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Buying A practice

Buying A practice

I am in the process of buying a tax consultancy practice near birmingham, have turnover of 100K and established for 14 years, have more than 95% of self employed and self assessment tax return,mostly subcontractors,5% ltd companies and bookkeeping,

I need advise from experts or who bought in past,

1-What should my offer? seller looking for 120K,

2-How many installments ?

3-Clawback period ?

4-Anyother thing which i should be carefull,because of area,nature of clients,future prospects etc,

Many thanks in advance

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By Tosie
24th Jun 2011 21:54

Too high

The going rate is 1*1.  Sub contractor clients are not sort after as they are here to-day gone to-morrow.i.e they get transferred to PAYE, they cannot find work etc. You need to examine the records and see how many of the clients are well established. So far as I aware sub-contractors do not normally cost as much as say a well established business with staff and premises.

I bought a practice 20 +years ago which was a mixture with 20% subbies. I paid at 75% of grf. Five years ago with a view to retiring I have sold two lots of clients. The first were subbies and I sold £15k for £5k with no claw backs. The second sale was a good mix of solid clients and I received 30% down and the balance over 2 years. I researched the market and I realised that people would not pay 100% for subbies.

In a previous life I worked for a practice that bought fees on a regular basis but they cherry picked and would not buy subbies or taxi drivers.

Your seller will not get £120k for such a practice.

Just  a further consideration these are low value clients and so you will have  a lot of clients and my exprience is that a lot of clients mean a lot of phone calls.!!!!

Send me  a pm if you want to see the contracts I used.

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By Locutus
24th Jun 2011 23:37

Agree with previous poster

I wouldn't claim to be an expert by any means, but my thoughts from my experience are ...

1.2 x GRF (gross recurring fees) is way, way too high.

1 x GRF has for a number of years been considered the "going rate" for a reasonably good basket of clients ... which would certainly not be a barrow load of subbies and SA returns.

If you like doing lots of subbies and SA returns (I don't as I find the admin versus income too low ... I prefer a smaller number of limited companies) then you should be able to pick something up for significantly less than 1 x GRF.

For a client base of GRF £100k, I would expect to pay the seller over 3 years.  If seller wants a shorter time frame then the the GRF multiple payable would need to come down even further ... as you are taking a greater risk, since you have a shorter time to decide how many clients will actually stay.  Probably the biggest risk that you face is that the clients acquired will walk away within a year or two of the hand over, if they find the "change" too different.

As for claw back, what I would do is divide your GRF multiple by the number of years that you are paying.  So if, for instance, you end up paying 0.75 x GRF over 3 years then pay 25% of fees received for 3 years.  Then at least if you lose lots of clients in years 1 or 2 you are not paying too much for them.

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25th Jun 2011 07:47

Check the files
I agree with the above - lots of smallish clients isn't good - much harder to manage and administer and they're far more likely to last only a year or two as they'll give up, get a job, retire, do it themselves or find someone cheaper.

I'd also base my offer on the standard of the files kept. Not just transparency (or otherwise) of working papers, but also the permanent stuff, especially know-your-client, ID proof, tax elections and reliefs, etc. If you can get it cheap, you can afford the time to create good perm files and maybe take the occasional hit for a "tax timebomb" in the case of a missed election, but if you're paying over the odds, you want the files to be top standard.

Finally, make sure you know their charge out rate, recovery, etc. £100k GRF is fine if it can easily be done by yourself normal office hours, but you may find that the current owner has to work evenings and weekends to achieve it, charging maybe only £50 per hour, or attaining recovery of only 50%.

It's relatively easy to build up a low quality practice - a bit of advertising and charging less than others will soon get anyone up to that kind of fee level, but at the price of working all hours and having to deal with dross.

For 120% GRF, I'd want to see a top quality client base, immaculate files, a diverse client mix, and an average fee of around £500-£750 based on a charge out rate of £100 with at least 80% recovery of time spent.

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25th Jun 2011 10:40

Buying A practice

Thanks everybody for great help,some more informations and like  your comments,

1-100K Turnover in last 3 years each, with 40K Net profit, 1 Staff 22K, Seller only works 20 Hrs a week,Rent & Rates 22K with chances to sublet and can reduce, number of clients are 500 as he is charging average fee £200,advertising 5K,some clients with him for 10 years,no decline in turnover,files as per him are scanned and no big files but donot know how orginise have to see?

2-My draft proposal is 80% of GRF for subbies with 30% upfront and remaining in 3 years,with 2 years clawback

3-I can pay 90%-100% of GRF for Ltd comapnies which is only 5-10% of total turnover with 2 years clawback.

Many Thanks

 

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28th Jun 2011 16:02

Still seems high

It is a few years back now but we bought a block of fees (circa £40kpa) of tax return only cases with small amounts of additional property income and paid £17k with no come backs.

Is the vendor going to agree never to compete again?

I would check out exactly what you are taking on here, you mention staff and rent & rates.

Staff wise you should check up on the TUPE regulations for transfer of staff to you, you may be taking on a liability to redundancy pay for the staff member (as much as 1.5 weeks salary for every years service). If you dont take on the staff member is there a barring out clause in their contract and is it any good beyond six months? You could be buying something that doesnt exist in seven months time...

Property wise if you are thnking of taking the lease over have you had it checked out for continuing liabilities for dilapidations, any alterations he has carried out that may need to be put back when the lease ends etc etc.

Also have you looked to see if there is anything else out there for sale so you can compare prices?

Apart from that dead easy :)

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28th Jun 2011 16:04

oh and another thing

what will the impact be on the fee income of the £70k turnover limit for three line sets, will you still be able to charge for accounts preparation which from a tax return compliance point of view isnt needed?

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