Buying an accounting practice

Buying an accounting practice

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Dear AccountingWebbers,

I am currently looking into buying a local accounting practice. The practise has been running for around 10years with a 200k t/o the owner is retiring.

It is quite an old fasioned practice with a lot of paper and I think there is opportunity  update the systems for more efficiency, it is in a good positon to grow in the local market.

I have an offer in principle from the bank and wanted some advice on what to look for in the client bank for due diligence? Does anyone have any experience buying a practice?. I see Glenzy was previously 'pipped on the line' I hope this won't go the same way!

Grateful for any advice, thanks in advance!

Replies (15)

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By tom123
05th Aug 2016 18:32

There must be a million and one things?
Retiring accountants usually have retiring clients.
Is the average fee £1000+, or £100+
Are you familiar with the business sectors.
What are the terms of payment - clawbacks?
Do the clients use software?
After all, if you have 'manual' clients you will be stuck with 'manual' systems to a certain extent.

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Replying to tom123:
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By Commerce
05th Aug 2016 19:03

I agree it is a very broad question! thanks for your response.

So far I understand 30% ltd co clients, the rest mainly sole traders circa 1k per client average fee. the next job is to investigate the client bank finding fee level, how long the client has been their, what sector etc. Any sectors you would avoid?

I am discussing paying over three payments with clawbacks. I had seen clients not using software as an opportunity to help them see the light.

I am keen to automate the practice work to get some idea of time spent on each client, any suggestions for proven software?

Thanks

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Glenn Martin
By Glenn Martin
07th Aug 2016 13:02

I guess it depends on how risk averse you are. I have worked for entrepreneurs the last 12 years who would regularly bid on land or businesses without conditions but completed quickly so as to get an edge over their rivals so I maybe less risk averse than most practice Accountnants.

Firstly you have decide what is going to be covered by your lawyer and the sale agreement. The 2 bigs things are earlier the clawback and exposure to earlier liability which need to be covered by your lawyer and PI cover in place.

With regards to the clients I asked for a list with DOB, industry type, fee and split between sole trader, limited co etc. He removed the client names but on reviewing the list he had a very similar client mix to mine and as he was 3 miles from my office was drawing from same catchment area and his fees were in line with mine so I was happy it was a very good match.

I then reviewed about 6 files which were very old school with a lot of hand written analysis but seemed OK, I saw this as a big opportunity as I felt I could do jobs a lot quicker but still get market rate so as to achieve a better recovery than he probably was. I also liked the guy and got on with him well, I was happy enough with that and felt I could spend loads more time but it wouldn't change my opinion.

Also as the guy was going to handing over clients to me post deal I wasn't overly concerned about any other minor issues that came up as he would still be on hand to help.

I have looked at 3 or 4 of these sole trader accountants lately and they seem to kitchen sink there accounts wise so I ignored the accounts and expenses side of things as was only concerned with verifying income which matched his Vat returns so was happy with that.

The list of clients and there fees was going to be attached to sale agreement so would be transparent for the clawback side of things.

If the fees are £200k I would assume staff are also involved under TUPE again I wouldn't spend ages on that just check they havnt all add contracts boosted prior to the sale the rest let you lawyer sort out.

personally I would wary of taking on fees which are mostly sole traders or private tax clients as they are the ones most likely to cause a problem with fees when MTD finally happens.

What you also need to consider is that the seller thinks he is selling a shiny Mercedes which he has lover and looked after for 20 years where you see a second hand car with all the [***] so go steady as finding middle ground is essential for a good deal.

Keep us posted with how things go.

Good Luck

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Glenn Martin
By Glenn Martin
08th Aug 2016 15:46

Also you would need to factor in a calculation for WIP as if clients are paying monthly you will have to do the year ends which the out going guy has been paid half for or whatever.

The one I looked at was still on annual billing so when asked what jobs would be there for me to take over.

The response was "the cupboards full now but might not be when you take over".

As I would be starting with nil WIP that would then require additional working capital to fund wages, office costs etc until you had jobs into a billable position I would also imagine if used to annual billing for years it would be a slow process to get everyone on monthly.

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Replying to Glennzy:
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By Commerce
08th Aug 2016 16:13

Dear Glennzy,
Thank you very much for your replies, especially the advice on the client analysis. So far I have been told 70% of clients are paying monthly by DD. I need to check what this means is terms of % of fees, and the months the 30% payin. Apparently many of the smaller clients are not on dd so I assume will pay annually.
I hope to get access to the client files sometime over the next two weeks. I did an initial cashflow for the bank and had 70% of value of t/o by monthly fees then the rest spread across jan/feb/march. I won't know the exact spread it till I see the accounts and am nervous of cashflow fluctuations through the year on top of purchase costs. I will reconcile to VAT. I think I have most of his fixed costs, staff, rent, insurance IT etc down.
I plan to go back to the bank statements, deduct owners drawings salaries etc then look at movement in average balances.
Its a bit frustrating not being able to get straight into the numbers!
Thanks for your comments

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Glenn Martin
By Glenn Martin
08th Aug 2016 21:05

No worries.

I think the working capital is what screwed the deal for me the guy was wanting 50% up front then 2 x 25% after 12 and 24 months.

As he was on annual billing I figured I would need to fund 3 months staff and office costs etc before a bean came in from his fees. As it was his last payday I suspect he will done all the work he could before the sale so initial work in progress would be nil.

