Why converting to a cloud firm can be a good exit strategy

By Brannon Poe, CPA

The past two years have forced accounting firms to adapt quickly to changes in technology and the world around us. But the pandemic also caused many firm owners to reassess their priorities. Many approaching retirement age are taking a closer look at their exit options.  

If you're thinking about retiring or exiting, you need to think about the factors that will determine what you can sell your firm for and whether you can even sell it.

I've been facilitating accounting practice transitions for almost 20 years, pioneered a consulting-based approach, and developed a five-stage process for selling and transferring practices. Based on that experience, I know that you have to build a firm that others will want to buy. That's why for many firms that are not yet on the cloud — perhaps 70% of the firms we work with — I recommend becoming a cloud firm as an exit strategy. Here's why:

  • Demand for cloud firms is high. As a leader in cloud firm sales, it's clear to us that the demand for cloud firms is high. These firms spend approximately 50% fewer days on the market than non-cloud firms. They're easier to sell because potential buyers are not constrained by geography.

We've seen little demand for non-cloud firms in rural areas. For these firms, conversion may be the only solution. With no buyers willing to relocate to the area, and with a talent pool too thin to generate local candidates willing and able to take over a firm, some firm owners may be forced to walk away from their small rural practices. 

  • They sell for a higher multiple with better terms. Accounting practices are generally sold on a multiple of their revenue. Owners of cloud firms can ask for — and receive — a higher multiple because of the demand. We analyzed our prior year sales history and cloud firms on average sold for 13% more than our traditional firms as a multiple of revenue. However, this doesn't capture the whole picture. Anyone who has experienced rapid growth will know that scaling a business requires a heavy reinvestment of profits. When we looked at the sold price as it relates to owner cash flow, cloud firms got a 27% premium. Our cloud firms sold for a multiple of around 2.83 times annual owner cash flow. In contrast, traditional firms fetched approximately 2.22 times owner cash flow. 

Also, cloud firms sold for all cash at closing more often than traditional firms did. To top it off, because cloud firms tend to have more growth, these firms sell for a higher price because owners have a bigger asset to sell at the time of the exit. 

  • They allow you to expand your reach. Successful firms have a tendency to gravitate toward higher profit practice areas. Being virtual allows you to do that more effectively, because it means you can go after clients outside of your geographical area. Let's say you have a firm that specializes in dental practices. With a virtual firm, you have a greater ability to expand in that niche. You can work with a dentist in Boise, Idaho, just as easily as with one in Memphis, Tenn. The more you focus on a niche, the better you get at serving those clients, and the more efficient you are, the more your margins go up. All of that makes your firm more attractive to a potential buyer.
  • They let you operate where today's entrepreneurs are. Today's younger entrepreneurs are used to doing everything online, so you may have a hard time attracting new clients if you're not working in the cloud. As older business owners retire and sell their businesses to younger, tech-savvy business owners, you may lose those businesses as clients. Firms that haven't moved to the cloud risk a steady drop in clients, which also makes your firm less appealing to buyers.
  • Staffing is easier. One of the biggest constraints to growth these days is staffing, and by embracing a remote work environment, your staffing options become wider. The whole country is available, not just your town or region. Allowing for a remote team is really helpful in finding the talent you need. Let's say you want to hire another CPA who has a lot of experience with dental clients, but they live three towns over. With a cloud firm, that's not a problem. 

In fact, if you are virtual, with ever-expanding options for offshoring, you can tap the whole world to staff your firm. Even some of your administration can be offshored. You can have virtual administrative staff and virtual assistants to help with some of the firm's more routine tasks. 

Conversion challenges

Converting to a cloud model is not to be taken lightly. Owners need to be highly motivated to see the transition through. The number one challenge we hear from clients who have gone through this transition is not the technology itself but getting both clients and staff exposed to the technology. You've got to convert every single client and every single member of staff. I tell people it's like loading a dishwasher: You load it one dish at a time. Converting to cloud technology has to be done one client at a time. 

One strategy is to convert the easiest clients first, so you can get the quick wins. The same approach works with staff. Start with your most tech-savvy employee and get them to learn the system and begin developing the new processes, and then they can teach everybody else. Now, don't be surprised if your most tech-savvy staff person — or client — turns out to be someone in midcareer, rather than someone early in their career who has grown up with this technology. Someone who is process driven, detail oriented, and not afraid of technology changes can help to blaze this trail.

For bookkeeping clients, the conversion will involve moving clients from desktop to online software, often from QuickBooks Desktop to QuickBooks Online or to Xero. Depending on your client base, you may find that some are more willing to adapt than others. You might lose a few clients. Is this trade-off worth it? I believe for most firms, the benefits far outweigh the risks. 

Technology is not a panacea 

Just because you have a cloud firm doesn't automatically mean you'll have a successful firm. The same fundamentals are crucial, whether you operate in the cloud or not. You still need to provide good client service and a good client experience. You need to have good communication, both within the firm and with clients, and you've got to have a good work culture. 

These are all universal aspects of a successful firm, foundational things that can't be ignored just because you've moved to the cloud. But if you have that strong foundation and you're in the cloud, you'll have a much easier time with firm succession. 

Brannon Poe, CPA, is the founder of Poe Group Advisors, a brokerage company with offices in the United States and Canada that facilitates the buying and selling of CPA firms. To comment on this article, contact Courtney Vien at Courtney.Vien@aicpa-cima.com.

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