We also have opportunities that are not listed below.
We also have opportunities that are not listed below.
Copyright © 2020. All Rights Reserved.
This question is a very common cause of boardroom disputes, especially between directors and shareholders who are passive, commonly known as sleeping investors .
Money is advanced to a small business by an outsider, typically a friend or family member, which makes the whole situation more complicated given the non-business relationship.
The intent is to help out and a chunk of the business is given to the person supplying the funds.
What does not take place is a full and frank discussion as to when the source of the funding will be repaid, which needs to be balanced against the need for the person actually running the business to receive a living wage.
The funder is keen to receive back what he or she deems ( now ) to be a loan and wishes to pull out as much cash as fast as possible, especially if the venture is not as prosperous as had been envisaged at the outset.
Little if anything is agreed in writing, and this case was no different.
They had not even used the back of a beer mat!
The director on the other hand is treating the capital as a long term investment and soon runs out of patience with an investor ( lender ) hounding them for repayment.
The case in hand involved the director folding his own fledgling business into a new joint venture backed by the investor, a friend who had multiple business interests and saw synergies in persuading the director to join him, with the personal relationship complicating matters even further.
Neither were seeing eye to eye on the point of whether the funding as a loan or a share capital.
The pressure on cashflow made the director feel he was operating with one hand tied behind his back, with the goal of the operation to repay a short term loan, rather than build a business with foundations on a sound footing – a strong balance sheet with adequate capital that could be deployed to grow the operation.
Nothing was reinvested.
It became clear that they needed to go their separate ways but the sticking point became how much the director was due for the business that he had brought into the operation as a result of closing down his own operation and building up the clientele for the investor on the back of his own solid reputation and contacts.
A solution was found that allowed for a reasonably amicable split, but a lot of damage was done to both parties. The investor ultimately had poured in a lot of money and now had to pay the director to go, and the director had lost several years when he could have got himself on a solid footing for his own benefit.
All entirely avoidable had they sat down and fleshed everything out properly.
Three children had the task of splitting up the estate of their parents.
Following the grant of probate it rapidly became clear that each sibling had very different views on how to deal with the primary assets, a large plot of land with mixed industrial use as well as several acres that were neglected and had decaying buildings sitting on them.
They had inherited equal shares in the holding company but the impasse was threatening the ability of the company to address several pressing issues with the tenants that would impact on the site’s value if left as they were.
Relations between the parties were deteriorating and an aunt whom they all respected decided to wade in and offer her sage advice, which was to mediate. It’s not so often that we come across a third party whose advice to mediate is immediately accepted by all, so that made for a good start and helped defused some of the acrimony that had set in.
The open session allowed the brother to air a longstanding and festering issue he had with his younger brother, namely that he had been talking about his grand development plans for the site since the turn of the millennium, when the parents were both in rude health and actively managing the business.
In addition, the older brother also aired his frustration with his sister, or rather his sister’s husband, whom he felt was trying to muscle in on the inheritance for his own ends rather than the benefit of the family as a whole. Hitherto the brothers-in-law got on cordially but since the passing of the last parent his mood had changed and everything was focused around the inheritance.
The sister didn’t have much to say as she had no real grasp of property or finance, and was happy to accept whatever her husband said. The younger brother felt that he had more business acumen than his big brother, which was actually not the case – something that came out during the mediation.
Following this open session, which at times resembled a Punch & Judy show, it became clear that each party had very different plans, quite literally, for the land. None of the 3 shared the same vision but it became apparent from the private sessions that they would consider splitting the plot into three with each of them re-registering their own parcel of land independently of the others.
They agreed to let the company’s accountant appoint a valuer to confirm the figures they believed each part was worth, which was actually something they agreed upon, and proceed to split up the land accordingly and move forward.
As the session closed it was clear that they wanted to reconcile their differences as each one was concerned that the discord was not something their late parents would wish to see.
Accountants
As you are an accountant you shouldn’t need reminding that all the necessary figures required to value the business should be up-to-date and accurate. The seller should co-operate to ensure that all relevant disclosures have been brought to the buyer’s attention to ensure that the accounts show a true and fair view. The buyer will want to pore over the books and records as part of the due diligence process to help them understand the financial workings of the business being acquired. Although accountants are usually expected to work closely with the broker or agent, it must be stressed that the accountant is neither of the two and that the difference between their roles must be understood at the outset.
Assets
The seller has to make it clear from the outset if there are any assets of the business that are not to be included in the sale, such as personal assets or items they wish to take with them. The buyer needs to be satisfied as to whether they require any of the assets being offered or whether any additional assets will need to be purchased that have not been included in the sale.
Bespoke marketing
Instead of simply putting a business for sale as a listing on the agent’s website or newsletter, the agent can arrange a specialist marketing campaign for an individual client, ensuring that the business has better exposure and also enabling the seller to target potential buyers. Similarly, a buyer may wish to approach one or two firms only as opposed to making their intentions available for all to see. Such a marketing campaign will cost more but usually achieves a better result in a shorter period of time.
Billing cycle
This is a period in which clients are normally charged. Typically it is on an annual basis but for some practices it may be monthly or quarterly.
Brokers
Business brokers act as a matchmaker and negotiator for buyers and sellers, bringing them together in the marketplace via a website or by specialist marketing and networking. The broker will take a percentage of the sale price as a fee and may represent either or both of the parties. Experience shows that when the broker acts for both parties, a better result is achieved in a shorter period of time.
Business premises
Buyers and sellers need to agree as to whether any premises are being sold with the business and if they are not whether the buyer will be able to rent the premises. Buyers will need to consider carefully as to whether the premises are required and the ramifications of moving an established business from its existing premises.
Buyer beware
“Caveat emptor” is the Latin expression for “buyer beware”. In simple terms this means that the buyer is taking a risk when making the purchase and has to be satisfied that everything is in order.
Chemistry
This is one of the most important and often the most elusive areas of a business deal. We encourage early contact between the buyer and the seller to establish whether there is a rapport between them as they will have to work very closely during the sale and often for a number of months or even years after the sale. If the chemistry is not right we normally advise the parties not to proceed unless a solution can be found to obviate the need to work together and even then this would only occur where one or more of the parties is desperate for a deal, which would be reflected in the price.
Clawback
This is the period during which if a client leaves the buyer is refunded the relevant amount paid for that client’s fees as a portion of the sale price.
Comparables
This means establishing whether the price for the practice is in line with current market trends. There can be a variety of reasons why the price is not in line with comparable firms but it is essential that all parties are aware of this rather than finding out once negotiations have gone too far.
Completion
This is the point at which point the business is transferred in its entirety into the hands of its new owner which may or may not be the same time as the contracts are exchanged.
Confidentiality
This is another reason for using a business broker at the outset as most buyers and sellers do not wish their identity to be revealed for fear of affecting business. Before we agree to act on behalf of any party they must sign a confidentiality agreement to which we are also bound. There is no problem with handing over client files once a deal is completed as long as due process is followed vis a vis data protection rules.
Cultural mix
Whilst many practices may look similar on the outside, each principal will run their affairs in a manner which is moulded around their personality which means that the practice being purchased may not be compatible in its working ethos and environment to the buyer’s, unless it is intended to run the new unit completely independently and with the existing management.
Deal structure
There are many ways of arranging the deal, from straightforward handing over of cash in a lump sum, to staged payments based on future performance with payment in cash and/or shares in the practice being sold. Most deals are straightforward and paid for in cash but ultimately the way the deal is done will depend on the particular requirements of each party, including any clawback.
