Cull-Out Sale: Partial Retention of a Practice
Joel Sinkin and Terrence Putney
NOVEMBER 2006 - Many
professionals think of their transition to retirement in black-and-white
terms. Often they define succession as “One day I’ll
sell the company and retire.” However, there are a plethora
of ways to address succession that allow professionals to
make a change in their organization and career short of the
finality associated with an outright sale. One option is a
cull-out sale refers to an arrangement wherein a sole practitioner
or professional firm elects to retain a portion of the practice
and sell the other portion. The portion sold can be an office,
a group of clients, or even certain services offered to
all clients. There are a number of reasons to consider a
cull-out sale. It can be a first step toward succession
planning; it can increase profitability; and it can free
up resources (including time) for a professional to pursue
practice areas of greater interest, such as a particular
sometimes use cull-out sales to sell excess individual tax
clients so they can focus on business clients, or vice versa.
A group of clients less desirable to one practitioner may
be very desirable to another.
Step Toward Succession
study can illustrate how a cull-out sale can work for succession
planning. Consider a professional practice generating $450,000
annually from traditional accounting and tax services. Over
time, the practice’s profitability had fallen to about
33% as the owner hired more staff to free up some of his
time. He originally came to the authors seeking a “two-stage
deal.” This common technique allows the practitioner
to affiliate with his eventual successor firm, remain in
control of his client base, maintain a similar level of
income, and continue to control the daily schedule. It also
allows the practitioner and the successor firm to start
the transition process, which should ensure a proper complete
succession when the time comes. The technique is very useful
when a practitioner is five or fewer years from a significant
reduction in time devoted to client service. In this case,
under these circumstances, a cull-out option was a good
individual reviewed his client base and selected approximately
$150,000 worth of clients he wanted to keep working with
long term. These were clients who traditionally had required
less handholding and paid good fees. They were also clients
he felt personally connected to and enjoyed working for.
After helping create parameters for an appropriate successor
and valuing his practice, he was introduced to several firms,
and he selected a specific firm to acquire the $300,000
of business he was prepared to sell immediately. In addition
to selling a portion of the firm, he acquired the rights
to use the buyer’s software and conference room facilities
when needed, and negotiated a discounted rate for clerical
buyer of the practice was thrilled because they acquired
a group of very good clients who fit their target. By working
out a means to keep the seller around, there was greater
continuity for the client base, which resulted in high retention
rates. The buyer also became gradually acclimated to the
portion of the practice retained by the seller. As long
as the buyer retained a minimum agreed-upon percentage of
the purchased clients and made its payments on time, it
received a right of first refusal to buy the remaining portion
of the seller’s practice at a later date.
seller received strong compensation for the culled-out portion
of the practice. He got access to an infrastructure to continue
servicing the clients he retained, a practice-continuation
agreement for retained clients, and the independence to
continue running a practice as he desired. The retained
clients took the seller less than 10 days a month to handle.
Because of his greatly reduced overhead and the payments
from the sale, the seller was actually making much more
money despite working fewer hours.
practice-management seminars focus on the need to get rid
of the least profitable clients in a practice. The rule
of thumb is that, in many firms, 50% of partner time is
devoted to clients that generate less than 20% of revenues.
Adding to the pressure to change is the fact that many firms
have no excess capacity. Firms are encouraged to free up
partner time to serve clients that generate more revenue
per partner hour by “firing” the least desirable
the value of partner time is certainly desirable, but why
get nothing in return? Why not find a new home for these
clients and place them with a firm that covets their business?
This is another excellent use of a cull-out sale.
benefits of this approach for the selling firm are:
The value of the client base culled out is realized;
The selling firm avoids having to “fire” the
clients, which can be very distasteful;
Resources can be redeployed to a higher use or cut back;
In some cases, firms create excess capacity, which can
be a tremendous catalyst for growth.
culled-out clients find a new home with a firm that wants
their business. They are not abandoned, and their information
is properly transitioned to the buyer. They can now have
security in the long-term continuity of their accounting
needs. It is a win-win situation.
or Niche Practices
accounting firms offer specialty consulting services, such
as financial planning, litigation support, business valuation,
information technology, and CFO outsourcing. This has created
a type of cull-out sale focused on practice niches. A very
common scenario involves practitioners who have fallen in
love with financial services and now loathe the compliance
work they were previously doing.
following is an example of just such a deal. Consider a
two-partner firm generating over $1,550,000 annually in
traditional accounting and tax services and an additional
$475,000 in financial services and investment product sales.
One partner sought to retire, the other partner desired
to handle only the financial services business but recognized
the accounting practice was crucial in maintaining relationships
and developing new financial services clients.
partners found a firm willing to buy only the accounting
and tax portion of the practice. The buyer did not currently
offer any financial services to their client base. The remaining
partner moved into the buyer firm’s offices, although
he operated through a separate entity. The combination was
held out as a merger motivated by a desire to provide more
services to both client bases. The seller’s clients
continued to be provided accounting and tax services just
as they had been accustomed to. They also were comforted
in the fact that the retiring partner’s transition
had been addressed without any interruption in their service.
The buyer’s clients were provided access to financial
services for the first time. Both firms benefited by achieving
their strategic and financial objectives.
issues need to be considered in pursuing cull-out deals.
An noncompete agreement must be established to protect
both the buyer and the seller firms.
A referral program and agreement should create incentives
for each firm.
valuation process for the portion of the practice being
sold can be tricky.
The transition plan for clients and staff should address
the special circumstances created by these transactions.
Risks for both firms should be addressed in the agreement,
especially when the clients sold will be serviced by both
firms after the sale.
always a good idea to get an expert to help with any acquisition
or sale, especially with cull-out deals.
firms should be cognizant of the fact that there are potential
obstacles to overcome and proper planning must be done.
These include culling out a portion of a practice and selling
it to a firm that will be interested. It is important that
the interests of both the buyer and the seller are complementary.
The example above might not have been successful if the
buyer had already had a financial services practice. Even
if the successor firm agrees not to compete, a potential
conflict can arise.
of the niche, there can be clients who simply insist on
remaining with the original owners while they are still
in business. This kind of mindset can hamper the succession
process. The best way to avoid these and other traps predominantly
involves strong planning and open communication. Sellers
should let clients know that the successor firm is now better
suited to handle their needs because the old owners have
now specialized in other areas and no longer can remain
on top of both.
communication between the buyer and the seller about potential
conflicts in advance, rather than after the fact, is the
key. Potential client losses can follow a sale that is not
Sinkin and Terrence Putney, CPA,
are partners in Accounting Transition Advisors, LLC, which
exclusively consults on the merger and acquisition of accounting
and tax practices. They can be reached at 866-279-8550 or