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Buying an accountancy practice / fees - Frequently Asked Questions

 

If you want to buy an accountancy practice we’ve got the answers to the most common questions, but if your query about buying an accountancy practice is not listed, please do not hesitate to contact us.

  

  • How is goodwill calculated for accountancy practices ?

    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 established reputation of a business regarded as a quantifiable asset and calculated as part of its value when it is sold.

    www.investopedia.com/terms/g/goodwill.asp

     

    • business : the amount of value that a company's good reputation adds to its overall value.

    www.merriam-webster.com/dictionary/goodwill

     

    • Goodwill is the excess of the purchase price paid for an acquired entity and the amount of the price not assigned to acquired assets and liabilities.

    http://www.accountingtools.com/dictionary-goodwill

     

    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 workload 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 (October 2016) the normal multiple is between 1 and 1.2 times the gross recurring fees , 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 or three times to the right.

    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 five times net profit that the average trading business would be aiming to achieve were it to be sold.

    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. The same holds true with the sale of an accountancy practice 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 is 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.

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  • How much should I pay for an accountancy practice ?

    The value of an accountancy practice is normally worth between 1 and 1.2 multiplied by the annual recurring fees. Obviously by having a significant number of purchasers chasing a practice, it should push the multiple nearer the end of the going rate but this band has been quite sticky for some time. For a highly specialised niche practice with valuable consulting contracts, which is essentially a brand, the valuation could be significantly higher .The more potential buyers showing interest the greater the possibility of being asked for sealed bids or holding an auction-style competition.However, this is time consuming and may not be worth the effort for many sellers. Profitability and productivity is always a major factor in determining the value of an accountancy practice and there are many other factors in the valuation equation. This is where specialist advice is required.

    For a more comprehensive discussion on calculating the goodwill of an accountancy practice see the question "How is goodwill calculated for accountancy practices ? " on this  list  

     

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  • Can I protect my anonymity for as long as possible?

    At Maximiti we are acutely aware of the sensitive nature of buying an accountancy practices and will at all times endeavour to ensure the highest level of confidentiality and discretion. Whether you already have a practice or are currently employed we will not release your details until you allow us to do so.

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  • Will the seller be required to work after the sale?

    This is a point which is always up for negotiating. With our experience we usually advise that the seller is involved with the purchaser for a period between one to three months. The advantage is that this will ensure the smooth transition of clients to the acquirer. Although a direct contact with the clients is not always encouraged after the sale, it is beneficial to all to know that the predecessor is still on hand if need be.

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  • How long does it take to buy an accountancy practice?

    This normally depends on the urgency of both the seller and acquirer. You can expect the whole process to take from anything from six weeks up to six months but at Maximiti we guarantee to respond to all correspondence received within three working days. This ensures a swift transaction when both parties are willing.

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  • What is the best time of year to buy an accountancy practice?

    The records over the years have shown that there are two main upturns in the market. The first is between mid February to June and the second is from September to November. Obviously this is the time when vendors come out to sell but the whole sale-acquires process spans over the whole year.

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  • What is "Clawback" and how does it protect me?

    Clawback is a clause in the sale agreement documentation. In the event of the acquirer losing the fees in an agreed period of time (normally one year) they deduct a percentage of the remaining balance. In the event that a purchaser makes a claim under the clawback clause, the vendor has the right of discovery. They may look at the appropriate client files and if necessary, speak to the client and confirm that the loss is genuine. This is one of the more intricate parts of the deal and requires real understanding and expertise to make sure that not just is the clause fair to all but most importantly that you understand exactly what it means for you. We will be on hand at all times to explain the smallest query which you might have.

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  • What happens to work-in-progress and debtors?

    It is normal procedure for the vendor to collect his own debts and to agree the level of work in progress at the point of completion. The purchaser finishes off the work in progress and bill it and remit the vendors share at 85% of sale price on an as collected basis. The 15% is a collection charge retained by the purchaser. Any under recovery is apportioned.