Desktop research
It is fundamental to any business deal that the buyer in particular undertakes sufficient research to ensure that the deal is appropriate and to assist in determining the correct price. The seller will also want to know what an appropriate price is in current market conditions as well as knowing the position from which the buyer is approaching. At a basic level, the research is done literally from the desktop by reading press cuttings, chat rooms, blogs, bulletin boards, talking to associates and professional brokers. Once a potential buyer is satisfied that the initial research has revealed nothing untoward, they would move towards more detailed examination of the company’s position, either by a site visit or requesting the books and records from the seller.
Disclosure
It is essential that both parties make known to the other party any matter which they think could scupper the deal, for example, pending regulatory action or imminent closure of a facility. The contract will normally provide for such eventualities to have been disclosed, failure to do so rendering the seller liable to be sued. Although a good negotiator will ensure that only that which has to be known is revealed, careful thought should be given to what falls into the category of requiring revelation. Similarly, the buyer should make it clear from the outset that they are in a position to complete the deal rather than wasting everybody’s time if they are speculating and have no real chance of raising the finance.
DIY
A buyer or seller could arrange a deal without any professional help in a similar manner that one could sell a house without an estate agent or a solicitor if one really wanted to. However, it is strongly discouraged as very often mistakes will be made by either party which will cost a sum well in excess of the amount spent on professional fees.
Due diligence
Unless one is buying a practice for a ridiculously cheap price, for example, when it is in distress and clearly marketed thus, it is strongly recommended that as much due diligence as possible is done prior to completing a sale. The amount of checks that the buyer wishes to make into the affairs of the seller is not cast in stone and in each person should act according to their own gut feeling, although there are a number of fundamental checks that are expected, such as the state of the market and the finances of the seller.
Enhancing value
This is where parties decide to merge in order to create synergies whereby the sum of the whole created by the deal is greater than the sum of the parts. It should be noted that in many cases what appears to be a straightforward calculation does not follow through in practice. Similarly, a buyer may wish to purchase a seller’s practice with a view to closing down part of an operation and integrating it entirely into surplus capacity that they may have. In any event, if the sole reason for doing a deal is to achieve enhanced value, careful thought should be given as to whether this will actually be achieved and it should be stress tested as far as is reasonably possible.
Exchange of contracts
This is the point at which the deal becomes binding although all the monies may not have been handed over. It is essential to check with the legal team as to what responsibilities fall upon the buyer at this point e.g. employment protection and insurance.
Fees
You may not be surprised to learn that brokers do not work for nothing! At Maximiti we firmly believe that you should not pay up front fees unless you have arranged a bespoke marketing campaign with full details of what you will receive for your money. Some brokers will charge the seller, some will charge the buyer and some will charge both parties albeit each of them at a reduced rate. It is also important to establish at the outset what your other professional advisers such as solicitors will charge for their involvement.
Finance
When you enter into negotiations to purchase a business, it is essential that you know how you are going to pay for it. Ideally you should have a finance offer letter from your bank or have access to cash. Unless you can demonstrate to the seller and the broker that you have funding behind you many will not take you seriously and you may lose the deal.
Financial information
This will tell you how well the company that is up for sale has performed in the past. Basic information on incorporated practices can be obtained from Companies House and more detailed information will only be available from the company itself if they give you access to their books and records. Whatever figures you are looking at, it is essential to be aware that the more up to date they are, the more credence you can give them and the more you can rely on them. It is also worth remembering that books and records that are deficient or sloppy may be indicative of potential problems within the organisation or may simply be a case of “the cobbler going barefoot”.
Focus on sectors
If you wish to buy a practice you may wish to focus on a speciality. An advantage of dealing with a broker who focuses on the accountancy sector is that they will probably have better access to practices for sale.
Formal offers
Once you are ready to proceed after having established that the deal is satisfactory you should arrange for a formal offer to be made to the seller. You should take legal advice at this point as there may be financial ramifications should you wish to withdraw for any reason.
Founders
When a person who has founded a practice decides to sell it, the negotiations can often be more complex due to emotional factors. It is also important to establish how involved the founder is in the day to day running of the business and the goodwill associated therewith, especially where customers and suppliers are concerned. Often the founder agrees to stay on and work alongside the purchaser for an agreed period, usually in a consultancy and advisory basis, for a period of six months.
Future sale
If you are buying the practice with a view to selling it on at the outset, you should be aware that market conditions can vary and many potential purchasers will be wary of buying a practice that has recently been purchased and quickly sold.
Goodwill
This is the amount which you are paying over and above the value of assets and stock. In most practice there is a large element of goodwill being paid and the amount will depend on a number of factors including market conditions, reputation of the business and willingness of the buyer.
GRF
This refers to “gross recurring fees” and excludes one-off assignments that are performed for a client that cannot be expected to be repeated such as cash flow reports and loss of earnings reports. Typically, recurring fees consist of annual accounts and tax return preparation. If a practice that specialises in one-off assignments has a regular flow of these, then they have to be valued differently to a GRF basis.
Growth
Some people buy a practice in order to achieve a steady income flow whereas others see an opportunity to grow the practice once they have taken it over. In order to expand what was somebody else’s practice you must be completely sure that the opportunity exists and be confident that you have the capabilities to realise growth potential. A classic case where there is growth potential is when somebody wishes to retire and has not invested in the practice or attempted to drive it forward for a number of years.
Heads of terms
This is an outline contract and is basically a list between the parties of all the matters that need to be visited and any associated terms. It is expected that at this point both parties will contribute to the heads of terms in good faith and all relevant facts will have been disclosed
History
The history of a firm is essential in determining its value and is comprised of the financial history which should be readily available and the non-financial history which can be found in a number of sources, including trade journals, the internet, magazines and good old fashioned spadework amongst competitors and suppliers.
Honesty
Whilst it essential that all parties deal honestly and openly at all stages of negotiations, one should always be aware that not every counterparty is as honest as you may wish them to be or is as honest as you may think you are. We recommend that you go forward at all times in a businesslike manner but with an enquiring mind.
How long does a deal take?
A deal can take from five minutes to five years! Typically though, a deal will take around three to six months, although in a distressed sale, where a low price is being sought, the deal will move much faster, often in days, and the buyer will accept that the lack of due diligence is part of his risk and is being reflected in the price.
How long will it take to find a buyer?
Finding a buyer can take from minutes or years, depending on the state of the economy but more importantly, how specialised a particular practice is. Often a practice will be put up for sale and the owner is adamant that they will not accept less than a certain sum, which therefore means that it will take much longer for them to sell their practice if they can sell it at all if their price is not realistic. Similarly, a practice with a bad history and negative goodwill may take a long time to find a buyer or could be virtually unsellable.
How much is my practice worth?
This is the $64,000 question that every potential seller asks. Your practice is worth the amount somebody else is willing to pay for it! Deals done in recent months will be the starting point although one has to take into account a number of variables in order to arrive at the valuation. As with many matters concerning the purchase of a practice, you often have to follow the feeling in your stomach as to whether you are willing to accept a particular sum for your practice or whether you are willing to pay a particular amount to acquire somebody else’s practice. Very often, the practice is worth far more to the purchaser than it is to the seller.
Indemnity
There may be issues which are uncertain at the time of a sale being completed and in order to finalise matters, the seller may give the buyer an indemnity which means that if particular matters come to light or events crystallise, the buyer will be compensated, either by the seller directly or through a third party insurance policy which is arranged. The clawback will form part of any indemnity.
Independent advice
It is essential that all parties to a business deal such as this receive independent advice and do not rely on the other party’s advisers. This is where a broker who is working for both parties comes into his own as there is no bias and both sides know what the broker’s role is.