Because of this I was shy on the deal so amended the bid to 40% and 2x 30% so as not to run out cash to pay the wages. But instead he took a lower up front fee with no clawback.

In hindsight I have just cleared a load of WIP in July and August so maybe would not have been that far away with a bit ducking and diving, and sort of regret not getting it now as cannot see I will find as good a match.

Back to drawing board and just marketing now for clients which is going ok.

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Glenn Martin
By Glenn Martin
09th Aug 2016 15:06

.

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Glenn Martin
By Glenn Martin
09th Aug 2016 15:06

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By HBTax
16th Aug 2016 11:36

I can only offer some advice as someone who has gone through the process and it was a disaster!

I agree with all of the other comments, but you need to be very clear on claw back arrangements. In my particular case, I went through what I thought was very detailed due diligence only to discover once we had bought the practice that nearly all of the clients were actually loss making and the debtors were fabricated.

The other issue that we had was the retiring practitioner didn't handle the handover process well and we lost a load of clients through perception that we would be more expensive. Never underestimate that clients who have been with someone a long time, do not like change!

Also take into account any staff that are to come along with you. Although they can be the key to a successful handover, they can also be the key to absolute disaster.

I am not trying to put you off in any way and wish you the best of luck as I realise that our particular case must (I hope!) be very rare.

We are now two years down the line and nearly £300,000 out of pocket to go along with the hefty legal fees incurred on litigation against the retiring accountant with no prospect of ever seeing a return as one of the former staff members who we took on from the old practice has now taken most of the clients that we "bought"!

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Replying to HBTax:
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By Commerce
16th Aug 2016 15:35

Dear HBTax,
I am very sorry to hear about your experience and grateful to you for sharing some of the challenges.
We are currently reviewing the clawback arrangements and I will take this into account.
I take your point about clients not liking change, my plans to introduce the current clients to cloud accounting may have to be thought through carefully.
I have discussed the owner not taking clients back on his own but not the staff and may have to put some wording for this in the agreement.

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Replying to Commerce:
paddle steamer
By DJKL
16th Aug 2016 16:58

And there is the rub.

The staff contracts re non solicitation are the staff contracts, the seller may well have no power to alter/insert a staff restrictive covenant/ non solicitation clause given it is a contract and there are two parties, existing employer and existing member of staff. Any change likely needs agreed by both and why should employee agree to change without compensation?

So if existing owner has no restrictive covenant/non solicitation clauses within existing staff contracts, or heaven forbid no contracts, there is possibly very little that can be done without the agreement of the members of staff.

Even with restrictive covenants they can be a nightmare to enforce and of course if written too wide may well fall anyway. (As I recall Bluebell v Dickson or something similar)

Enjoy TUPE and caveat emptor.

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By Commerce
07th Sep 2016 13:49

Update: I have been looking for debt to buy the business from the high street banks. One in particular is having trouble understanding the difference between turnover in the published set of accounts and current turnover one year later. The 'specialist business manager' I deal is very professional and I spent time with him explaining the situation however I get the sense the banks credit team have a 'tick box' process so it takes quite a bit of toing and frowing to get them to understand some fairly remedial points. I think we are nearly there. Does anyone know any experienced lenders who can make decisions on this sort of transaction? Thanks

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Glenn Martin
By Glenn Martin
07th Sep 2016 14:42

Commerce I will send you some details via PM

My bank manager didnt understand what it was I buying as was wanting bricks and morter type security

You need to ask for it under the Enterprise Finance Growth scheme where they government underwrite the loan where traditional security is not available for Goodwill purchase.

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Replying to Glennzy:
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By Commerce
22nd Sep 2016 14:05

Hi Glenzy, I have just picked this up, I have property equity for the loan and HSBC mentioned the EFG scheme, I will review the costs.
I had met with and given three high street banks information about 6 weeks ago, then when I get final accounts etc I reverted to find most of the guys i dealt with and the credit teams were on holiday so we have gone into slow motion, this is a bit frustrating!

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Replying to Commerce:
paddle steamer
By DJKL
22nd Sep 2016 15:00

No knowledge re finance for accounting practices but lots re dealing with banks, mainly re property lending.

Across the board the agreement process is far slower than say ten years ago, there often is no real cohesive request list for information at outset and more and more extra data gets requested in dribs and drabs (probably at behest of credit/risk committee or similar) as you proceed.

I find that the relationship manager may well wish to do the deal but if he is not good at pre-empting credit/persuading credit the whole process becomes a very slow ping pong match.

Even regarding security arrangements/documentation the larger entities appear to have adopted a one size fits all approach, so however pointless the instrument in the particular case (assignment of rents doc, duty of care doc etc) if it is on their list they tend to say they must have it.

I am currently in process of aborting a refinance with a large entity to go with a smaller private bank simply because the communication speed is faster and they have a clearer steer from credit early in the process and are not wanting a swathe of legal documentation covering daft points. In effect made to measure rather than off the peg banking.

In our case the original transaction started in February and was still very slowly grinding forward when I got really fed up and started discussions with a much smaller replacement lender in early August, since then we have received credit and board approval, scope of diligence has been agreed, fee quotes obtained and we have a target settlement end October; sort of says it all, start to finish likely three months is vastly better than start to still havering five and a half months.

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