I am really not enjoying the pressure of being a small practice (3 staff plus me) any more. I can't afford to retire but could afford to earn less in a year's time, so I am starting to think more and more about selling. Everything I have read on it puts me off. Most articles say you get paid in 3 stages with the third being based on who the income person managed to retain. This puts me off as it means you couldnt really plan what you would do with the money as the amount would be very uncertain and also a long time off being received.
I received a mailshot from someone selling their practice a few months ago and it got me thinking, could I do the same and say I am not interested in this three stage approach and would take slightly less just to get a one off cheque? I also don't want queries forever more as then it will still be stressful.
So in short is any of the above possible or is selling the stressful protracted process that it reads like.
I also thought £1.25 per £1 of turnover was the norm but a selling agent told me £1.
Replies (23)
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From what I have seen (not having sold up myself but having had first-hand chats with friends who have) you'll be lucky indeed to get more than 1:1, and if you want a quick hassle-free sale, probably less than that.
Of the two people I know who sold, one was going back to industry (wanted steady job and more time with a young family) and one moved abroad (fell in love etc). Both had issues and had to wait some time for all the money, but both went straight to other jobs so cash flow not an issue.
Are you normal?
Assuming a "norm" is unwise. Essentially you need to be able to justify any multiple you want to use.
Whilst looking at it from the other side, this thread I raised should give you some factors to consider.
clawback?
Anybody have experience of how much gets clawed back from the later instalments?
clawback actuals
@hugh: thank you for your reply. Yes I understand that is the case.
I was asking if anyone had direct experience of actual clawback in specific instances.
[EDIT] I recall some horror story of a big-ish firm buying a block of fees and then delberately getting rid of the ones they didn't want, leading to a very high clawback for the 2nd and 3rd thirds.
Clawback
Sounds about right.
Look at it from the other side. The purchaser paid the price they did on the basis they expected to receive recurring fees of £100,000. If they only received fees of £80,000, then they also have less money than they planned. It's likely to be more of a problem for them though. Unless they had significant cash savings, they are likely to have finance they HAVE to pay regardless, whereas you are presumably talking about optional plans for what you were expecting to receive.
By the way, the question "are you normal" was meant to get you thinking a bit more deeply. If you just want to describe yourself as pretty standard, then you are going to struggle to achieve a multiple higher than 1. Certainly you'll only get what someone is willing to pay, but someone might be willing to pay more if you can convince them your fee bank is worth it.
Clawback
You can reduce the clawback figure by selecting your buyer carefully and ensuring a seamless handover from the clients' point of view (yes, those irritating ongoing questions). There is usually an agreed handover schedule eg 1 month of intensive introductions to key clients and a letter to all others and then you on hand for however many months perhaps followed by a period as a consultant for an additional fee.
Spend time getting your staff onside to maintain those relationships and tie the client loyalty/goodwill to the business rather than to you personally. Spend time documenting your processes and client information so that your knowledge transfers easily to the new owner. This is your opportunity to minimise clawback.
The clawback is usually 100% after year 1 (clients left before buyer had any chance so why should he pay?) or 50% after year 2. Any terms are possible if you are prepared to accept a lower price as the buyer will be taking the risk.
Normal price is 1:1 so work down from there if you want a shorter handover, faster payment or reduced clawback and work up if you have a specialism or are highly automated and more transferrable.
If you're selling in Bristol/North Somerset I may be interested.
As stepurhan suggests, I think it helps to look at it from the buyer's perspective.
They won't want to handover a huge cheque on day one. They'll want to do due diligence on the practice (which will likely involve you giving them lots of sensitive information...but of course they should be subject to NDAs/whatever), asking lots of probing questions, assessing the business that they're taking on. If they agree to buy, a letter goes out and half the clients turn round and say "well we're off then", then you can understand they won't want to pay a lot for those clients.
If you want a more front ended cash payment, expect the multiple to drop accordingly, as your proposition becomes higher risk for the buyer.
As a potential future seller
I hear too many stories about deferred payments never being made, but the seller has already handed over the practice/fees.
It seems a big gamble to take 1/3rd of the value, with just a promise of future payment. A bank wouldn't loan those amounts without some sort of security.
Clawbacks take care of the buyer, but what security does the seller normally get?
Seller gets some cash in advance
Clawbacks take care of the buyer, but what security does the seller normally get?
IMHO the up front payment is "security" for the seller. They get a big wodge of cash before the buyer's got anything useful, other than a signed bit of paper.
To me it seems a bit like deals you get in many places, chunk up front, balance once you're happy you've got what you thought you were buying.