Input from both parties
It goes without saying that both parties are expected to co-operate at all stages including disclosure and replying to documents. If you feel at any stage that your counterpart is not pulling their weight, you have to ask yourself why this is.
Instinct
Always follow your gut feeling. If it tells you there’s a fundamental problem then there probably is and you should walk away.
Jumping the gun
Very often, patience is required and time is needed to sort out what can often be seen as small issues. While this can be frustrating for either party, it is essential that when time frames are agreed that they are stuck to and neither side is pushed into making a decision earlier than they may so wish. This does not mean that reasonable deadlines cannot be imposed, but simply means that events have to run their natural course and normal delays should be tolerated.
Keeping me informed
A good broker will at all times keep their clients informed of developments at all stages. This is what the broker is being paid for.
Key documents
A seller will be expected to have available within a reasonable time frame any documents that are deemed to be fundamental to the running of the practice. If a financial claim or any other matter is stated to be fact, then it can be reasonably expected that a document will be available to back it up. It is worth remembering that if a document which can be expected to be easily found for some reason cannot be brought into play for several days, this should put you on alert.
Key staff members
If the practice has any key members of staff, it is essential that steps are taken to keep them ‘on board’. This will mean identifying who they are, what their skill sets are and what the cost of retaining them will be. In this case the reputation of the buyer may be more important than the reputation of the seller.
Letter of engagements
When you deal with any professional or broker who is acting on your behalf, you should always sign a letter of engagement, just as you require from your own clients, which sets out the terms and fees that you can be expected to pay. If any professional who acts for you does not wish to give you a letter of engagement to sign, you should not use them. You may require new letters to your own clients once a transfer has taken place.
Lock in period
This refers to the time during which the seller is obliged to continue assisting the buyer. Normally this will run along the clawback period as it is in the seller’s interest to cooperate, but direct involvement should diminish rapidly soon after the handover of files.
Lock out period
This refers to the period for which the seller is locked from competing with the buyer, either in outright terms or for a geographical area, depending on the nature of the business. It should be noted that any restraint of trade which is deemed to be unreasonable, will not be upheld in court and specialist legal advice is advised before making any conditions.
Management team
This is generally more important for a larger practice but where there is any key management team, it is essential that the team as a whole is retained and this should be borne in mind during negotiations. It should be borne in mind that the key management team it affects could essentially be running off with your investment and worse still, end up as competitors.
Matters unresolved
It is important that there are no matters left unresolved by the time the sale is ready to go ahead. If anything material is outstanding, the buyer should consider as to how important this is in terms of stopping them from proceeding and should give careful consideration as to whether an indemnity policy need be taken out. Certain matters may be left unresolved if both parties agree it is only fair and reasonable that the outcome is contingent upon future sales for example.
Meeting the other side
We recommend that once both parties have established that the circumstances are correct to investigate moving forward towards a deal that they meet informally for a chat together, without the agent being present, the purpose of the meeting being to establish initially whether the two personalities are compatible. If the meeting is successful then a more formal setting is usually arranged for further meetings, some of which may require the agent to be present if the circumstances demand it, usually on larger or more complex deals.
Meeting with the broker
At Maximiti we do not normally become involved with meetings, although if a buyer or a seller wishes us to build a business portfolio for them, we would normally meet them but not in the context of any specific deal. If a deal is particularly complex or large and our presence is indeed necessary, we will make the effort to attend the meeting.
Merging
When an outright sale of the practice is not feasible, or there are two practices in a similar situation which does not warrant outright sale, they may wish to merge. This is a much more complicated route to take as both principals were previously at their respective helms and but have to work as one unit from now on, usually with only one captain. Such a deal will normally be more complex and take longer typically involving more professional advisers to negotiate the new hierarchy.
Motivation
It is vital to understand what motivates each party in a deal be it the buyer or the seller. This will set the background for the negotiations and will help establish which party has the upper hand in terms of calling the shots, although it should be remembered at this stage that this does not mean that one party can trample over the other without expecting ramifications somewhere further down the line.
Moving forward
Once a deal has been agreed and terms have been set out to the satisfaction of both parties, it is crucial that a swift timetable for going towards completion is set out and that a further timetable post completion is established. If matters drag, one or the other of the parties will lose impetus, which can lead to problems and stalled progress.
Negotiation
Negotiation is a subject that warrants several text books in its own right, however the one point that we would like to stress at this stage is that without a broker, negotiations are more difficult and that an ideal negotiation will lead to both parties coming away feeling satisfied.
Noncompeting clause
This means that the seller agrees not to compete with the buyer after the deal is completed and may include certain key staff who were formerly employed by the seller but have to lose their job as a result of the deal. It is crucial that appropriate legal advice is taken to ensure that any non-competition clause is fair in order to prevent it being declared void by a court of law.
Objectives of each part
Both the buyer and the seller should make it clear at the outset why they are entering into this deal to enable the other party to tailor their demands in such a way that the deal can actually happen. While the buyer may have another commercial motive for doing the deal that he wishes to remain secret, it is crucial that the seller makes known to the buyer any matters which may be deemed as untoward which may lead the buyer to seek legal redress after events.
Post-sale
After the sale is completed, the broker will normally remain in contact with both parties to ensure that there are no matters which remain unresolved or are giving cause for concern. Sometimes issues arise which are due to a misunderstanding and can usually be cleared up quickly with the co-operation of all parties. Sellers will normally be expected to make themselves available for an agreed period of time to answer any difficult queries that cannot otherwise be dealt with.
Preparing clients
Once a deal has been agreed, it is essential that clients are prepared for the changeover if it is going to affect them in any way. Often this means reassuring them that the original partners are still working in the practice and after the new owners have eased themselves into position, the old owners will usually fade into the background, either immediately or stage by stage, becoming consultants and eventually vanishing altogether.
Preparing staff
Some practices are sold without the knowledge of the staff and it is dropped on them like a bombshell. Whilst it is essential not to create a situation of uncertainty amongst staff, especially prior to a sale, the seller should think most carefully about how he is going to break the news to them and when. In the case of more senior staff, or key staff, it may be advisable to bring them into the negotiations at an early stage; however, each situation should be judged on its own merits.
Preparing suppliers
Suppliers need normally only be told of the change after it has happened, although it needs to be borne in mind that the credit status of the company may change, especially if there is a personal guarantee on any accounts and it should be noted that the former partners need to ensure that the guarantees are removed.
Property
If the business premises are to be sold as part of the package, this should usually be made clear early on. If a lease is involved, it is essential that full details of the lease and any changes which are pending are made clear to a potential buyer. It also needs to be borne in mind that if the buyer is not going to require the seller’s premises or in the case of a merger there will be a rationalisation leading to premises that are surplus, that this issue is addressed early, as it is often a major part of the financial consideration.
Pitching the price
Of course, everybody likes to get as much as they can, and a practice is going to be worth as much as it is worth to the buyer. It is important to gauge initial interest by pitching the price at the correct level. It is not easy to raise a price from the advertised level once negotiations have begun so one needs to ensure that they are not being undersold. Usually, the broker will give this point careful consideration at the time of the initial contact with the seller, although in some trades there are more or less fixed valuations over which the seller will have very little control. Generally there is a market value for an accountancy practice, comprising a multiple of the gross recurring fees.
Quality of enquiries
At Maximiti we firmly believe in screening enquiries at the outset and ensure that you do not waste time with tyre-kickers and other agents pitching for business. Whilst this may reduce the number of enquiries, it will mean better quality enquiries which ultimately means a quicker sale with more beneficial terms to the seller.
