Transition the book for a share of the profits.

This works especially well with companies that have recurring revenue or recurring clients, such as CPA firms or bookkeeping/accounting practices.  One practice looking to expand its client base “buys” the book from the practice looking to wind down.  Payment for the book can be a lump sum or a percentage of the profits the buyer realizes from the book over the course of the next year or several years.  This option may require the seller to assist with the transition for a period of months, or simply co-author a letter to clients to introduce the buyer as the new service provider.  I’ve even used this strategy when one firm is looking to “level up” its client base and offload smaller clients onto a newer firm in growth mode.

Buy and sell options.

Buy/sell agreements typically outline a process when one of the five Ds happens – divorce, dispute, death, disability, default.  Rarely have we seen an agreement that tackles voluntary retirement, specifically when an owner is eligible to retire and how that process is handled.  This tends to be a more complex conversation because an owner’s retirement can be a double whammy to the business. Not only will the company lose the retiring owner’s labor and relationships, but the company also must buy that owner out without insurance proceeds that could be available in the case of death or disability.  That’s why it’s important to talk through timing and structure of payments.  Let’s first talk timing.

It’s wise to set an age for retirement, and possibly provide for the purchase price to be discounted if the owner retires before that age, which lends some predictability to the process.  Ideally, the owners have kept succession in mind as they hire and promote younger workers to the C-suite.  That said, one scenario involved two owners of the same (advanced) age basically racing each other to retirement. Though one owner’s son was employed by the company, he didn’t have the professional licenses to take over the company.  Without enough runway to recruit, hire, and promote a licensed professional, one owner was left behind, waiting until his son could take – and pass – the licensing test.

If the company has a healthy blend of older partners and younger employees climbing the partnership ladder, the senior partners can slowly divest themselves of their ownership by selling shares to the younger employees. The younger employees can pay for the ownership themselves, possibly through financing, or the company can issue bonuses that are intended to cover those payments.  Consult with your CPA to discuss tax ramifications.

In one scenario, we had two partners of similar ages and one partner who was 10 years younger. We created a process by which any partner could initiate the sale of all or a portion of his interest, and another process by which the younger partner could initiate the purchase.  That allowed both the buyer and seller some flexibility in timing those transactions.  How about structure of payments?  We provided for a lump sum payment if the purchase price was under a threshold the owners thought the company could withstand, and for payments over time if the purchase price exceeded that threshold.

In another example, the founder of a two-owner firm married a retired guy and decided to retire as quickly as possible, without having really planned for it.  We put together a three-year transition plan. Year one required that the firm bring on a younger associate to take on some of the smaller clients to free up the other partner to take over the senior partner’s clients.  Senior partner (“SP”) took a big step back from the actual work and handled the administration of the practice while junior partner (“JP”) worked to meet and hopefully retain SP’s clients.  At the end of year one, SP transferred a portion of her ownership to JP, with payment for that ownership being reflected in the revenue generated by the SP’s book (now transitioned to JP) during the previous year.  In year two, SP stopped meeting with clients altogether and reduced the number of hours she was expected to spend at work.  Like the end of year one, at the end of year two, SP transferred more ownership to JP, which made JP majority owner.  To protect SP, we drafted agreements that limited JP’s ability to make certain significant decisions about the business while SP was still an owner, even though JP technically held a majority.  Specifically, JP couldn’t sell off the business, dissolve the company, or take on debt over a certain threshold without SP’s consent.

As you have probably gathered, there is no “standard” way to handle these types of transitions, which can be good and bad news.  It’s important to get your business attorney, tax, and wealth management advisors together to brainstorm the approach that’s right for you and your business.