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How to navigate the broker process

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24th Jul 2013
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Expanding an accountancy business is not easy; you either increase the number of clients generically through recommendation or direct marketing (both of which could take years to produce valid results) or put yourself in the market for buying, explains Jennifer Adams.

You might be lucky enough to know someone who wants to give it all up and sail into the sunset but usually the introduction is via a broker.

For the past few months my firm has been in the market for purchase and suffice to say it has not been an enjoyable experience. So when a comment was posted under the heading Buying an accounting practice describing the use of “specialist” practice sale consultants as “driving me mad” I was intrigued. It was the second point of the posting in particular that caught my eye, making me nod my head in agreement as I read: “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”.

HTB seems to place the blame squarely at the door of the ‘consultant’ broker but my experience is that the broker tries his best in ascertain the buyer’s wants. I would submit, however, that the failing is in not asking the right questions of the seller thus producing a waste of time and emotion all round.

I would also submit that the broker needs to remember who it is who will be paying their fee (the buyer) - as such they should do more to 'broker' (sorry) a deal. In my case there was no “what can we do to get a deal” after the supposed seller pulled out of a sale that I was very interested in completing; there was no attempt at arranging a compromise deal.

However, HTB is absolutely correct when he states that many of the firms being introduced are "not really that interested in actually selling their firm". The sellers I am coming across seem to want the best of both worlds - they say they want to sell their business but in effect they don’t want to let go. When it comes to it what they really want is someone to take over the administration pain but that person also has to purchase a large slice (but not all) of the business. The seller wants to remain in place as 'part-boss' - sometimes for years. What they really want is not a buyer of their business but a minority dogsbody partner, but this is not what the broker is told. So the seller and buyer meet with different agendas.

Ken Howard hit the nail on the head- current sellers invariably can't afford to retire, wanting the money the business brings but most importantly on an ongoing basis rather than a lump sum (which will not take long to get through). As D Weston states: “pension funds have taken a hammering” and as Ken also reminds us, the promised “fire sale” has not and will not happen. There are no firms selling in my neck of the woods - no 'mass exodus'.

Even so, brokers must have had years of experience in dealing with such situations, so why don’t they try advocate other options rather than just the two basics of either partnership or sale? For example, the seller could take some clients with him to ensure that he has something to do whilst in retirement and that value could be included as part of the selling price.

Jason Dormer suggests a consultants' salary - this might be fine for the seller but for the buyer it will mean that they may find it difficult to implement different (dare I say more up-to-date) working practices in case the seller objects because he remains in the background. The seller may not bear to let go of the reigns of a business which might have taken years to build.

There needs to be a third option - call it 'the third way' or pension option - being a variation on Jason's suggestion. With this option the seller receives a consultants' salary/fee for attendance/helping out/advice for a set period of a year (possibly two) with the balance of the payment being spread evenly over a further period of say, eight or nine years. That way the seller will still receive an ongoing payment (similar to receiving a pension) rather than the three lump sums as is currently the norm; the buyer receives advice and assistance to smooth the transition. After the year the seller would legally be required to 'back off' in that although he would be paid his consultancy fee, he would not attend the office - just be available as required. The payments made would be deductible from the final purchase price. The problem with this option is in deciding when payment of the brokers commission is made. Currently brokers receive payment in three tranches to coincide with the three payments made by the purchaser.

The value of this 'third way' option is that everyone knows where they stand - the buyer knows that the seller is available for advice but will leave on a set date and the seller can stay for a long enough period to see for himself that his business is being looked after, then receive monies over a longer period. But I suspect this method of purchase will only be possible as Jason suggests - by doing away with the middle man (broker). This option needs a different method via which to bring sellers and buyers together - may I suggest AccountingWEB’s opportunities section or LinkedIn.

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By AccountingPracticeExchange
31st Jul 2013 11:17

M&A Market

Interesting article which raises some great questions.  I'm very familiar with the US market, where the typical brokerage fee for the sale of a practice is in the region of 10% of the final sales price.  The most common complaint I receive from CPA's is that they don't feel they are getting real value from their broker in the sales process.  As in all walks of life there are good and not so good brokers.  Good brokers that are experienced and are proactive in the sales process, overcoming the hurdles that always arise and driving the deal through to conclusion.

I'd imagine the same issues face UK firms looking for acquisition or exit strategies.  What I can tell you from my experience in the US is that it is possible to buy and sell practices without a broker.

Dan Crowley
Founder: http://accountingpracticeexchange.com

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By N.Draper
31st Jul 2013 11:43

Selling your practice

Thank you for your article.  I am a broker of accountancy practices and I deal with all sizes of practices for sale.  Prior to selling a practice I will ask the vendor two questions:- can you afford to sell and what will you do with your time when you have sold your fees.  You will be surprised at the number of accountants that cannot afford to retire and give up work.  My heart goes out to those that want to retire but have to stay on, they get more and more stressed and then end up with heart attacks or strokes.  I have had to deal with widows where selling their husbands fees is the last thing they want to deal with but have to in order to get something from the practice.   Industry norm is for a vendor to be paid in three tranches but we have will do deals where one off payments are made with no clawback, two payments are made with 12 months clawback, three payments are made with 2 years clawback, earn outs are made over a period of 4, 5 or even 6 months with negotiated clawback periods.  As a broker I often find that the vendor has not sold before and so wants to understand how the process works and wants to know they are getting a good deal for their fees.  Typically they will only ever sell their fees once so it is important to get a good commercial rate for the fee base.  Sometimes the buyer has not  bought before and they need hand holding through the process as well.  I was once asked to define my ideal client and I said "a seller that says they want to sell and then does".  We can have five offers for the one practice for sale and each will be entirely different.  There is an increasing trend for vendors to keep some clients to work on from home after they have sold and so they have a continuing income that diminishes pver time as the clients retire or move away.  The vendor is happy to sign a non compete clause.  The average age of our vendors is increasing, ten years ago it was late 50's now it is late 60's and beyond.  A good deal is one where the vendor is happy and the buyer is happy.  Our fee is paid for the introduction of the buyer and seller and for monitoring and making sure the deal goes through.  If a vendor goes direct to a buyer they do not know if they are getting a proper market rate for their fees.  We take huge pride and effort in what we do for our vendors and our buyers. 

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By geoffwolf
31st Jul 2013 13:15

One has to ask

Is it really worth the continuing cost o PII and Practising certificate to keep a few clients who may themselves retire within a relatively short time.

My advice to young accountants is to assume that there will be no proceeds from a sole practice on retirement and there invest sensibly for retirement during a working life.

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