Research of buyers and sellers
At Maximiti we believe that both the buyer and the seller need to be properly understood which is why we make both parties fill in a detailed questionnaire at the outset. One may wish to undertake further research on the other party especially for a larger deal to ensure what the financial position is. If one can ascertain that the seller is in financial difficulty, one may be able to obtain a better price and conversely, if it can be established that the buyer is not in a position to fund a deal, then one does not waste time.
Restrictions
This normally refers to restrictions placed upon the buyer or the seller before, during and after any negotiations and also following the completion of the sale. Restrictions can vary from forbidding a seller to go into the same business line for a period of time or selling in a geographical area. Similarly, they may be restricted from making any reference to the sale once it is complete in order to disassociate their name or pre-empt them from giving any opinion.
Screening
Once a list of potential purchasers has been established or, in the case of a buyer potential targets have been established, the agent will work with the relevant party to screen applications as industry knowledge from the client is going to be infinitely more accurate than that of the agent.
Site visits
It is often necessary for the buyer to visit the seller’s premises and the seller will probably not want the staff to know what is going on. The buyer will be made aware of this at the outset and some excuse or cover will be found.
Size of company for sale
It is important to use a broker who is able to handle the size of your deal. For some brokers, they will only gear up to a maximum amount and others will not deal below a certain amount.
Solicitors
The role of the solicitor is to ensure that all documentation is in order and all facts are disclosed properly on the contract which will be enforceable. It is useful to be aware that an unscrupulous solicitor may see this as an opportunity to delay the deal by finding unnecessary complications for which they will charge extra. On a smaller deal, the parties may decide it is not worth engaging a solicitor and simply draw up a contract between themselves. At Maximiti we firmly believe that solicitors should be used but under the strict supervision of the broker who at all times will be managing the sale. However, we have found that many accountants are reluctant to use a solicitor and if this is the case with you we can assist with preparing heads of terms and contracts, but with the caveat that we’re NOT a firm of solicitors.
Staff retention
Whilst the buyer will be keen to ensure that certain staff members are retained, it is usually helpful if the seller gives some guidance on the matter. If the staff are not to be retained, specialist advice needs to be given regarding redundancies.
Stalled negotiations
Negotiations often stall at various stages and for a variety of reasons. This is when the broker comes into their own as a third party who is independent and is able to speak to each side individually and report back which manages to defuse much of the emotional element and remove misunderstandings, which lie behind most stalled negotiations.
Synergy
This refers to a situation where the outcome of the deal is that the sum of the parts is greater than the individual parts. Very often a buyer looks to achieve synergy through acquiring or merging with another practice.
Taxation
Inevitably, the Chancellor wishes to get his hands on the proceeds earned from this deal and it is essential that the deal is structured in such a way to minimise the tax paid by the seller. The buyer will also be concerned that there are no hidden tax liabilities which may potentially transfer to him after the purchase and it is possible to take out insurance against this. Once again, specialist advice is needed and if it is beyond your experience do not be embarrassed to ask for guidance.
Terms
The terms of the deal should be made clear early on once it is clear that there is a deal on the table. The exact details will vary from deal to deal and may vary back and forth between the two parties in terms of give and take. One can expect the eventual terms to be broadly in line with the original terms as discussed unless something untoward or material comes out during negotiations.
Timing
The timing is everything. There are certain times of the year when an accountant will not consider taking his eye off the ball, for example during the firm’s busy season, or when tax return deadlines are looming. Both parties should understand that the timing can affect the price of the deal and the whole deal in itself. Where undue pressure is placed upon either party or if one of the parties seems to be delaying, careful consideration should be given as to the reason why this is taking place and it is not unreasonable to expect a rational explanation.
Understanding the business model
There are many types of practice out there and the buyer often feels he has the ability to learn new skills. While this may indeed be true, if one is entering into uncharted waters without any support or understanding of a marketplace, they should remember that it is usually a recipe for disaster. An experienced accountant who has exceptional talent and wishes to go into a new field, should ask of the seller to remain behind for some time to teach them the ropes so they can pick up the business. This is often a good idea for a seller who is struggling to find a buyer but we would advise the seller to ensure that they do not get pulled into the business for too far for too long. At Maximiti when we screen potential buyers, we do ask for experience in the accountancy field which they wish to acquire.
Upfront fees
At Maximiti we believe upfront fees should not be paid except for specific campaign fees. If you have been asked for upfront fees by a broker you should be extremely wary and you will probably find in the first few weeks or months, they will be bending over backwards for you, giving you many leads. What actually counts is the end result. At Maximiti we firmly believe that our fees should be based on results and any broker who is not competent enough to base their fee upon a result should be treated with caution. The accountancy practice market is very different from general business sales, where a marketing fee is justifiable.
Valuation
The practice is worth as much as someone is willing to pay for it, within the parameters of the marketplace. We should remember at all times that just because you think something is worth a particular amount, this does not mean it is worth the same to a buyer. Conversely, there may be situations where you think it has nothing of value but the buyer is most keen to get his hands on it. The best way to achieve maximum value for your business is to sell at a time of your choosing and not when you are forced into it by circumstances.
Verifying identity
You may be asked to verify your identity by the agent as part of compliance with Money Laundering Regulations, and you should not be unduly disturbed by this. You should ensure that your counterparty is genuine and is not on a “fishing trip” to find out commercially sensitive information on behalf of a third party.
Warranties
The seller may be asked to give a warranty to the buyer regarding various contingencies that may or may not crystallise and you may be asked as a seller to find an insurance company wishing to underwrite such a warranty as the buyer may not be willing to rely upon your solvency some time in the future. It could be that you have been asked to deposit some money by a solicitor as a potential payback in the event that something goes wrong during the defining period.
Working together
At all stages it is essential the buyer and seller work together to achieve the common aim which is a successful deal. You may have to put aside prejudices in order to achieve the deal. Remember at all times, this is a business arrangement and not a dinner party and the fact that you may not like the people you are dealing with is not necessarily a reason to walk away, although you have to ensure that there is trust between each other.
X-Rays
We are not blessed with the ability to see through items without the use of an x-ray machine, so if you think something is being hidden from you, it is essential that you dig deeper. A good accountant who performs due diligence should be able to find out whether their trust is being misplaced or not. Normally, the more you think, the more you find, but there is a point at which you have to decide enough is enough, although at all times if you find something which is genuinely untoward, you should continue to ask questions.
You
This is probably the most fundamental area of doing the deal. It boils down to one thing, what do you want to get out of it?
Zeal
It is important for both sides to be brisk and business like about the deal. It is important that neither party displays too much zeal as the other party may be asking themselves what all the rush is about
How Do I Sell My Accountancy Practice?
RETIRING ACCOUNTANTS – The essential guide from Maximiti
The aim of this guide is to give you an insight into the basics of what is involved when selling an accountancy practice upon retirement, and prevent you from falling into the hidden traps that await the unprepared.
Selling your accountancy practice is probably one of the biggest business decisions of your professional life, certainly financially and most likely emotionally too.
For many accountants it heralds a new era in their life, often ushering in retirement or part-time “lifestyle working” in a consultancy role.
Of course, it is entirely possible that you may only be seeking to dispose of a block of fees whilst remaining in practice but most of the contents of this guide will nonetheless hold true in such a scenario.
Whatever your reason for selling it is very easy to turn what should be a straightforward and fairly routine transaction into a nightmare.
Remember that no two deals are the same and everybody seeks something different from a practice sale, so it pays to be flexible and maintain an open mind where possible, especially as the landscape of a deal can change throughout due diligence and negotiations.
Thinking about selling
Committing
Normally, people don’t wake up and declare that today they are going to sell their business. The decision to commit to selling a business, and let’s not forget that your accountancy practice is a business, is a culmination of several factors over a period of time.
