Buying an accounting practice

Buying an accounting practice

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We are in a similar position to many firms whereby we have been actively searching to purchase a practice for sale. Over the past two years, we have engaged the services of a few "specialist" practice sale consultants and my experience is driving me mad! Every firm that we have been "introduced" to is either looking for a merger to enable them to be bankrolled by us or not really that interested in actually selling their firm. I am realistic and understand that it is a sellers market and there are many firms chasing the same targets, but why is it that it all seems an impossible task? We have cash to spend (no borrowing required), we are looking to retain staff/offices etc. as long as it makes financial sense and also retain the "retiring" practitioner on a consultancy contract as this is absolutely vital to safeguard our investment. I would be interested to hear if anyone else is experiencing the same issues as I feel really frustrated at the moment!!

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By a_m
19th Jul 2013 00:03

Frustrating!
Yes I am experiencing the same thing! The brokers are annoying as they promise the earth and make you excited. One broker actually referred to me as 'absolute gold dust' to retiring accountantants due to my age!

I also think practitioners are to blame as it appears they can't make their minds up or don't want to let go!

I also have funding ready and willing to take on staff, premises, etc.

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By Mouse007
19th Jul 2013 00:38

PM me

on second thoughts ...

 

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By bernard michael
19th Jul 2013 08:56

Why don't you two merge?

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By wilcoskip
19th Jul 2013 09:08

'Fire sale'

A few years ago the 2020 Group were talking about an imminent 'fire sale' of small practices due to an approaching time-bomb of retirement and an increasing average age of accountants.

It would appear that we still haven't reached the fire-sale stage yet.

WS.

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Replying to Mr_awol:
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By Ken Howard
19th Jul 2013 10:08

There'll never be this mythical firesale

wilcoskip wrote:

A few years ago the 2020 Group were talking about an imminent 'fire sale' of small practices due to an approaching time-bomb of retirement and an increasing average age of accountants.

It would appear that we still haven't reached the fire-sale stage yet.

WS.

It was never going to happen.  Our "industry experts" were the ones out of touch.  Just like our professional bodies who havn't a clue about life for smaller practices and one man bands outside their corporate metropolitan world.

How many "triggers" for the fire-sale have their been?  First it was going to be xbrl (no mass exodus), then it was going to be RTI (no mass exodus) and now the buzz is about cloud accounting (there won't be a mass exodus).  Just the same as the old chestnut about the abolishing of small company audit as being the death knell for smaller practices.  Just like the other old chestnut on non regulation being the demise of smaller practices due to non qualifieds.  

The exodus of one man bands and small practices hasn't happened, despite these dire warnings from the "experts" - and here's a forecast, it won't happen.  Small practices and one man bands are here to stay and will continue for the foreseeable future.  Much to the annoyance of the doom merchant experts who keep willing it to happen.

What they fail to understand is that it is their misconception of smaller practices, one man bands and older accountants that is the problem - what they perceive to be the case and the reality are two completely different things.  Sometimes I'm convinced that the experts and professional bodies still see the older generation as sitting at sloped desks with quill pens and ledgers - they can't get it into their addled brains that even the older accountants are perfectly capable of using a computer, dealing with change, etc.  

The older generation who refuse computers have long gone.  Anyone with half a brain would have seen the impending dominance of computers and the internet and will have long since adapted or got out.  Even the most die hard will have sorted themselves out by now.  I know one such person who literally detested computers and would never even touch one - the stereotypical old dinosaur - he had a one man practice consisting mainly of tradesmen - his wife did the typing of letters and accountants after he wrote everything long hand - by rights, CIS should have seen him off, but he survived and prospered - he just carried on doing everything by hand, and passed it to his wife who did all the online filing etc - he's now in his 70s and still going strong, which brings us to the next issue.