I appreciate reality is final payment will only ever go down based on what was initially agreed...so I guess as seller you need to factor in a rational estimate of leavers, hence clawback, and plan that into future receipts.
That doesn't work for the seller
Clawbacks take care of the buyer, but what security does the seller normally get?
IMHO the up front payment is "security" for the seller. They get a big wodge of cash before the buyer's got anything useful, other than a signed bit of paper.
To me it seems a bit like deals you get in many places, chunk up front, balance once you're happy you've got what you thought you were buying.
I appreciate reality is final payment will only ever go down based on what was initially agreed...so I guess as seller you need to factor in a rational estimate of leavers, hence clawback, and plan that into future receipts.
They are giving 100% of a practice/fees for only 33% of the value (and future payments may not arrive), so how is that giving them security?
Buyer
Clawbacks take care of the buyer, but what security does the seller normally get?
IMHO the up front payment is "security" for the seller. They get a big wodge of cash before the buyer's got anything useful, other than a signed bit of paper.
To me it seems a bit like deals you get in many places, chunk up front, balance once you're happy you've got what you thought you were buying.
I appreciate reality is final payment will only ever go down based on what was initially agreed...so I guess as seller you need to factor in a rational estimate of leavers, hence clawback, and plan that into future receipts.
They are giving 100% of a practice/fees for only 33% of the value (and future payments may not arrive), so how is that giving them security?
The buyer may receive 100% on paper but reality may be, and often is, different.
the thing is....
Everythings negotiable....
So how about
1) I give you 1.2 x turnover but only on the basis that your £120k of audit fees moves with the practice
2) Ahhh ho audits...how about I give you 1.0x turnover but only on the turnover that turns up..but what happens if no one turns up? well then we reduce it. As the seller its hard to get your money back ...so.... How about we do it in 4 installments
3) I only want two installments not 4 ok Ill give you 0.9 haf on completion half after one year
4) I just want a check and sail off into the sunset and have no worries...ok I can do that how about 0.6 of turnover.....thats a bit low..Sure but what if only half the clients turn up and I have over paid...ooohhh...what if 85% turn up and the vendor should have had more... well you throw your dice and someone wins
Having someone nearby or actually sitting in the same office will retain most of the most clients. If the relocation is say 5 miles away expect to ose 10% of clients...which coud be 2% of turnover or 50% depending on fee allocation.
If you are near me, give me a nudge GU14LY :)
See my articles on this very subject...
I was looking to purchase recently and my experiences are described in these articles....
https://www.accountingweb.co.uk/article/how-get-broker-process-right/544815
https://www.accountingweb.co.uk/anyanswers/question/buying-practice-0
Also my blog explains what Due Diligence is needed.
https://www.accountingweb.co.uk/blog-post/due-diligence-list-question
When I was in discussions it was 1: 1
6 months on and the norm ratio has not changed much. At the time London area was 1.2; in a city 1.1 but Nicola (broker) told me that it is not unusual to get 0.75. It all depends on the client mix.
Also are the clients local or are they serviceable wherever. Nicola told me that you pay a premium for offices that are by a cross roads for example!
You are not alone in not being able to give up moneywise. The broker I was speaking to said there is a shortage of accounting firms for sale (you just have to look at accweb Opportunities to see that everyone is looking to buy not sell).
Usually what happens is that there is a hand over time which looks as tho this would fit into your plans. You can always keep in the background as a consultant.
I endorse Hudson and Co's comments - and if you are in Dorset or Surrey I would be interested!
Contract wording
A contract gives security - you will receive what you're contractually entitled to.
Get the wording right.
Sale of Practice
Having done this myself twice, I endorse previous comments, but add:
1. Better to stay as a "Consultant" for the period of payback, to ensure retention of clients and therefore full payment of Goodwill. You will also receive payment for actual services rendered, by agreement.
2. A multiple of 1 to 1.2 seems normal nowadays, but is often paid one third on day one, one third after 1 year, and the balance (less clawbacks if any) after 2 years. However, as stated above, if you want out completely and all your money on day 1, then the multiple will be reduced to protect the purchaser.
3. It depends on the contract -- this is a must and MOST important ! (see 4 below)
4. I wish I had contacted Jeremy Kitchin of APMA many years earlier, who is very thorough in his preparation (with a great deal of input from the vendor), and marketing, and even has a draft contract which can be used as a base, with input from the vendor;'s solicitor.
5. APMA charge a fee to vendor and purchaser (50/50), but it is worth every penny.
Although I got paid in full, I was not happy with the purchaser for a number of reasons, but cannot fault APMA.
6. Check all previous threads on practice goodwill sale.