A ‘lifestyle’ vs ‘commercial’ practice…and how it affects value

A practice may position itself on the ‘lifestyle v commercial’ linear line, with ‘one’ being strongly lifestyle and ‘ten’ very commercial.

At the bottom end of the scale we normally find practices with lower than average profits and reduced-time working for the owners. At the other extreme a commercial practice will be full-time working, optimising profitability and investment for a sustainable future. The majority of practices fall into the ‘three’ to ‘eight’ sub-group.

In analysing practices for many years, we see owners seeking to express satisfaction both with income and the time they dedicate to the business. Foulgers’ role as advisers to accounting practices, law firms and other professional services outfits, is often about gauging the time investment of the proprietor/owner and to split the profitability into:

  1. Remuneration for chargeable work;
  2. The super profit (profit over and above ‘normal’ profit) generated from the business as a whole; and
  3. The profit generated by the support organisation excluding partner time.

This analysis raises some interesting questions and often provides new insight and a blurring of the lifestyle/commercial analysis.

I recently dealt with a two-partner practice where both partners were recording over 2,500 chargeable hours a year, profitability was in the bottom quartile and their super profit was negligible…zero.

Both partners were content with their position (lifestyle) and although they had started to consider ways of reducing time with a view to an exit in five-to-ten years, they were by no means regarding their situation as requiring urgency or indeed fundamental change.

Can you ease the foot off the pedal?

At the other end of the lifestyle v commercial measure, we have taken on a practice-profiling exercise where two partners wish to retain equity, but reduce their time over eight-to-ten years, from five days a week down to one day. This firm, very similar in size to the first example, has strong second-tier management who are remunerated at or above market rates – and have no intention of taking on equity.

The practice has achieved a size and client loyalty with a self-generating referral pipeline, giving the owners well-above-average profitability and prospectively an opportunity to work one or two days a week.

There is no reason why their objectives, as outlined above, cannot be met although we have had to raise the issues of commitment, strategy, risk and business development as being four areas that may be of concern as their invested time reduces.

'Lifestyle' can lead to 'reactive'

An over-emphasis on ‘lifestyle’ can also lead a practice down a reactive path. With partners close to retirement, there is an urge to reduce time and ‘maintain’ the status quo. Fee increases are noncompetitive and the business pipeline shrinks. This is never a good idea. Often stakeholders (staff and clients) are not nurtured or developed, which leads to a decline in service and an erosion of capital value.

Each practice is different. The choice by owners to be ‘lifestyle or commercial’ is a personal one, and may transcend the linear representation in terms of just ‘one’ to ‘ten’.

Keith Underwood is a director at practice advisers Foulger Underwood

This is an edited and abridged version of an article that originally appeared in Accountancy Live

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