Invariably it starts following a conversation with a friend or colleague, a throwaway comment at a dinner party, a serious problem in the office involving a client or member of staff, or simply a realisation that you’re battle weary and not prepared to confront the rapid and unremitting changes the profession is undergoing.
Other causes are simply that it is time to retire or a life changing event such as illness, bereavement or family relocation forces your hand.
Whatever the catalyst it is important to be 100% sure that you are making the right decision as there is no turning back once the contract is signed, nor do you want to spend many weeks in preparation and legalities only to wake up one day, look in the mirror and realise you have made a mistake.
It pays to discuss your decision with people whose judgment you trust, especially as your decision may be emotionally charged during a difficult time in your private life or simply that you have overlooked opportunities within your practice that could easily be exploited with a little planning and perseverance.
One of the advantages of using an agent or broker is that they will ask you to complete a comprehensive questionnaire about your practice, and this process gives you time to think and reflect about your decision.
How much is my ACCOUNTANCY practice worth?
This is the first question that every potential seller asks. The “smart” answer is that your practice is worth the amount somebody else is willing to pay for it! Deals done in recent months will be the starting point although one has to take into account a number of variables in order to arrive at the valuation, which can vary significantly. A good agent will have a sound grasp of local market conditions and be a strong negotiator on your behalf. A GRF multiple is the most popular basis for ascertaining price but others do exist.
Strategic planning
Typically an accountant looking to sell up will have given it several months of thought but there is no reason why you cannot make the decision now to sell a couple of years down the line. The earlier you have clarity about where you want to be within a particular timeframe the easier the process will be. If you are using a practice sales broker they should understand the need for a long lead time and will not put any pressure on you to sell earlier.
How long will it take to find a buyer FOR MY ACCOUNTANCY PRACTICE?
Finding a buyer can take from minutes to years, depending on the state of the economy, how specialised a particular practice is but most importantly the location and size of the practice. Often a practice will be put up for sale and the owner is adamant that they will not accept less than a certain sum, which therefore means that it will take much longer for them to sell their practice, assuming they can sell it at all if their price is not realistic. Similarly a practice with a bad history, in a remote location or with insufficient goodwill may take a long time to find a buyer or could be virtually unsellable.
How long does a deal take TO SELL MY ACCOUNTANCY PRACTICE?
A deal can complete in days or months. Typically though, a deal will take around three months, although in a distressed sale where a low price is being sought, the deal will move much faster, often in a couple of days, and the buyer will accept that the lack of due diligence is part of his or her risk and is being reflected in the price. When there is a bereavement or sudden ill health a quick sale is highly recommended if any value is to be salvaged. The value will drop precipitously after the initial period of good grace any sympathy.
Broker or DIY?
Like selling your house, there is no procedural reason why you cannot sell your practice yourself and this does take place, usually to a friend or family member. However, it is important to make up your mind early on which route you will take – the DIY way or the traditional route via a broker – as bringing in a third party once you have started and had regrets is messy and can cost you a sale.
Sometimes either or both parties match themselves up but request a broker to assist them from the outset. Obviously you can expect to pay less in professional fees as the hardest part – the matchmaking – has been done. Many DIY jobs end up using a broker somewhere along the line and two of the main advantages are:
Using a broker from the outset has the added advantages of:
Fees to the agent / broker
The $64,000 question – “how much should I pay in fees to the broker?”
Some charge the seller, some charge the buyer and some charge half to each, and some even charge a commitment fee.
Often market condition and the circumstances surrounding the sale will influence the fee arrangements.
Ultimately it is not about who is paying and feels that they are in the driving seat but rather a case of ensuring the broker or agent can actually get the deal done professionally and efficiently, without sweeping problems under the carpet so they only become apparent once the ink has dried and their fee has been paid.
Selling to staff
The ideal purchaser could be hiding in plain sight. Staff understand how the practice operates, know the clients and hopefully get on well with each other. Selling to staff is seamless aside of course from certain regulatory and legal matters. Some sellers still engage a broker but on a consultancy basis to ensure that everything is dealt with properly as it is a business transaction that is complex with mistakes having potentially catastrophic consequences.
You need to be wary of staff who express an interest but simply cannot raise the necessary funds as you don’t want to be strung along pointlessly for many months nor do you wish to alienate them when selling to a third party after discovering they have no funds. Beware of being the funder yourself – you are not a bank and you need to ensure that the risk is not being unwittingly transferred to you until they pay you off over several years, usually out of profits – if there are any!
If you employ staff their position should play a prominent part in your initial planning, both from the aspect of their own welfare and also because they are an important and integral aspect of your business with the ability to derail the deal prior to completion or create serious problems after the deal is sealed.
No two situations are the same and choosing which staff members to advise of your intentions and at what stage to do so is a delicate balancing act that needs considered judgment. Typically key staff members would be brought “on board” at an early stage and kept appraised of developments throughout.
Preparing for sale
Whilst you may think that everything in your practice is shipshape, an outsider may take a different view. It’s similar to selling your car or your house – there are defects that you have grown used to and can live with quite happily, but when it comes to showing prospective purchasers around they’ll be scared off.
Main areas to consider
Bookkeeping
As you are an accountant you shouldn’t need reminding that all the necessary figures required to value the business should be up-to-date and accurate. The buyer will want to pore over the books and records as part of the due diligence process to help them understand the financial workings of the business being acquired. It is the seller’s responsibility to ensure that all records are in suitable condition for the buyer to examine, not the broker’s.
Client records and files
What sort of picture does your working papers and client correspondence paint? Whether it is paperless or in a filing cabinet the buyer will expect to see completeness and structure. Are you storing client telephone numbers in your head or are they easily accessed in a proper database?
Tax and accounts
Your records and bookkeeping may be acceptable but do you actually submit your own tax returns and prepare your own year end accounts in a timely manner? If so, are your payments up to date or is this a case of the “cobbler’s children going barefoot”. No single omission on its own will necessarily see a buyer turn on their heels and disappear faster than you can say “HMRC”, but taken in aggregate several small items could set off alarm bells. You may still get the sale but at what price?
Staff
Your workers are a vital part of your business but are you the captain of a happy ship, are there ongoing disciplinary issues or problems with the quality of their work?
Or perhaps a key member of your team has announced their intention to leave, which will severely affect other staff members and client relationships.
Premises
Are you tied into a lease that the buyer may not wish to take over? Is your lease coming to an end and not being renewed, causing issues with relocation that may drive clients away or lose passing trade? Perhaps you own the building and wish to sell or let it to the buyer as part of the package. Do you actually have a copy of your lease and are you aware of any significant clauses that may give rise to problems?
Fees
Do you have a clear charging structure that is understandable to a buyer? Are you over or undercharging? Assuming that your fees are correctly pitched and fairly charged, do your clients actually pay up in a reasonable time or is the book debt swelling slowly but surely? Your lax approach – perhaps it is more a case of generosity – may not be something a buyer will countenance.
Claims
What is your PI claims history like?
Business model
Some practices have a very specific business model that may rely on the principal’s specialist knowledge or ability to reel in and nurture new clients, leaving open the question as to how a buyer will be able to replicate this post-sale.
There are many types of practice out there and the buyer often feels he or she has the ability to learn new skills. While this may indeed be true, if one is entering into uncharted waters without any support or understanding of a marketplace, they should remember that it is usually a recipe for disaster. An experienced accountant who has exceptional talent and wishes to go into a new field, should ask the seller to remain behind for some time to teach them the ropes so they can pick up the business. This is often a good idea for a seller who is struggling to find a buyer but we would advise the seller to ensure that they do not get pulled into the business for too long without a properly agreed remuneration structure.
