Help! We are in trouble !

Help! We are in trouble !

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We recently purchased shares in a Ltd company (accountancy practice) and it seems that its a mess.

1. Alot of backwork: client has already paid the previous accountant for services that he did not do and its left to us to sort this out (unpaid work)

2. Many client listed in the purchase do not exist or already left the practice

3. Some clients that had  left before we took over are contacting us to say that they have already paid for work (typically the closing of a company or sole trading business) which the previous accountant has not done and are now receiving penalties.

4. last years submissions for payroll is still outstanding

5. Advice given to clients that is incorrect and could prove to be costly to the client.

6. There is alot of missing information (eg no payroll info) so reconstructing clients work is very difficult

7. It looks like the previous owner may have padded out the expenses in clients SA100's?

I don't have the man power or the financial ability to complete the work without getting paid for it. The payments received by clients were taken out via payroll so the company doesn't have any cash. The owner also prepared accounts for the practice upto the date of transfer and it appears he hasn't recorded things correctly and the tax bill is another liability that we may have to pay for.

I have spoken to the previous owner and also drawn up a list of client with their fee to show there would be very little to pay for the second installment (we paid 50% upfront and 50% with clawback). However the previous owner doean't seem to recognise that fact that we did the deal on a recurring fee basis. if the fee is not recurring then its not counted? One off work to close down a company is actuall a loss for us as we not only paid for the client but are doing the work free and are not getting any future benefits (income from that client).

I'm not sure what to do and am really worried about the situation.

Count

Replies (23)

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By taxhound
20th Nov 2011 09:30

Hindsight is a wonderful thing but...

Did you not do any due dilligence?

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By petersaxton
20th Nov 2011 09:41

Action

I would think you should insist on a reduction of the price for all these issues.

If the previous owner doesn't accept your idea then legal action is required.

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By User deleted
20th Nov 2011 11:04

I agree with the first response

Competent due diligence ought to have flushed out most, if not all, of the issues - or did you consider that, as an accountancy practice, it ought to have been clean and therefore not bother?

And does the SPA cover you for quantifiable losses arising from the vendor's actions prior to Completion?

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By zarathustra
20th Nov 2011 11:28

don't pay the second installment
Don't pay - its as simple as that. Hopefully that should cover a large chunk of the additional costs you will incur.
I think you could alledge fraudulent misrepresentation. Probably not worth ltigating though because of the costs.
I doubt the previous owner will try and get any more money for that reason.
You have obviously learned a valuable lesson about due dilligence.

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By Steve McQueen
20th Nov 2011 11:29

If its a bad as you say...

I have a "very close friend" who bought a crock of S*** accounting practice with £70k down and £140k to follow in installments. The best rescue if its as bad as you say is to get a friendly IP involved NOW and look at a pre pack admin buying back the good bits for £5-10k and sinking the rest. My "very close friend" was ICAEW registered and they had no problems with it provided all boxes were ticked and all "i's" dotted.

Also, do you have a case for any misrepresentations from the previous guy? You need a no win no fee litigation lawyer to look over your contracts etc and to set them loose if there is a case.

And finally, whilst I know this is a cliche, you need to "keep calm and carry on" at this time.

If you want to talk to someone, PM me, I have been through what you have - and a lot lot more that is worse - and I would be interested in helping (anthough I am not an IP or lawyer)... and I am not looking for a fee.

All the best

Steve

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David Winch
By David Winch
20th Nov 2011 11:33

I am wondering . . .

I am wondering what the contract says (the contract dealing with your purchase of the shares in the company) and what your professional indemnity insurance arrangements are with respect to claims against the company by its former or continuing clients.

I certainly wouldn't be in a hurry to pay the remaining 50% of the fee.

You also need to talk to the solicitors who drew up the contract about what is to be done now (and also bear in mind that you may have a claim against them re the advice they gave you at the time of purchase).

David

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David Winch
By David Winch
20th Nov 2011 12:28

Rescission?

When you talk to the lawyers you might like to ask about any possibility of rescission.  In effect that means cancelling and unwinding the contract.  It means that you give back the shares you purchased, the other side return your money and things are put back to how they were - as if the sale never happened.

In practice that may not be available particularly if the company's clients have been made aware of the change in ownership, you have met them / written to them / done work for them etc so that you cannot sensibly return what you bought in the condition in which you received it.

Did the contract specify how the purchase price was calculated?

Did it contain warranties from the seller regarding the client list and the recurring fee income from them?

Did it contain warranties as to the accuracy and completeness of the company's own accounts?

What were the contractual provisions regarding the second 50%?

David

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By dropoutguy
20th Nov 2011 12:52

Client list and compliance list.

