Buying and Selling an Accounting Practice
Warning – some content may offend!!
Introduction:
Buyers: Yes, you have qualified as an accountant, either by degree and professional exams or by experience, and you want to own your own business so you can make the super profits you dream your boss is making by employing you! He/she is paying you $30 per hour and charging your time out at $135 per hour! In other words, a profit of $105 for every hour you charge to a client!! Wow! So if you work 40 hours per week for 45 weeks per year with your productivity at 75%, he/she is making a cool $141,750 out of your hard mental and physical work!
But of course it is not as easy as that is it? Your boss will be paying rent, power phones, printing and stationery and a hundred other things to allow you to work as hard as you do!
So, not only must you be a good accountant, technically competent, personable and hard working, you must also be a good businessman/woman. Often we assume that because we have qualified formally and been admitted to the professional organisation of your choice, then you must be able to run a successful accounting practice. Not so! The greatest attribute is to have the ability to relate to people, get their confidence and retain their goodwill as clients!
So what do clients want? Clients think that all accountants are technically proficient! Which of course we are not! So how do they judge us? They judge us by silly things like whether we return phone calls promptly, whether we send them Christmas Cards or whether we give them a cup of tea when they arrive for an appointment!!
Psst!! Want to know more? Contact me to enrol in my Complete Marketing Course!!
Sellers:
Yes, it is a wonderful practice! You have worked long hours, taken no holidays and it is time to put your feet up and enjoy the fruits of your labour! You probably have been slightly too lenient on your clients in terms of under recovering time and cost or leaving too much in WIP. Your staff are long serving and loyal as is your client base. You have probably lost your initial zeal for new services to your clients and you have now a practice which is mainly compliance based.
So, now none of your staff want the extra responsibility or stress of running an accountancy practice and it is time to hang up your slate. You are quite happy to stay on to help a new owner but you want someone else to carry the responsibility of dealing with clients and the Inland Revenue Department on their behalf.
You have been to seminars on ‘Succession Planning’ and have left feeling slightly bemused!
Now is the time to list your practice for sale – but some of the stuff from those succession seminars was correct. Spend some time getting your information memorandum up to date, or start writing it NOW! Buyers will judge your practice on how it is presented to them! Remember it is 90% perception. This means the look of the practice, both in terms of the information you give to a buyer and also the physical look of the practice. Of course this in addition to the information memorandum!
There are buyers out there!!
Two recent examples of advertisements of practices for sale in the Accountants Journal got 15 and in excess of 20 replies respectively!!
Information Memorandum:
As a seller you will want to present a vibrant, successful practice to your purchasers. To do this you should prepare a comprehensive document which contains everything a purchaser will want to know about your practice! In addition to being comprehensive, it should be clear, concise and contain the unadorned truth! It can, and should, be a selling document however. It has to justify the selling price you as seller are asking as well giving purchasers’ sufficient detail to make an informed decision.
BEFORE any information is given to anyone however, a comprehensive Confidentiality Agreement must be signed and counter signed!!
Budget:
Yes, the first thing you must do is to set up a budget with a range of fees and therefore numbers of employees and hourly rates so you can see how these critical things affect the profit you anticipate you will make.
Buyers: It may seem strange but a lot of accountants fail to carry out this simple exercise! Make sure you are not one of them.
Sellers: If you are selling make sure that your Profit & Loss Account and Balance Sheet reflect what is going on in the practice and not what you want the tax man to see!! In other words prepare a 5 year summarised Profit & Loss Account and exclude things like Interest paid or received, Use of Home as Office, Vehicle Expenses, home phones and the other expenses which may be legitimately claimed but the quantum will depend on the new owner!
Goodwill:
One of the most vexing questions facing both buyers and sellers is the quantum of goodwill. The other assets are relatively simple to value (book value?) but Goodwill will always feature in the equation at some stage.
Buyers: In my experience Goodwill is the amount you will pay someone so that you do NOT have to start up your practice from scratch.
Sellers: If you are selling, then it is an expression of the hard work you have put in to get your practice to where it is today.
The greatest part of Goodwill is the client base. That list of names and addresses and therefore the relationship between the client and the practice. The ‘stickability’ of the clients to the practice is of vital importance. Hence we will discuss later the question of the wind down period of the vendor – that dreaded word ‘consultancy’! If you ask the average client who there accountant is they will almost without exception say something like ‘Don Wood’. They will not say ‘XYZ Accountants’. Thus the accountant/client relationship is often personal and may or may not be easily transferable.