What to expect
You can expect the initial meeting to be an informal affair, not unlike a first date. Normally this will establish whether there is chemistry between the buyer and seller that will enable them to conclude the deal and work together post-sale as is usually required.
Thereafter the buyer will have a list of questions, many of which will only become apparent during the due diligence process, and you’ll have to be patient and ensure that you understand what lies behind their line of questioning.
At all stages the broker should be available to help you deal with requests and questions that you may be uneasy answering or may not be familiar with, bearing in mind that some buyers purchase practices regularly but this is your first sale.
As mentioned earlier you will have to open all your own books and ledgers so the buyer can corroborate your claims, and they will also wish to check that your client files and procedures are in order which means inspecting some of them.
Although they may wish to speak to your staff this should be resisted in most cases, and care needs to be taken to allow the buyer’s enquiries to take place without the “wrong” members of staff finding out, in order not to rock the boat. This is probably the trickiest part of the process and there is no “one rule fits all” that can be applied.
Naturally all contractual obligations of the firm that will affect the buyer need to be examined and missing paperwork is understandably not acceptable.
The process can run from days to months, depending on the complexity of your practice and the available time for both yourself and the buyer.
Expect stress, ups and downs and the occasional bout of panic. Many deals wobble at an advanced stage but if they are handled appropriately, especially with a go-between such as a broker, these potential deal-killers can usually be dealt with – often they are down to misunderstandings.
A word of warning FOR RETIRING ACCOUNTANTS!
Whilst it is up to the buyer to perform his or her own due diligence you need to ensure that not only does everything appear right, you need to make sure that you are not misleading them on any points or withholding material information that could sway their decision.
As sure as night follows day, if there are any suspicions of dishonesty or lack of integrity, post-sale you will become embroiled in a bitter and costly lawsuit with the prospect of not being paid the next instalment due from the buyer, and in the meantime you no longer have your practice.
Should I use a solicitor?
This is a very commonly asked question by accountants prior to the sales process but in my experience the vast majority of deals between accountants do not use the services of a solicitor, which begs the question as to why this is, bearing in mind that for all other business sales it is almost unheard of not to use a solicitor.
The role of the solicitor is to ensure that all documentation is in order and all facts are disclosed properly, within a contract which will be enforceable. I would always counsel accountants to use a solicitor but I suspect that the reason why this guidance is observed mainly in the breach is that there is a belief that an accountancy practice is a straightforward business and that as both parties are regulated they can trust each other. Anecdotally this is coupled with a professional suspicion of solicitors, who have a reputation for charging vastly higher fees than accountants and “who go looking for problems” and slow deals down unnecessarily. If you do choose to use a solicitor make sure they have the requisite experience for your transaction.
Some brokers and agents provide a template contract as an optional “free extra” over and above their core service and let the accountants negotiate it amongst themselves, which will work in the overwhelming majority of transactions.
As they say in legal circles …… “caveat emptor”, but it will apply equally to both parties.
Types of sale
Full – You sell the practice as a going concern “lock, stock and barrel”. Goodwill or shares
Partial – You sell a batch of clients fitting a certain criteria. Goodwill only
Earn out – You sell the practice now but are paid over a longer period of time and might be contracted to run the practice in the interim, on behalf of the buyer.
Shares – Buyer takes ownership of your limited company. Seamless from client aspect but legally complex.
Goodwill – Buyer pays for goodwill. More disruptive for clients but legally straightforward.
Goodwill
Goodwill is a word or term that is used frequently in business scenarios and certainly one that accountants come across when preparing balance sheets for clients. But what about when they are looking at the value of their own business – their own accountancy practice, whether in its entirety or a block of fees – or when considering the purchase of an accountancy practice or a block of fees?
Let’s start with some standard business orientated definitions:
The 3rd definition should come as no surprise to members of the accountancy profession but it does focus the mind somewhat to compare and contrast with the 1st and 2nd definitions.
Typically an accountancy firm’s tangible assets are worth a fraction of the price the firm would sell for in its entirety and may not even figure at all in some negotiations, especially if the accountancy practice was to be relocated, but where only a block of accountancy fees is being sold the actual tangible value being acquired is the sum total of zero!
It is exactly this that makes the valuation of goodwill so difficult to tie down precisely in any given circumstance. However, our old friend “the marketplace” does most of the work for us as it usually does. Therefore the only way to know for sure, or as near to sure as one can get, is to find out what the going rate is for the sale and purchase of accountancy fees, either as a standalone block or as an entire practice. But there is no published list of deals that buyers and sellers can refer to, so the most reliable means is to undertake research by speaking to accountancy practice sales agents and brokers, and even then it is difficult to be precise as no two deals are exactly the same.
The value of an accountancy practice is typically defined as a multiple of the gross recurring fees – in other words, the fee income that can be expected to be earned in the following financial year based on the current year. The accountancy profession is fortunate that most clients come back each year for the same service because of the mandatory filing of returns. Unlike a trip to the dentist, a tax return can only be put off for so long!
So where does that leave us then? Well, at the time of writing (Summer 2021) sale prices have been creeping up for “good” practices, whether for a block of accountancy fees or the sale of an accountancy practice in its entirety. If we were to plot a distribution curve it would peak between these figures with a sharp drop off and a long tail on either side, perhaps stretching to almost zero on the left and possibly as much as two times or more, to the right in exceptional circumstances.
Given that a typical practice (with the exception of a true one-man band practice without any assistance) will post a net profit of around one third of its turnover, their valuation can be seen in perspective when compared to the multiple of around three to five times net profit that the average trading business would be aiming to achieve were it to be sold, in normal circumstances.
At the one extreme is a fire-sale, where a firm is essentially sold at a knockdown price very quickly, perhaps due to illness or insolvency (or even in my experience due to imprisonment of a very naughty accountant). At the other is a firm with a laser sharp focus in a particular field of expertise with a longstanding contractual relationship to service members of a trade body or membership organisation, causing the valuation to deviate from a strictly professional one towards that of an “ordinary” trading business.
With any given firm there will be many intrinsic factors that could affect the valuation of the goodwill. These would typically be: charging basis, level of fee recovery, location, staffing, adverse publicity, claims history, average fee size, client profiles, ethnicity of staff or clients, opportunity for value added and opportunities that may be peculiar to a particular buyer.
At this point it is worth reminding ourselves that the only thing an accountancy practice has available to sell is its goodwill. It cannot and never sells its clients – slavery was abolished a very long time ago and the accountant has absolutely no control over the freedom of their clients to walk away and choose another accountancy practice to act for them.
So, in light of this timely reminder, why pay anything for a block of fees if there is nothing to prevent your “asset” or perhaps more precisely, your “expected income stream” vanishing into the ether? Simply put, the facts on the ground are that if the sale is handled properly the overwhelming majority if clients will stay with the accountancy practice (if sold in its entirety) due a combination of inertia and goodwill built up.
Where a block of fees is sold the same holds true although it needs handled in a slightly different manner as the practice name itself is not necessarily taken by the purchaser, but there are safeguards in place to ensure that the seller of the accountancy fee block has carefully selected the accountancy fees (i.e. the clients) they are divesting themselves of and will take every step to ensure that the clients are satisfied with his or her choice of purchaser.
Whether a client bank sale or the sale of an entire accountancy practice, the buyer is protected via a contractual and payment mechanism known as “clawback”.
For most sellers and buyers of accountancy practices or accountancy fees blocks, only one big question remains outstanding. Namely, if the demand for accountancy practices outstrips supply of accountancy practices on the market why has the multiple not increased dramatically in line with the fundamental economic law of supply and demand?