As for ageing, why do accountants need to retire, in fact can they afford to retire?  Isn't it a little old fashioned to assume that when someone reaches 65, they retire.  The reality, especially with relatively non physically demanding office based jobs, there's no reason to retire.  Rather than selling up and retiring, I think a lot of one man bands will simply be winding down gradually, so there'll never be a sale.  It's certainly my plan.  I can't see why I should "sell up" upon reaching a certain age, only to get a cheque for maybe 1.3 GRF - it's a hell of a lot more worthwhile for me to keep going - another couple of years and I'd have made more than 1.3 GRF so I'd be in profit.  I really don't think that 1-1.5 GRF is an attractive proposition to anyone who's in the position of being able to carry on into "retirement" on a reduced/part time basis - carrying on is a far better return than investing a relatively small lump sum.

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By wilcoskip
19th Jul 2013 10:17

GRF

I've thought for a while now that GRF is a daft, daft way of valuing any sort of business transfer.  I've benefited from buying clients on this basis, but I'd hate to be on the other end of it.  What other business would go about a valuation like this?  Nuts.

WS.

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Replying to she2656:
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By Ken Howard
19th Jul 2013 10:35

Agree, GRF is stupid

wilcoskip wrote:

I've thought for a while now that GRF is a daft, daft way of valuing any sort of business transfer.

Completely agree.  It grossly overvalues a poor practice and grossly undervalues a quality practice.  Trouble is that it's become some kind of "industry-standard".  What's more stupid is that it's our own industry that we get so badly wrong - we seem to be far better at valuing other industries than our own.  

I've worked for two largish town centre practices and have seen what they do when they buy out a smaller practice.  They never intend to keep all the clients - they cherry pick the best and just ditch the others.  The 1-1.5 grf value allows them to do this - keeping just a fraction of the client base still makes them money if they choose the right ones.

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By Jason Dormer
20th Jul 2013 19:55

OP

Have you tried contacting firms directly and cutting out the middleman?

It's not neccassrily a sellers market, you are in a strong buying position and you can be more selective about the firms you approach with an invitation to discuss possible sale.

Agree with valuing any business on turnover multiples is ridiculous. Madness.

 

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By Jason Dormer
20th Jul 2013 19:58

Ken Howard

Agree on both your points 100%.

The doom merchants usually peddle this stuff when they have got something to sell.

Retirement at 1 - 1.5 makes no sense (if profit leveles high), better off taking a consultants salary and grooming a successor.

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By Tosie
20th Jul 2013 22:29

Never get all monies agreed

They agree  to buy at 1.5 pay third upfront and that is all you get. The fees go up the client gets allocated a junior who is not interested. Client finds another smaller accountant because he likes the personal touch.

All this after endless negotiations and time wasting.

Far better to run practice to the ground.

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By andy.partridge
21st Jul 2013 13:02

Cherry picking

As someone who expects to be a seller in future years I am sceptical of the whole process. If the GRF factor is assessed on the profile of the client base as a whole, how does the seller protect themselves against the buyer cherry-picking and then dumping the rest? It means the seller's proceeds are seriously compromised and the best clients are acquired on the cheap.

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By ShirleyM
21st Jul 2013 14:36

I worry too, Andy

It's the stage payments that worry me. You hear of the first payment being made, and then nothing more. If you only get 1/3rd up front, then it could mean disaster for the seller.

It's no good deciding to take the clients back, I doubt they would come back knowing you had quit once already.

I keep thinking of different options, and as I am a very cautious person when it comes to large transactions, I think I would maybe prefer to sell at a low GRF conversion, but with 100% payable on handover. I think this is what is known as a fire sale. Knowing me, I would probably still worry about the clients being properly cared for, though, and would want to be around for introductions and gradual handover.

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By petersaxton
21st Jul 2013 14:53

Experts

This is the problem with "experts". As Mark says, they usually have ulterior motives.

It's like when they recommend that you charge outlandlishly high fees. There's always some mug who will think it's a fantastic idea to charge 10 times what they are charging now. "So what if a few clients don't like it. I'll still be rolling in it" They have a different view when 100% jump ship - but by that time they've already paid £10k to the "experts" for the advice and ruined their client base.