Two of the lists appended to the agreement should be lists of clients and lists of compliance deadlines missed or work outstanding on clients to be transferred.

If they are substantially incorrect, then there may well be a claim for breach of warranty.

But earlier posts are quite right.  Due diligence would discover these matters. I should have thought the courts would be slow to reward a claimant who turns up ( particularly and accountant ) at court saying they hadn't bothered to look much at the files.

You should have a lawyer look at your clawback provisions in the agreement and ensure that you do all that it necessary to give effect to them and claim the maximum 50% clawback. There must be some good work in the practice. Make sure you bill that, and your existing clients, to ensure that there is good recovery.

When you say, however, that you don't have the manpower to do work, that does start alarm bells ringing a bit as it seems that you may have found yourself in trouble even with a better buy. You always need ample good staff in place by completion when purchasing a practice - many practitioners do not appreciate this.

Hopefully, you did not borrow to pay to pay the purchase price. If you didn't, then the situation may well be salvageable. If you did borrow a substantial sum, then an administration may need to be considered.

 

 

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Image is of a pin up style woman in a red dress with some of her skirt caught in the filing cabinet. She looks surprised.
By Monsoon
20th Nov 2011 13:25

Also happy to talk
Like Steve, I have a "very close friend" who had a similar situation, although it wasn't a purchase, it was a similar dire situation that had been created by a partner, who had somehow managed to cover his tracks until my "very close friend" finally realised what was happening and took prompt and drastic action to fix things, which included ending the business partnership and transferring the practice to a new limited company (not because it was insolvent but simply because the potential for future liability was immense and would have probably cost her her house). Her professional body were kept fully in the loop and were very supportive. Like you, there was a hell of a mess to fix, work paid for but not completed, dodgy working methods, lack of decent records etc. Twelve months later she had turned it around and was more profitable than it had been, so it's possible to come through this kind of situation, it's just not pleasant at the time.

If you want to talk I'm happy to as well, and I fully agree with all the others about not paying any more money and taking legal advice, there's some excellent advice in this thread. If as David says there is a possibility of rescission, that might be a preferable option, depending on the actual specifics.

Good luck with it, and trust that you will come out the other side in a much stronger position. Keep calm and carry on, indeed.

Very best wishes
Monsoon

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Euan's picture
By Euan MacLennan
20th Nov 2011 18:51

Shut down the limited company

I agree entirely with Steve McQ.  If you have been foolish enough to buy the shares in an existing company rather than the goodwill from a company, you take on the responsibility for all the skeletons in the cupboard.  If the situation is as bad as you say, avail yourself of limited liability, close the company and start another.  Tell the clients who were foolish enough to pay the original company upfront that your new company will be happy to undertake the work for a proper fee, but that the new company has no responsibility for completing the work for which the original company was paid.  OK - you may lose some of the clients (don't pay the previous owner), but since you "don't have the man power or the financial ability to complete the work without getting paid for it", there is no alternative.

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By Countinformation
20th Nov 2011 19:31

Many thanks for your responses and am deeply touched by your comments and openess.  I did do due dilliegence. I went through to broadly verify that clients existed (obviously not in much detail) and that fees were coming in. I also looked at income levels of prior years -it was a sole trading business before it was converted to a limited company and it appeared that the income levels were were consistent. What i didn't do is to go through each client on a case by case basis to see if any issues were there.

Steve and Monsoon: I really appreciate your offer to talk to you about the situation.

I have been through the panick stage and am trying to get the clients on track. The sales agreement did specify the clients and work in process and if it comes to it I may well go down the legal route.

Many thanks

Count

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By Bob Long
29th Nov 2011 11:03

PII

Was the previous owner a member of one of the professional accountancy bodies?

If I have this right, you have to continue to pay PII for 2 years after ceasing practice, if indeed they have ceased, and thus anything which arose during the previous owners time should be covered by the 2 year "run-off" period.

At least, that's how I understand it, although I'm not an insurance or legal expert, just a person who has to pay PII himself.

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7om
By Tom 7000
29th Nov 2011 11:04

Insolvency

If it came to that you need to talk to the institute, they can be funny about things like that.

 

You need to make a list of all the jobs hes billed for and not done and then nock it off the 2nd installment. Let him sue you for the balance, he wont it will cost too much. Lawyers are expensive.

 

Alternatively,  what about getting him in the office to do them...give him a choice...do em or Ill knock em off the bill.

 

I dont think any acquisition will ever go smoothly, well unless someone bought me out ;o)

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By The Minion
29th Nov 2011 11:54

looking back

might be a good thing to do.