I refer you to our old friend – “the marketplace” – who has decided thus, based on a host of factors ranging from interest rates to the general perception of traditional business loyalties or pricing pressures in the broader economy. What this does mean however, is that sellers can pick and choose with whom they wish to deal, especially if the goodwill they have accrued truly is goodwill and not simply a list of clients.
Terms and definitions
GRF – Gross recurring fees
This refers to fees that can be expected to recur year on year and excludes one-off assignments that are performed for a client that cannot be expected to be repeated such as cash flow reports and loss of earnings reports. Typically recurring fees consist of annual accounts and tax return preparation. If a practice that specialises in one-off assignments has a regular flow of these, then they have to be valued differently to a GRF basis.
Clawback
This is the period during which if a client leaves the buyer is refunded the relevant amount paid for that client’s fees as a portion of the sale price.
Clawback terms are not set in stone and like the rest of the deal are fully negotiable and can be flexibly written to allow for uncertainties or peculiarities of a deal.
Billing cycle
This is a period in which clients are normally charged. Typically it is on an annual basis but for some practices or services it may be monthly or quarterly.
Disclosure
It is essential that the seller makes known to the buyer any matters which they think could scupper the deal or have a material impact on the sale price, such as pending regulatory action or imminent loss of a major client.
The contract will normally provide for such eventualities to have been disclosed, with failure to do so rendering the seller liable to be sued. Although a good negotiator will ensure that only that which has to be known is revealed, careful thought should be given to what falls into the category of requiring revelation, especially as you will most likely need to work with the buyer post-sale as part of your contractual liabilities.
Similarly, the buyer should make it clear from the outset that they are in a position to complete the deal rather than wasting everybody’s time if they have no realistic chance of raising the finance. They could be liable for losses incurred by the seller if they have negotiated in bad faith, although in practice it is rare.
Structure
There are many ways of arranging a deal, from straightforward handing over of cash in a lump sum to staged payments, perhaps based on future performance, and even future commissions for bringing in new business.
Most deals are straightforward and paid for in cash but ultimately the way the deal is done will depend on the particular requirements of each party, including any clawback and whether or not the seller is to remain in the business post sale.
Goodwill
Normally this is the amount which you are paying over and above the value of assets and stock. With a practice sale almost all of the payment is goodwill as in reality you are not actually selling anything tangible nor can you sell your clients per se – they are not slaves nor are they beholden to your practice.
Lock in
This refers to the time during which the seller is obliged to continue assisting the buyer. Normally this will run alongside the clawback period as it is in the seller’s interest to co-operate, but direct involvement should diminish rapidly shortly after the handover of files at exchange of contracts.
Lock out
This refers to the period during which the seller is blocked from competing with the buyer, either in outright terms, a field of expertise or in a geographical area, depending on the agreement. It should be noted that any restraint of trade which is deemed to be unreasonable will not be upheld in court and specialist legal advice may be advisable before agreeing any restrictions.
Five costly errors to avoid when selling an accountancy practice
Failing to understand what your practice is worth
Often potential sellers approach brokers too late in the day to maximise the value of their practice, which is possibly their largest asset after their home. They fail to realise that they have a valuable intangible asset that if marketed properly can attain high prices, and the time to start thinking about selling can in certain cases be up to 4 or 5 years prior to the desired exit date.
The value of the practice lies in the fees that clients pay, not the clients themselves, who are of course free agents and not bound to you – something that while obvious still needs pointing out. You are selling this income stream as goodwill and it has a value, based on the gross recurring fees (GRF) that these clients can be expected to generate, based on historical performance.
Being unprepared for sale
You wouldn’t sell a car without cleaning it and preparing the service history and neither should you put your practice up for sale without ensuring that it is well presented. Too often we see that “the cobbler’s children are going barefoot”, without the practitioner realising the state of his or her own records. Buyers will expect, as a minimum, to see ; A detailed client list with their age, trade and respective fees and most importantly what services you perform for them, details of non-recurring work, VAT returns, bank statements, wages records, lease details for rented property and equipment.
Inflexibility on clawback periods
Unless you are paying a very low multiple, typically in a “fire sale” scenario, you can expect a clawback period as standard. Many practitioners believe that the clawback period is strictly 12 months but it can extend beyond this depending on client billing cycles, timing of the payments and the seller’s departure after the sale. Refusal to be flexible on this could undermine a sale, and it is always possible to achieve a different concession without undermining the buyer’s confidence in the deal, which is backed up by the clawback.
Not prioritising your requirements
Usually there are a number of variables driving the need to sell, but not each one will necessarily be compatible with the desires of the buyer. It is therefore crucial to recognise, understand and prioritise your requirements, so that the deal is a “win-win” for both parties. Decide early on what is important and what is not important, always maintaining flexibility to reconsider and remembering that there are two parties to the transaction and in the grand scheme of things some requirements are not worth sacrificing the deal for.
Refusing to use a broker
Occasionally you can pull off a quick deal with a friend or colleague and all is well. Otherwise you’ll need a broker to ensure the deal goes smoothly and completes successfully. In particular, when you wish to push for a point it is much easier to cause offence when negotiating directly instead of using a third party, who can explain your stance in a more sensitive and less confrontational manner. A good broker will have pre-vetted both sides and understand the background of each party and what they want out of the deal, drawing on experience of completed deals and is usually able to suggest innovative solutions in trickier deals.
The best time to sell
6 Key Factors To Consider
Unlocking the hidden value in your practice
Many sellers fail to realise how much their practice is worth.
We unlock the hidden value
to maximise your return.
Buyers often find opportunities that the incumbent is unable to capitalise on.
This could mean that the amount we can achieve for you is higher than the traditional multiples applied.
What buyers look for in a practice
We know what you REALLY want to ask!
The burning question that most practice sellers have is: “How much is my accountancy practice worth?”
You’ve probably heard figures ranging from 0.5 to 1.5 times your gross recurring fees (GRF). The answer, as often is the case, is that the true figure lies somewhere in between.
GRF is the most commonly used basis for working out the value of the goodwill within a practice – and remember that it is only the goodwill that you are selling, as you cannot sell clients.
The lowest figure would be for a fire sale, such as a bereavement or sudden serious illness, and the highest figure may be achieved by a highly profitable practice with ideal client profiles that enjoys a sterling local reputation.
The multiple is also affected by location, with large cities typically holding up well and rural practices fetching lower multiples. There are also regional variations to add into the mix.
The number of partners and their plans for retirement, as well as how involved they are on a day to day basis will also influence what can be achieved.
All of the above will be taken into consideration when deciding what multiple to pitch your practice at, in addition to whether or not there are any potential problems lurking beneath the surface that need to be declared.
Three reasons deals fall through
SKELETONS IN THE CUPBOARD
Whatever it is that you are failing to disclose was probably a historic event, perhaps a former partner being struck off, a member of staff imprisoned for embezzlement of client funds, a disciplinary matter or you yourself being wrongly accused of something publicly. Either way, you weathered the storm at the time so why won’t you weather it now when coming clean with the buyer? Of course there is certainly more than just a theoretical risk when making a full and frank disclosure at the time of sale and exactly when to bring it up requires careful consideration; too early and you’ll never see the buyer again, too late and the last you’ll ever hear of them is the sound of a phone being put down. But balance all this against the fallout of not making disclosure and the buyer finding out – all trust will immediately evaporate and if you are tied into a service contract or awaiting a final payment it isn’t going to be pretty. Even if you do nothing and think you’ve pulled it off, if the business runs into trouble the discovery could well come back to bite you, however robust your contract drafting may be. So it’s down to timing but that’s where a face to face meeting, perhaps with the sales broker present, is your strongest gambit – if everything else is going swimmingly an honest unprompted disclosure is unlikely to derail a deal, and in fact is likely to strengthen trust.