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Replying to lionofludesch:
Red Leader
By Red Leader
22nd Jul 2013 10:58

sell small block

I think if you sell a small block of fees, then there is more scope to get nearly 100% up front at say 1.0-1.2x.

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By leicsred
22nd Jul 2013 12:37

How would you define small?

What would you call a small block - we have potential succession issues, and the sale of a small block to fund succession might be interesting in due course.

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By Tosie
22nd Jul 2013 13:04

My experience

I have sold twice first part was all taxi drivers sub contractors plus a selection of grade A clients.

The reason for this sale was because a key member of staff qualified and went off to pastures new. I asked for a single payment of a third of the fees.This worked out well for both parties.

Second part was to a local firm of chartered accountants who I thought that I knew well.. The senior partner was MA camb. FCA CTA plus another long list of qualifications .This was a disaster. I received the first payment and it was agreed that I would work in the practice as a paid consultant.I spent a lot of time in the practice introducing clients and sitting in on meetings with clients and also reviewing juniors work on clients other than my own. No pay.

After year one the fees were increased to a ridiculous level but the clients stayed because I was still in the background although a lot less.

Then I was advised of a cash flow problem no money paid but a letter issued agreeing the liability. Then an agreement entered into to pay £100 a month until cash flow improved.

Then mass exodus of clients due to poor work. A sandwich bar was advised to pay three times the vat than previous. When I discussed this with senior partner it came out that he thought all supplies were vatable.Further loss of clients.Finally through a solictor I agreed a full and final settlement of less than a third of original amount due.

Shirley the one way I think might work is if you were to sub contract to somebody for a period so that they know the clients and you know the persons work but only pay a small amount for the sub contract work the balance being placed in a protected account against a future practice sale.Other than that work till either you or the clients move on to a better place in the sky.

 

 

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By ShirleyM
22nd Jul 2013 13:34

Thanks for sharing your experience, Tosie.

I have heard of other sellers being stitched up over stage payments, so you are not alone.

I can, and probably will, continue working for a few years yet, but I have a very good employee who I care about. If I just let the practice fade away, and work from home rather than the office, then she would become redundant and I couldn't do that to her.

That's one of the main reasons why I would prefer to sell. She would be an asset to any practice, so I wouldn't be making an unreasonable demand.

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By SWJWBA
22nd Jul 2013 13:43

Purchase of blocks of fees

Purchasing smaller blocks of fees may be appropriate in certain circumstances. However would anyone pay nearly 100% up front? I doubt it. You are not buying a client - you are buying an introduction and expectation of fees derived from them. This is not guaranteed. Therefore on the buyers part there has to be some stage payment basis and clawback provisions. Trust by both parties is the ideal scenario and this only happens if both parties generally know each other and/ or appropriate professional references are available.

The trouble is business is business and so many are prepared to 'screw' the other party if they can.

If the seller really cares for his client rather than seeing '£' signs he would get a better price by ensuring that he is around for some time after the disposal and 'work' with the purchaser to ensure as best as possible that no client leaves. No prospective purchaser wishes to buy fees (particularly ones fully paid for up front) that become non recurring through no fault of his own and so needs this time with the seller.

No practitioner surely wishes his client to be left to fend for themselves in finding an alternative accountant (potential horror stories) so the payment over a period method with consultancy ensures that he the seller can remain 'in contact' throughout with the purchaser. He is protecting his interest and providing some sense of assurance to the purchaser who will gain client knowledge from the seller over a period of time (not all information is contained on client files!) and that the sale/purchase agreement is the best for both parties not exclusively one or the other. 

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By k whyte
22nd Jul 2013 14:28

retire!!

I am contemplating retirement from my small book-keeping accountancy business - what is the ratio I would expect in relation to the sale price and turnover? Is there a set amount?

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By petersaxton
22nd Jul 2013 14:38

Is there a set amount?

Are you serious? There would be no logic in there being a set amount. It's a matter of negotiation between buyer and seller. You really think there is some kind of law that governs the selling price!

