Harsh realities
An accountancy practice is in reality a business.
There’s nothing new about this statement but while many accountants view themselves as professionals rather than businesspeople, the fact cannot be denied that their practice is a business – even if they work out of a shed at the bottom of the garden.
Furthermore, when accountants retire and put their practices up for sale they make the same mistakes as their clients when they sell up, typically on retirement.
Getting your practice to the point where a suitable purchaser has been found and the terms have been agreed is usually the first point at which vendors allow themselves to breathe a small sigh of relief – again just like any other business.
If you’ve never been through the sales process let me assure you that it really is a significant milestone but in reality it is not the finishing line. In fact it is often some distance off, but nonetheless a fairly good indicator that the marathon is rapidly coming to its end and you’re going to make it.
At this point it’s usually a case of the buyer performing due diligence and wrapping up handover and post-sale details, and in reality most sales will proceed unimpeded and on time.
However, before a seller can truly relax, look themselves in the mirror and afford themselves a smug but well-earned smile of satisfaction numerous pitfalls may still be lurking beneath the surface. Some of them are totally beyond your control and are emanate entirely from the other side, some of them are events in your own life that were unforeseen, but there are others that are entirely down to you as the seller and it is your fault for allowing them to happen.
If this sounds blunt I make no apology because sometimes you have to say things like they are in order to maximise impact. After all it is for your benefit as a seller that I am going to open your eyes to the following common reasons why the deal you have dreamt of and eagerly anticipated for months or even years is about to unravel before your eyes and you’ve only got yourself to blame as you look on helplessly in desperation.
- Skeletons in the cupboard
- Staff issues
- Failure to collect debts
- The bottom line
1) Skeletons in the cupboard
Some people prefer to label it as “baggage” but to a buyer it is made of bones, is white and scares them witless – it is a skeleton, plain and simple.
In reality it is the shock of opening the door and watching helplessly as the bones lurch outwards that gives people such a fright, but what if they knew to expect a surprise?
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 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 after that if the business runs into trouble the discovery could well come back to bite you, however robust your contract drafting may be.
Remember that these days everything is known to everybody – there are no secrets especially in small markets and local communities. The bush telegraph continues to perform admirably in the digital age.
In my experience as a broker you can find out about your counterparty, and vice versa, at the click of a button followed by a telephone call, email or dip into LinkedIn.
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 between yourself and the buyer.
2) Staff issues
For many employees the sale of their employer’s business can present a golden opportunity to “get even” or extort concessions. In some practices the staff spend half their time wondering when the principle is finally going to retire so the element of surprise may be taken out of the equation but often it is going to come as a bolt from the blue and they will quite rightly worry about their futures, and if mismanaged can rapidly become “each man or woman for themselves”.
Careful planning needs to go into who to tell what and at which stage in the process. But of course it all depends on the circumstances. If they are in line for 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”.
One issue that is quite common is where the vendor has seen fit in his or her wisdom to sell to an outsider rather than a member of staff. Some workers hang around in a firm in the belief, implied or imagined that when the day comes it is they who will become the proprietor or partner. Imagine their disappointment.
Even more problematic is where a member of staff has already commenced negotiations that are turning out to be fruitless. This tends to play out over many months and more, often without them realising that it is not going to happen. You have been going round in circles time and time again, every time a new excuse rearing its head, although it is nearly always related to their inability to raise the necessary finance or actually make the commitment and take the plunge.
Another tricky issue is the need to modernise when staff are reluctant bordering on Luddite, but as they say, “if you want to make an omelette you need to break eggs”. As above the time to confront people is before the sales process commences because unlike men’s toothache it doesn’t just go away. However tricky it is in advance it has the potential to be infinitely more damaging during a sale.
3) 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; yes, it is your money as you’ve earned it square and fair. Then again 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.
This requires a strong nerve as you are breaking a comfortable routine that has served them well.
It isn’t necessarily easy and of the causes 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.
A change in owner coupled with a change in an established and comfortable financial situation is the ideal excuse for wavering clients to leave, which of course will trigger a clawback claim and make recovery of the debt even more complicated, usually ending up with a court summons – all avoidable with a little planning and foresight.
4) The bottom line
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?”
And if you’re not thinking of selling your practice any time soon you could enhance your reputation as a trusted business adviser by making sure your clients don’t make these mistakes.
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Click here to download the guide to selling an accountancy practice 2021/22