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  • How long do I get to make full payment?

    This depends on the size of the practice. For a smaller firm payment is usually received in two stages. The first payment is upon completion of the deal and the second is on the first anniversary. For a larger firm there are normally three stages of payment. The amount at each stage is open to negotiation and for that reason our staff are highly skilled in negotiating to ensure the best possible outcome for all.

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  • What happens with existing staff?

    We acknowledge that staff need to be looked after and we will endeavor in our negotiations to have them at the forefront of our minds when dealing with your purchase. Many buyers will want to acquire the services of the staff and we can make it a priority should you insist on it.

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  • If I don't want all the clients to come over or they don't all want to come will this ruin the whole deal?

    That depends on the seller's attitude and requirements. Some sellers appreciate that the nature of their practice and client roll is such that it may be a necessity to split the deal into 2 deals with 2 separate buyers, but most of the time it is not necessary. For most deals, if a buyer  does not wish to retain the entire client roll for whatever reason it is indeed a potential deal breaker.

    A buyer who takes on the whole list and then sells on a portion is asking for trouble , unless it can be carefully orchestrated immediately upon exchange of contracts when the new incumbent takes over. Even so, the buyer is risking their clawback rights unless the seller is acquiescent as to what is taking place. Buyers are usually advised to steer clear of a deal where the seller wishes a clean sale but the buyer wishes to cherry pick.

    If clients themselves are unwilling to transfer to the buyer then clawback will kick in, but it is difficult to ascertain in advance with any certainty as to which clients may take a dislike to the buyer or may simply use the change of accountant as a convenient opportunity to make a move they had anyway planned but felt uneasy making. In such an instance it does not break the deal per se as one only finds out post de facto, unless of course news has leaked out in advance of the trasnaction which can be disastrous for the seller if handled incorrectly.

     

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  • Will I be able to purchase or rent the premises?

    Maximiti is well acquainted with professional and successful property businesses around the U. K. and will willingly broker a deal between parties regarding your premises or can source a buyer seeking a property investment.

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  • Do you ever have practices for sale at knockdown prices ?

    Yes we do. Usually it involves a serious illness or bereavement situation, but it also happens when there is a bankruptcy, insolvency or legal situation that forces the seller's hand.

    In all these circumstances you can expect to pick up a bargain with the discount ranging from 30% right up to 75% depending on the reason for sale, the size of the deal and deadlines.

    But as they say - everything is in the price, so don't expect any clawback indemnity or warranties.

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  • The seller doesn’t want to use a solicitor but I do

    The vast majority of deals Maximiti has brokered did not involve a solicitor. Accountants seem to have an aversion to them probably because of the costs and the perception that they unnecessarily complicate matters, which is not unknown . You are quite entitled to insist on using a solicitor but make sure they have experience of his type of business sale previously and know what they are doing.

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  • The buyer wishes to retain some fees – should I be concerned ?

    It depends on whether the buyer is cherry picking or has a clear strategy that determines his or her choice. Typically a retiring accountant may only wish to retain clients that are small in terms of effort or perhaps within a few miles of their home. A firm that is rationalising may wish to divest itself of any fee under a given size. It is a legitimate concern and you should be satisfied with the explanation given.

     

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  • Do people ever pay above the market rate ?

    Yes , depending on the circumstances. The seller may have a highly specialised niche practice with valuable consulting contracts , essentially a brand. This could push the value up by 50% or more if the buyer accepts that the seller has something of particular value, or if the deal makes particular strategic value to a buyer and he or she does not wish to lose the opportunity.

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Often the answers provide the reassurance needed to enable the purchaser to make the decision to buy. Whatever you decide to do, we can help make the process of buying as easy as possible.

 

Whether you wish to sell, merge or buy please call us for a confidential discussion during which we will be more than happy to answer any queries you may have.

 

Maximiti puts the customer first, ensuring that you will receive a personal, sympathetic and professional service at all times regardless of the size of your proposed practice purchase.