A bookkeeping practice is very labour intensive so I think you would get a lot less than an accountancy practice.

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Replying to Tornado:
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By k whyte
22nd Jul 2013 14:47

Not a law that governs the selling price but I did think there was a ratio on what to expect - for instance pubs used to be based on £1 per £1 of turnover. I though I read somewhere an accountancy business (I,m sure all accountancy businesses do a little book-keeping) could expect around 80% of the fees?

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By petersaxton
22nd Jul 2013 15:13

Accountancy practices

I've seen ratios from 0.75-2.0 of gross recurring fees so it's quite a wide spread. I wouldn't want to pay anything for a bookkeeping practice as I turn work away because I do everything myself. A bigger practice would be more interested but I can't see them paying a lot.

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By k whyte
22nd Jul 2013 17:14

fees

So this last year I have separated the VAT, paye, accounts and tax although most of the vat and wages I prepare are also  accounts and the tax clients. Would the asking price only be on the accounts and tax returns or would it be per client for those whom I do everything?

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By petersaxton
22nd Jul 2013 17:30

My thoughts are

You would categorise the clients by the highest level but still split out the type of work you do for each client. Do a spreadsheet listing the clients and analyse the fees by type of work. It will depend on what the buyers want to buy and what you are willing to sell.

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Nichola Ross Martin
By Nichola Ross Martin
22nd Jul 2013 17:44

Price and GRF and smaller fees

The thing is that if you are buying and selling blocks of fees then it is quite useful to standardise a valuation method hence the love of GRF multiples.

I reckon that it is always worth valuing a business on maintainable earnings - EBITDA and then compare the result on a GRF basis. It can be quite a contrast as practices come in all shapes and sizes and salaries and charge rates vary all around the country but it really does sort out the wheat from the chaff. It becomes more complicated when you are taking over interests in property as you need to factor that in - and GRF is of no assistance. You must also go over each fee and see what is there - you are going to have to do that at some stage when you get to bill them, so its just part of due diligence.

 

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By petersaxton
22nd Jul 2013 17:55

GRF

Isn't it best to give the information per GRF and then the individual buyers will do their own calculations for the costs involved?

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Nichola Ross Martin
By Nichola Ross Martin
22nd Jul 2013 18:44

GRF

Nothing to stop buyers asking for accounts if they are buying practices or transfers of going concerns.

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By petersaxton
23rd Jul 2013 08:46

Accounts

Yes, it's totally different buying a block of fees or an accounting practice.

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Nichola Ross Martin
By Nichola Ross Martin
23rd Jul 2013 18:47

and VAT returns!

The thing is that due diligence is what you make it, and to be frank and having been caught out in the past, it is very dangerous to rely on anyone's word, even if they do have a qualification! If someone does not want to show you their files or provide any evidence of what you are buying into (such as accounts or VAT returns) then I suggest that you move on. Plenty more fish in the sea.

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By Jason Dormer
26th Jul 2013 10:43

Do it on trust

If you are going to purchase a block of fees or a practice then there has to be an element of trust.

Meet up with the seller - communicate clearly what you expect. Look into the whites of their eyes and go with your gut.  Like all things in life, if you play ball with them they will generally play ball with you.

Having said that, have every possible scenario inserted into the terms of the agreement and then both parties covered in the event.  Also meet any key clients in person - you may not want to work with them. 

I once bought a practice, reasonably small, and the main client was charged 5k per annum in fees, yet as soon as I met the directors I knew I didn't want to work with them and immediately let them go.  Fortunately, the seller and I discussed best treatment and we took a 50/50 hit so all very amicable.  Does reiterate the importance of due diligence on the client base profile.

 

 

 

 

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By petersaxton
26th Jul 2013 11:25

At the recent AccountingWeb meeting

I was mentioning my philosophy re selling fees.

Compare a sole practitioner working alone with GRF of £100k (minimal expenses) with a sole practitioner with staff with GRF of £1m and expenses of £900k (ie profit of £100k).