The bean counters amongst you will try and value by a multiple of EBIT or some such other valuation technique but remember that presupposes that both parties are eager but not desperate to enter into the transaction, as the good Judge said. Thus you must bring into the equation how eager the vendor and purchaser are to buy/sell. Or how eager they appear to buy or sell! We will talk later about negotiation techniques!
Profit and Loss and Balance Sheet:
Sellers: The financial trend of the practice is more important to me than the actual numbers. Thus it is vital as a vendor that you provide a sanitised version of your numbers over a say, five year period. This will show the purchaser that the practice has been expanding – good – or is contracting – bad. As a vendor take out the tax numbers.
Things like Use of Home as Office, Car Expenses, Telephones and Tolls and Travel Expenses should be scrutinised or removed so that the purchaser can get an accurate picture of the business as a business which he/she is purchasing. Naturally you as a buyer will make your own assumptions as to the tax take the Inland Revenue will demand!!
If explanations are needed then make them! Liberal use of notes will allay fears of the purchaser and give the seller a degree of authenticity and openness.
Buyers: You can (almost always) rely on the numbers and explanations given to you by the seller. This is (or should) be covered by the Agreement for Sale and Purchase in the preamble or covered more fully in the special conditions. But see above in the section on Budgets! Do your own numbers and be like me as I always set three budgets. One is called Realistic, one Optimistic and one Pessimistic!!
Look closely at the trends of the practice you are thinking of buying. DO NOT assume that you can reverse these tends if they show a gradual lessening of Gross fees over the period of the numbers! Also DO NOT assume that you can continue the growth in fees as well!!
Negotiation Techniques:
We should work on the basis of a willing buyer, willing seller when we value a clients business don’t we? Yet this is almost never the case! Sometimes the owner falls ill and must sell quickly, at other times the opposite is true! The owner may only want to ‘test the waters’ before he/she puts the practice on the market later. But, their rationale goes, if it sells now at my price then perhaps……..!!!
One assumption that I always make is that the opening price for the seller is an unrealistic target. Likewise the first offer by a purchaser is almost always under the asking price and gradually, we all hope, that there will be a negotiated middle ground which is acceptable to both parties.
Assumptions:
As a purchaser you may be tempted to increase fees if the client base is mainly compliance. You may think that you can increase fees by offering more services to the client base. But a note of caution!! Most clients in my experience look upon our accounting fee as a necessary evil!
Their reasoning goes something like this. ‘I take my books into my accountant once a year and he/she belatedly gives me a booklet (called something like a Statement of Annual Accounts) which I do not understand and tells me that I have an exorbitant amount of tax to pay when I don’t have any money, rather I have a bigger overdraft! And all for a fee which is plainly exorbitant!’
Some clients may welcome a closer involvement with you but depending on the practice, the clients may be clients there because they get a good cheap job in a short period of time. They may not want all the extras which you want to sell to them. Having said that however, surveys consistently show that we are the average business owner’s first port of call for any business advice! But you must prove to the client that you have the necessary skills and experience to offer those services or ‘add on’ fees.
A good start is to go to seminars like MYOB Profit Optimiser (Warning - Mark Holton is a South Sydney Rabbitoh supporter!!!) to gain the skills needed to offer these services!! Do not try and reinvent the wheel all the time!
Staff:
As a buyer and a seller take a close look at the staff the practice has. Will they transfer easily?
Buyers: Remember, that staff are a mostly a very scarce resource! They are hard to come by and difficult to keep. Are the staff long term? Do they have good qualifications – either by experience and/or by formal qualification? Do they work well with each other and do they have the respect of the clients?
Does the present owner allow them to interact with clients? Are you happy with that? Most staff members want client contact! They do not want to be locked away in a back room on a conveyor belt churning out endless sets of Accounts and GST Returns! Are the staff fully trained? Does the present owner keep them up to date with attendances at seminars etc? It is important you to meet the staff to see how they interact with each other and how well you think you can get along side them.
Seller: It is important for you to be relatively open with your staff and to let them know what is going on. If you are not, when the news gets to them you may face an open revolt!!
Ensure that at least the senior staff know what is going on early and that they meet the proposed purchaser early as well!!
Premises:
Seller: The lease, if any should be disclosed with quantum, period, rent review and area all disclosed.
Buyer: What are the offices like? Do they match the Information Memorandum? Do they need updating and modernisation? What about car parking and ease of finding?
Equipment:
Seller: A full list of all fixed assets being offered for sale which will include a plant and equipment schedule and the asking price. Sometimes this should include the book value as well! Are all operational and good working order?
