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Buying a practice

Buying a practice

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I am in the process of looking at a retiring accountants business, I would appreciate advice from anyone that has done this recently on the following

  • Multiple of GRF paid
  • Payment terms
  • Key questions to ask 
  • Key challenges of integration

thanks in advance for any help

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By CW2012
11th Jun 2014 13:35

Practice purchase

Firstly who are the clients, if the accountant is of retirement age are his clients in that case they might not be around for long.

In terms of payment, of late it appears that a ratio of 1:1 on gross recurring fees has been used as a basis, as you may know clawback provisions are the norm to cover client drift. I'd normally expect to see a lump sum upfront followed by 3 -5 year payment period.

This is just the tip of the iceberg, are there staff, pension commitments, WIP etc.

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By Andrew Dunbar
11th Jun 2014 15:59

Practice Purchase

I
 I  would try to obtain some sort of breakdown of the client lists and fees in order to base your purchase terms  This would give you some idea what type of clients were on the list.In recent times we have found that the multiple of gross recurring fees is less than one and in one recent case  nearer 0.5

Payment is usually an upfront lump sum followed by 3 year payment plan depending on the sums involved.However at each stage deductions would be made for clients who have gone

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Jennifer Adams
By Jennifer Adams
11th Jun 2014 16:13

Due Diligence....

Before Christmas I was in negotiation to buy a local accountants. I used the advice of the broker Nicola Draper  as per her website - on that site you will find a number of articles that will help.

see link...http://www.draperhinks.co.uk/

CW2012 is correct - you cant just take a figure as a multiple.

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 told me that it is not unusual to get 0.75. 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!

She did send me something you might be interested in - a long list of questions to ask as 'Due Diligence'. The list starts with:

The vendor needs to prepare a full client listing showing client and age profile, type of work undertaken, fee and when work carried out.

Again as CW2012 says there is usually a lump sum payment up front usually 25% with the balance over three years - less any clawback of course.

My purchase did not happen because the owner wanted a third upfront and the balancing payment over 18 months (ie virtually a cash buyer) which was too tight given the profits and cash flow and then he decided that he didnt want to sell after all! I was too exhausted with the whole thing to go any further so I have given up looking and am concentrating on expanding my own business using the £40K that was to be the up front payment.

If you take a look at the 'opportunities' section of accountingweb you will find a number of requests for blocks of fees. There are not many around so you dont want to lose it if you can help it.

But I would look at Nicola's website and even give her a ring. She knows here stuff and with such an important decision it would be a good idea to at least sound out her advice.

Meanwhile I'll load the Due Diligence list she gave me on my blog https://www.accountingweb.co.uk/blog/final-straw

There are a total of 40 questions to consider!

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By ShirleyM
11th Jun 2014 16:14

Clawback

It seems unfair to spread clawback over a 3 yr period. I can see that clawback in year one is fair, as clients will stay if they have had good service in the past. I would think retention in years 2 & 3 will be based purely on the services provided by the new owner, so why should the departing accountant lose out? Clients nearing retiring age is a different matter, and could be dealt with separately.

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Jennifer Adams
By Jennifer Adams
11th Jun 2014 17:50

No - clawback not over a three years

Its payment over three years then you take off the clawback of year one.

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By ShirleyM
11th Jun 2014 18:11

Thanks @JAADAMS

I got the impression from Andrew Dunbar's posts that clawbacks were taken in each of the 3 years ... but I may have misunderstood.

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Jennifer Adams
By Jennifer Adams
11th Jun 2014 19:07

Its usually one year... depends on the agreement...

If some clients leave in the first year and the fees retained on the first anniversary date are less, then the new owner can net off this shortfall against the next installment.

Nicola's notes to me say 'As it is a sellers market the seller will not normally agree to the clawback operating over the second and subsequent years. But nothing is written in tablets of stone.'

 

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