 

you mention that it was transferred from a sole trader to a limited company relatively recently. What did the previous owner do about the goodwill valuation, do you have a potential to argue that it was a transfer at market value for tax purposes (connected persons and all that), and get the CT deduction?

 

I assume that the contract declares all creditors and doesnt include him so you wouldnt be invoking any unexpected liability.

 

Of course the downside to this would be that he probably hasnt put this capital disposal on his SA return so may have an issue with HMRC. I am sure there is a german word for this Schadenfrude or something, but it might help you sleep at night:)

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7om
By Tom 7000
29th Nov 2011 12:06

the goodwills only tax deductable if it ''started '' after April 2002 so you need to know when he first started trading....got that on your list?

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By neileg
29th Nov 2011 15:13

Stable door

I know the horse has more or less bolted but this story reinforces the need for formal due dilligence and a proper sale agreement with warranties. Or you buy the assets and not the company, but even this needs due dilligence and warranties for full protection.

Good luck with rescuing the situation - there's lots of good advice in this thread.

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By The Minion
29th Nov 2011 15:28

silver lining?

One possible silver lining is that you could (obvioulsy worded very carefully) say that having carried out a thorough review of the cases you have taken over (as part of your due diligence) and that you are concerned that there may be an increased chance of investigation by HMRC (rattling the Plumbers/electricians etc scheme at them).

You therefore recommend strongly to them that they REALLY need to have fee protection insurance in place. Get them signed up (making a profit on the fee) and wait to reel in the extra fees if the past work is as bad as you say.

We use Abbey and have no issues at all with them, but if you search the site you will find loads of strings commenting on fee protection companies etc.

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7om
By Tom 7000
30th Nov 2011 11:26

I disagree on the Insurance, you need to preserve the'' goodwill'' of the old chap. ie all the clients thought he was great, well if they didnt trhey would have moved elsewhere ages ago. The harsh reality is he may have been rubbish, but they dont know that. If you start putting fees up and selling insurance and  ''moaning that he was rubbish '' they will vote with their feet...

 

Bright and breezy and happy to help and 70 hours a week will get you through :o)

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By The Minion
30th Nov 2011 14:08

if you re read the post

it doesn't say "your previous guy was C**p and you need to prepare yourself for the worst!"

Any goodwill you may have paid for would evaporate instantly and there would be no emotional capital left at all.

 

That is why i said worded carefully referring the the tax safe plans etc.

 

It looks like you are pro active and on their side, which they may appreciate and tell their friends how the "new guy" is totally different etc

 

Like i said silver lining.

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7om
By Tom 7000
01st Dec 2011 17:00

I think bottom line, we all just wish you the best of luck

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By Countinformation
05th Dec 2011 09:18

Times like this you know you can count on this forum

I am really very grateful and sincerely touched by the responses given. When crisis hits its reassuring to know you that you can turn to this site and its members for reall genuine support.

I think I may have got through the worst of it now (I hope !).

After reading the responses, the plan is:

1. I will be transfering the clients to a new company in the new year

2. Clients are now fully aware of their situation and know that we will do the backwork (many cases for free) but will not be responsible for penalties. This has created alot of goodwill which i was supprised at. Clients seem to be sympathetic and are greatful that we are now resolving the issues. Many of them weren't even aware that there were issues (eg not filing last years payroll)

3. We will explain the risks to clients on past tax returns and offer to re-do them but would have to charge them for this work. May also offer them fee protection insurance as well.

4. Decided not to take legal action at the moment but may pursue this at a later date.

5. Not pay the second installment (the missing clients and clients that left pretty much covers this anyway).

 

Lessons learnt

1. Look at each client seperately and look at the status of each one. Don't just assume that because they run an accountancy practice they do the work.

2. Insist on speaking to a handfull of clients to verify from them that they are a client and they have no issues with the company (can be done as a survey telephone call in front of the existing accountant).

3. Review each clients workings papers to ensure they exist and they are adequate.

4. Look at invoices and bank statements to verify the clients are being invoiced and funds are being received.

5. Don't buy shares in the company buy the clients and transfer them to a new company.

 

I hope anyone looking to buy fees takes on board the above. I am sure we can all learn from this experience.

 

Thanks to all those that responsed.

 

Count

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By The Minion
05th Dec 2011 09:21

Glad to see

You have emerged from the forest, or was it an alligator infested swamp!

 

Hope it all goes well, how about an update in a few months time?

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Replying to Duggimon:
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By Countinformation
05th Dec 2011 09:33

Watch this space

David

I will be glad to give you an update in a few months. I am sure it will be alot smoother once i manage to get through the jan deadline.

 

Count

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