They have the same income. Granted the bigger practitioner has taken the risk of building the practice but in some respects it's been easier because they have staff to do the detailed work and there's more opportunity to concentrate on practice development. Maybe the figures I have used are not realistic.

If they both tried to sell at a ratio of 1 then the smaller practitioner would get £100k and the bigger practitioner would get £1m. It seems more worthwhile for the bigger practitioner. The smaller practitioner could work for an extra year and be just as well off whereas the bigger practitioner would need to work for 10 years to achieve the same result.

This leads me to conclude that the smaller practitioner would be better off slowly downsizing the number of clients maybe with an increase in fees also (if it's reasonable and possible) rather than looking for a sale.

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Replying to fawltybasil2575:
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By andy.partridge
26th Jul 2013 14:10

Where's the logic?

petersaxton wrote:

The smaller practitioner could work for an extra year and be just as well off  . . .

This leads me to conclude that the smaller practitioner would be better off slowly downsizing the number of clients maybe with an increase in fees also (if it's reasonable and possible) rather than looking for a sale.

Why couldn't the small practitioner work for an extra year and then sell? If the small practitioner wants to increase fees, why do they have to wait until they are contemplating retirement to do that?
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Replying to legerman:
By petersaxton
26th Jul 2013 14:46

There's logic in what I said

andy.partridge wrote:

petersaxton wrote:

The smaller practitioner could work for an extra year and be just as well off  . . .

This leads me to conclude that the smaller practitioner would be better off slowly downsizing the number of clients maybe with an increase in fees also (if it's reasonable and possible) rather than looking for a sale.

Why couldn't the small practitioner work for an extra year and then sell? If the small practitioner wants to increase fees, why do they have to wait until they are contemplating retirement to do that?

If they wanted to work for an extra year before selling they would keep making that decision and never sell as long as they could work.

Practitioners may not know who will accept the increases so they may increase them across the board and see what the reaction is. Earlier they may be happy to work at full capacity but later they may want to do less work.

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Replying to Portia Nina Levin:
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By andy.partridge
26th Jul 2013 15:20

I totally disagree, Peter

petersaxton wrote:

If they wanted to work for an extra year before selling they would keep making that decision and never sell as long as they could work.

Practitioners may not know who will accept the increases so they may increase them across the board and see what the reaction is. Earlier they may be happy to work at full capacity but later they may want to do less work.

On the first point, the two are not mutually exclusive. If they had any intention of working an extra year, the sensible thing would be to work and sell, not work or sell.

Whether someone is at full capacity or not if a practitioner wants a particular client to pay more why wait until nearing retirement to put the fee up? Maybe you are saying this is just a means of sacking the client because they won't put up with a fee increase?

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By User deleted
26th Jul 2013 11:57

Can't see me retiring ...

... say I sold up for £150k, with the best will in the world that may make me £7500pa, I am far better to just stop replacing client's when they go and end up with £20 - £30k income, for 2 - 3 days a week work, which I think is the route Paul Scholes is taking - the prospect of life 24/7 at home is frightening.

If I lose my marbles and go ga ga in the interim I won't give a stuff anyway!

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By Ian McTernan CTA
26th Jul 2013 11:57

Wouldn't Sell or Buy

Maybe I'm strange, but as I have deliberately kept my practice small I know all of my clients quite well (and get to know the investigation cases I take on quite well too!), and would never consider parting with them by means of a sale.

I will carry on with them until I am no longer capable of doing the work, or until I find someone I trust to take over clients on a gradual basis.  No payments for this, I'd be much more interested in ensuring they go to someone who understands that type of client rather than squeezing every last penny out of my client then throwing them away to the wolves.

Maybe I am biased, but I gained a couple of clients over a number of years from one such retiree and I guess his values must have transferred to me over the years (he's finally 'got rid' of his last client at the age of 80!).