Buyer: Obviously make sure that all items you see in the office are included! Are they up to date and in good working order? Are they in need of replacement in the relatively near future? What about the computers in particular?
Software:
One of the most important aspects of a practice! What system is being used and is it up to date? More and more practitioners are being used as high end advisers as software (like XERO) is becoming increasingly user friendly and is being utilised more and more by business owners.
Be warned however there are still lots of clients who bring in the shoe box or paper bag full of unsorted JUNK that you are required to make sense of!! And questions like ‘Where are your working papers for your GST Returns?’ will bring a bemused look to the client’s face and a rude phone call when he/she gets your fee account for the reconciliation!!
So, the software must be able to be integrated into all sorts of other software that your clients use.
Make sure that it is up to date, functioning and is ‘future proofed!’
Consultancy:
Because an accountancy practice relies on the ongoing loyalty of clients, it is often a very good idea to have some sort of phase down for the seller. This lets the clients see that there is continuity in the practice. The premises stay the same, the staff stay the same and the service will hopefully stay the same as well!
People (clients are people!) hate uncertainty because uncertainty may lead to change. Although change is happening all the time, additional levels of change bring additional uncertainty.
Thus, if you as the clients accountant, have made a mistake (or a perceived mistake) in whatever area of your relationship with your client, then any additional change can be the tipping point which leads the client to change from you to another accountant. In any event a change of ownership will mean that the practice will lose some clients.
However, if the seller and buyer can negotiate a reasonable wind down ‘consultancy’ arrangement, then this helps to allay the fears of the clients.
The consultancy agreement must be specific in its terms and conditions. In other words both buyer and seller must agree and commit to the contract, the duties, the productivity and any targets that have been negotiated. It also must be specific as to the quantum of the fee to the retiring practitioner!
Usually, any agreement will be for a specific period of time. It may be for one to five years.
Claw Back:
We refer to claw back when assessing the reduction in goodwill for the loss of clients over a specific period of time. Some claw back agreements specify a smaller payment as the year’s progress.
In other words, if a large client is lost in the first year, then should the seller be responsible or partly responsible for that loss? If so, should the seller refund some of the goodwill that was paid for that client?
This is a vexed question!! It may turn on how much the seller has interacted with that client since the sale date! It may turn on the fact that the client cannot understand or like the buyer!! Personally, I believe that loss of clients is the buyer’s risk, as it is their responsibility to get to know all the clients as quickly and as efficiently as they can. However, again this claw back is a negotiated clause in the agreement to buy.
Restraint of Trade:
How long do you need to keep the seller away from pirating the client base which you paid an exorbitant amount for? Should it be one year or five? Should it be for 20 kilometres or 100?
Increasingly, in recent years, the courts have frowned on what they consider to be excessive Restraint of Trade clauses either in terms of time or distance. Again, this is a negotiated term of the contract. If, as buyer, you have not got the clients locked in within three years then you deserve to lose them!
Client Base:
A list of clients should be provided with the quantum of fees and the type of work carried out for that client, graded into A, B, C & D clients. (As Seller you should have done the grading anyway!)
This allows the prospective buyer to see how important each client is in terms of fees and also what additional work (consultancy?) you could sell to each client.
A warning here! If the practice is dominated by a very large client then the loss of that client would be catastrophic to the ongoing viability of the practice. In this case the buyer should get a warranty from the seller about the ongoing commitment of that client. This scenario may justify the payment of consultancy fees to the retiring practitioner as he/she could retain responsibility for that client on a reducing basis. This would last until the client was happy with the new owner!
Large clients can be demanding and unreasonable (in the new practitioners eyes at least!) They may expect a level of service which the retiring practitioner has gradually allowed to happen over a period of years. The client may have also negotiated a fee which works out an extremely low rate per hour of time spent!!
However, on the brighter side, they can also be a great referrer of new business!
The client list should clearly identify those clients who are ‘advocates’ in the market place! These clients may be low or very low in terms of fees generated by them but they may be hugely important to the practice!
Final Thoughts:
For both buyer and seller this is one of your life’s major decisions!!
It should be considered and well thought – not a bright idea that you had out walking this morning!!
Be careful, this may be a lifetime decision!
My offer to you is to listen, advise and help you however I can. I am available whenever you want to ring me (except Thursday afternoon when I am on a course - a golf course of course!!)
Feel free to telephone on 022 0432 880 or 09 363 9584 for a friendly chat.
We are the only agency that is 110% focussed on Accounting Practices nationwide!