The terms of your succession plan are often a top consideration when determining if now is the right time to move forward. After all, there are dozens of ways practitioners can structure their practice sale and continuity plan, including different types of financing agreements and valuation methods. Because tax practices have seasonal revenue cycles and client‑retention risks unique to the profession, choosing the right deal structure is critical for both stability and long‑term financial success

In the third article in this series, we discussed client retention strategies and best practices. In this blog, we’ll dive into potential ways to structure your transition and different valuation methods.

Succession Planning Series #4:

Succession Planning Triggering Events

Planning for the inevitable keeps tax practices flexible and robust. Even if you are years away from a potential sale or retirement, having an emergency plan in place can avoid undue stress on loved ones, business partners, and employees. Triggering events can include:

• Death
• Terminal illness
• Disability
• Long-term illness
• Retirement
• Divorce
• Restructuring
• New opportunities

Each of these events requires a predefined mechanism for valuation and payment, which underscores why a well-constructed buy-sell agreement is the cornerstone of emergency planning.

Legal and Financial Fundamentals

All succession plans will include a formal legal agreement, known as a buy-sell agreement. A well-structured agreement is important because client trust and continuity depend on minimizing uncertainty. Predetermined valuation and payment terms help prevent liquidity strain for the successor—particularly during tax season cash flow cycles. It outlines the value of the practice, payment terms, and any other applicable deal information, such as non-compete agreements and triggering events. It’s between practitioners and buyers on how they want to structure this agreement.

Seller Financing

In a seller financing agreement, practice owners act as the bank. The buyer will repay the borrowed funds on a set schedule, including interest and principal. For buyers, this method provides faster closing and less rigid qualification criteria. For practice owners, seller financing can make their practice easier to sell, provide a steady income stream, and potentially offer a higher return through interest income. However, there is always a risk of buyer default. Because tax practices generate revenue unevenly throughout the year, many seller‑financed deals are structured with seasonal payment schedules or secured with collateral or personal guarantees to reduce risk.

Deferred or Future Compensation

Many practice owners have spent years building their business, sometimes at the expense of their own retirement savings. A viable solution to support retirement savings after a practice sale is to add deferred or future compensation clauses to the buy-sell agreement. The buyer will assume liability for future compensation. Buyers can take a tax deduction for compensation paid in the year of the payment, while sellers can defer taxable income to a future date.

Rent as Payments

Practitioners who own the building where their practice is located may choose to remain landlords. Receiving rent as income can provide another income stream during retirement; however, maintaining asset control can require a time commitment that many practice owners may not want. Many solo and small-firm practitioners own their buildings, making rent-based payments a straightforward way to convert real estate equity into a stable retirement income stream.

Non-Traditional Options

Buy-sell agreements can be structured however both parties agree. While tax considerations of different sale structures should be evaluated, finding a sale method that fits their overall goals is equally important. For example, practitioners who want a steady, continuous income during retirement may pursue deferred income or seller financing. On the contrary, practitioners who want to walk away from their tax practice with no ties might find a stock sale advantageous. Other non-traditional options might include earn-out agreements and collection-based payments.

Deciphering Valuation Models

While you are working to uncover the agreement structure best for your practice, the overall valuation will come into play. Overstating a practice’s value can lead to unrealistic returns for buyers and cash flow issues, while understating the value can leave money on the table. There are two primary models for valuing accounting and tax practices.

Traditional Revenue-Based Model

A traditional revenue-based valuation method uses a revenue multiplier to assign a value to the practice. Typically, this multiple is 1 to 3 times the prior 12 months’ gross revenue. One drawback of revenue-based models is that they often ignore the practice owner’s time and compensation.

Discounted Cash Flow Approach

A discounted cash flow approach projects future cash flows and discounts them back to the present value. This method is well-suited for firms with fluctuating growth and is more accurate because it considers owners’ compensation and other risk factors.

Summary

Succession planning is an integral component of every tax practice. While practitioners hope to step away from their practice on their own terms, emergencies and unexpected events can occur, making it important to understand valuation approaches and potential deal structures. By understanding the full range of payment structures, emergency planning tools, and valuation methods, practitioners can create a transition strategy that protects both their financial future and the practice’s ongoing stability. In the next blog in this series, we’ll cover the key tax implications of succession planning and how to successfully transfer knowledge to buyers.

By Rachel Szeklinski, CPA

Sources

• Deferred compensation deduction and the sale of a business | The Tax Advisor
• CPA Practice Valuation: How to Value Your Accounting Firm for Maximum Sale Price | Accounting Broker Acquisition Group