After all, I generally act for my clients for a very long time during which time they provide me with fees (a couple I have had since the first day I started in practice 25 years ago).  Why would I shaft them for the sake of 1.2 times their annual fee?

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By MBK
26th Jul 2013 13:07

To go back to the original question.....

... we too were looking for several years without success and then, like the proverbial London bus, three came along in two years.

Our experience over three very different practices has been overwhelmingly positive - but we haven't been cynical about fee increases and would not have bought the practices concerned if we had needed material increases. This meant we turned down several opportunities while we waited for the right deal.

Don't be afraid to make direct contact with any target you can identify. That was the way one of our deals happened.

So keep going - it will be worth it. The brokers may not be much cop, but you need to nurture them.

 

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By petersaxton
26th Jul 2013 15:37

I agree with me

It's not about being mutually exclusive it's about choosing the better option. I would have thought that as long as you were able and willing to work for several years it would be preferable to get £100k per year for working than £100k once and nothing after that.

I wasn't talking about a particular client. We are not usually sure of individual client's elasticity of demand. I am talking about the complete client base.

 

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By andy.partridge
26th Jul 2013 16:11

Hypothetically

Let's say that I am thinking of retiring. Given your choices (forget the upping my fees red-herring) I could sell my practice for £100k or I could work another year for £100k. If working for an extra year was on the agenda I would work the extra year and then sell. I get £100k+£100k=£200k, but your choices only offer £100k or £100k.

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Glenn Martin
By Glenn Martin
26th Jul 2013 22:27

I was keen to buy some fees to boost my start up but now not sur
I was introduced to a guy looking to sell up at the end of last year. He was 67 and looking to sell up as he had a health scare. He was a nice bloke and very good at what he did. The fees were about 40k and were a general mix of shops, contractors tradesmen etc. The deal he suggested was £15k up front then over the next 12 months I was going to do all the work on the clients and split the fees 70:30 split in his favour which I thought was workable from my point of view. However when reviewing the clients it was not so straight forward. The problem for me was nearly all his clients were similar age to him and they worshipped him. I met a few of them and it was like I was not even there. My worries were that most of them would be looking to retire soon, and i couldn't see them fitting in with me. The next problem was the fees. He was not really that into current software that is available now. Most of his clients used simplex d cash books and the prices he was charging were low. I think my fees are reasonable but I would have to charge twice as much as he was charging to justify the time spent on the jobs. He was charging £300 for doing vat returns, accounts and SA returns for a corner shop which I couldn't justify. In the end he got all clear on his health and decided to plod on with his grand daughter helping him. I think I dodged a bullet really as couldn't see it working and would be surprised if I had more than 3 or 4 of his clients in a few years.

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By Jason Dormer
27th Jul 2013 11:39

Glennzy

Don't let this one experience put you off.  There clearly wasn't a 'fit' between you and him so would never work.  Look around, take your time, find the right one and then try it.

Let the first attempt just be part of the learning process.

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By petersaxton
27th Jul 2013 11:45

How many learning processes can you afford?

It seems an expensive education!

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Glenn Martin
By Glenn Martin
27th Jul 2013 12:40

Not put off for good
But I did waste a lot of time though. I think a retirement sale is not really the best unless they have young clients and have modern systems as there is too much of a gap to bridge otherwise.

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By petersaxton
27th Jul 2013 12:45

What about

the buyer working alongside the seller for a while (even part time) to see if things will go well.

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Glenn Martin
By Glenn Martin
27th Jul 2013 13:27

@peter
That's effectively what I was doing, just the clients were not right for me and in the end he didn't want to sell. I am still looking but it's a plan B at the minute as I am winning clients well with what I am doing. I think I will have secured the 40k extra fees I want to get to stage 3 of my practice developments within 18 months at a cost of maybe 8 to 10k in marketing spend.

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Jennifer Adams
By Jennifer Adams
01st Aug 2013 10:55

Article on the subject...

Just in case you've missed it - I've written an article drawing on your comments - see here...

https://www.accountingweb.co.uk/article/how-get-broker-process-right/544815

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