STAFF ISSUES
For many employees the sale of their employer’s business can present a golden opportunity to “get even” or extort concessions. Careful planning needs to go into who to tell what and at which stage in the process. If they are in line for a windfall it is much easier to keep them sweet and co-operative and in any event senior or trusted employees need to be made aware of your plans and kept up to speed more than others. If you treat the sale like a state secret something is bound to go wrong just when you don’t need the headache. It simply means that you need to think your tactics through most carefully and build in flexibility and quick answers because more often than not excluded staff will work it out or there will be a leak, even if unintentional. There may be pay, promotion or disciplinary issues that are simmering just below the surface, so prior to commencing the sales process it is advisable to tackle these issues head-on with a sustainable and meaningful result that defuses the matter and neutralises “bad apples”.
FAILURE TO COLLECT DEBTS
You have a very profitable practice but your cash generation is lousy. Usually it’s because the tail is wagging the dog and your clients have you round their little finger because you are a softie and haven’t got what it takes to “demand” your money. Or it could simply be because your practice is inefficient and nobody deals with chasing debt. An accumulated debtors list that is even 30% of last year’s fees is going to scare off a buyer for the simple reason that when they take over and ask for payment on demand or monthly instalments these clients are likely to turn on their heels. So it is up to you to train them in advance that bills need paid. One proven way to manage old debt is to ring fence it and perhaps offer a hefty discount for immediate settlement. It works in tandem with implementing a robust and workable method for collecting ongoing fees. It isn’t necessarily easy and of the causes of failure it is probably the most difficult to tackle as it impacts directly on your client relationships and takes much time and energy to get right but with the right advice, support and attitude it is definitely achievable.
The bottom line is that you can of course decide to do nothing about the above potential deal breakers and you may well pull it off, especially if a buyer fails to perform adequate due diligence or perhaps their desire for your fees outweighs any other consideration. Perhaps you’ll take a calculated risk, but accountants are traditionally a cautious bunch. Ultimately it all boils down to a single question – “how lucky are you feeling today?”
Rafael Katz | Mediator and deal Manager
After a number of years in teaching followed by several years in business, Rafael qualified as a Mediator with the Chartered Institute of Arbitrators.
In recent years, he has actively assisted in many mediations, bringing about successful resolutions in matters ranging from boundary disputes to professional practice dissolutions, and most memorably a poorly manufactured submarine.
Rafael’s educational experience saw him rise to the position of Chief Examiner for one of the major UK exam boards achieving this prestigious senior appointment due to his keen eye for detail, as well as the ability to clarify complex issues and present them in a user-friendly manner.
Rafael is experienced as a negotiator in the field of business transfer, using his keen listening observational and people-management skills to bridge the gaps between parties, suggesting innovative solutions where others may have given up.
Julian Kershner | BSc (Hons) | Lead Team Support
Julian is a graduate in Business Management from UMIST and brings over 30 years working experience with SMEs across a wide range of sectors from industry to professional services at a senior level.
He specialises in design and management of databases and is particularly adept at analysing and summarising vast amounts of information.
This enables Maximiti to optimise the search and match process and ensure that our clients enjoy a smooth and seamless experience in a time efficient manner.
Julian’s discretion and organisational ability enables us to deliver the boutique service that underpins our operation and bring our team of experts together for your benefit.
Norman Younger | BA(Hons) FCCA MCIArb
Founder and director and leader of the expert team of advisers
Our accountancy practice sales, business transfer and mediation team is led by director Norman Younger who started in the profession in 1989 as a trainee and has experience in building, managing and growing accountancy practices.
He has over 20 years experience advising on boardroom problems between directors and shareholders, and nearly as long in accountancy practice and business sales.
As well as being a fellow of the Association of Chartered Certified Accountants he is a qualified mediator and a member of the Chartered Institute of Arbitrators.
Norman is an expert and thought leader in accountancy practice sales and a regular columnist on AccountingWeb. He regularly delivers webinars related to buying and selling accountancy practices and businesses covering topics such as business and practice exit and succession strategies for retiring accountants and businesspeople.
Norman is ideally placed to give you the best and most up to date advice allowing you to make an informed decision when selling your accountancy practice, business or resolving boardroom disputes. Accountants and company directors are welcome to email Norman to arrange a confidential chat via phone or Zoom.
Fortunately, the business owner had the common sense and foresight to come for mediation before the manager overstretched herself with demands that were not feasible, given that external people of a different calibre to the incumbent would now be required. Not only would that essentially place a ceiling on the manager’s ability to earn, but it would place a significant short to medium term cost on the business.
Sitting down with a mediator as a means to fleshing out agreement in a contentious or thorny issue before it develops into an argument or falling-out, is time and money well spent.
The manager wanted a significant shareholding in the business, which was actually something that no owner would agree to, although this owner was reasonable and did want to recognise the contribution she had made, especially in the event that there a business sale at some point in the future, which was always the game plan.
Because we have so much experience in this area, we knew which questions to put to the manager and it rapidly became clear that she was ignorant about shares and failed to understand what she had been demanding. Once she had a rudimentary grasp of corporate law the discussions took on a new and more conciliatory dimension.
A point of concern, which commonly arises, is how to structure the award of shares in such a way as to be meaningful but not leave the owner with a shareholder who had any say in the business, nor one who would remain on the register years after she had left and any sale proceeds would be way disproportionate to her prior input compared to the new talent’s successes.
The owner wanted to ensure ongoing loyalty and was reluctant to grant an award of shares in a single lump, preferring to slowly ramp up the size of the manager’s equity year on year, but the manager was worried about a sale happening very soon while she remained with a very small number of shares.
Mediations typically take place within a single day but in these circumstances we prefer to conduct a staged mediation, as the manager felt more comfortable consulting with family and professionals prior to agreeing to anything. Given that there was no actual dispute the owner of the business was happy for this, and after a couple of session an agreement was reached.
The story involves twins, a brother and sister, who never had a great relationship and were very different characters. Nonetheless, the found themselves running what had been a successful international removals company.
Whilst their differences were manageable, just about, in a business setting, it all kicked off after each sibling had brought their daughters into the firm. The child of one was very capable and had an MBA but the other’s was essentially in a sinecure. This situation prevailed as long as the grandfather was alive, so as not to cause him any distress,
Withing 6 weeks of his sudden passing there was a showdown on a Monday morning when it transpired that a major customer was taking their business elsewhere. Ultimately after a further 2 acrimonious years, during which the business drifted and cashflow became an issue, one sibling offered to sell out to the other, and move onto pastures new, mainly to ensure her very capable daughter could use her skills properly.
It goes almost without saying that the siblings could not reach agreement as to the value of the business so each party brought in an independent valuer. Naturally each expert painted the best scenario for their client and it degenerated into a slanging match between the professionals.
The twins were too wrapped up in the personal aspect of the dispute to recognise that any attempt at a valuation would require compromise, so a mediation was arranged, even though neither fully grasped how the process worked or what it would achieve.
Agreement could not be reached on the day, but each party ended the formal process having got things off their chests in front of the mediator, which was to a certain degree a cathartic process, and will hopefully allow them to reach agreement in the not too distant future.
They now had an impartial presentation of the valuation variables laid in front of them, accompanied by an explanation of where the business might find itself, and by extension of that, where their finances might end up, if they cannot find a middle path.
More crucially they have a proper understanding of why they must not go to law over this dispute, as the only winners will be lawyers and should it end up in a court of law they will have lost control of the process, whereas with a mediation they will always retain control and never have a decision forced upon them.