Share this content

Introducing new business to an accountancy practice

Introducing new business to an accountancy...

Didn't find your answer?

I recently became a shareholder of a limited company accountancy practice .  I had to pay for my shares and in return I get paid for the work I do plus a dividend based upon the perfromance of the business.  The only other shareholder is the owner and in buying my shares I have effectively paid him for a proportion of the goodwill he has generated since strating the practice many years ago.   One thing that concerns me, however, is that he is approaching retirement whilst I am fairly young and I would imagine that over the next 5-10 years I will generate a lot more new business than he will and, as things currently stand, if I were to then buy some more of his shares I would effectively have to pay him for my own clients which seems grossly unfair to me and offers little incentive for me to work my socks off trying to grow the business.  

I would be greatly interested in hearing from anybody that finds themselves in a similar situation or from anybody that can offer suggested solutions to this problem.

My 'partner' for want of a better word  is reasonable and I am sure if I made a suitable proposal he would be open to discussing it.  I would imagine that this must be an extremely common issue in our profession and I am hoping that there is a typical solution.

Thank you in advance to all who can contribute.

Replies (12)

Please login or register to join the discussion.

By mrme89
11th Jul 2014 14:30

Timing is everything

Shouldn't you have raised your concerns before buying into the business?

 

It's a bit late now and will be a matter of negotiation if / when your partner retires. 

 

Thanks (1)
Replying to leeanneB:
avatar
By dhughes1975
11th Jul 2014 15:33

I take your point Mrme but, let's suppose I was having this conversation 2 months before I was due to buy in.  What would you advise me to ask for that would seem reasonable and would allay my concerns?

Thanks (0)
avatar
By Jekyll and Hyde
11th Jul 2014 15:09

unfortunately this is the similar to most buy ins...
... especially if the younger accountant is good at generating new clients. One of the reasons I would not buy into a practice without agreeing future plans for the business, Including the purchasing the next chunk of shares.

This is also one of the reasons I now find myself back on my own and not building a client portfolio in a former employer of mine. I could foresee a similar type situation you are now in and I would be effectively buying goodwill that I had generated myself.

However that is life and business.

Thanks (0)
avatar
By Carolynne
11th Jul 2014 15:15

Can you look at it another way?

It seems that you have no choice now, other than hoping your partner will be fair in the negotiations.  However, I always try to find a positive in a negative situation, and it could be like the ‘which came first – the chicken or the egg?' scenario.

 

Had you have just set up on your own, would you have been able to build up such a client base – living on no income for a while whilst gaining more clients?  If you could not have done it this way.  Then in a way, this partner has financially supported you upon entry, so that you had a liveable income whilst building your client base.  And therefore you are doing the same for him upon leaving (albeit he will most likely be better off at the end than you were at the beginning).

Thanks (1)
Replying to andy.partridge:
avatar
By dhughes1975
11th Jul 2014 15:24

Thanks Carolynne, that is how I have been looking at it.

At this point however, i only have a very samll shareholding and, like I said, my partner is very reasonable and I am certain that he will go along with any reasonable equitable proposal that I can come up with.  My biggest problem is not that I have trapped my self but that I cannot think of a solution to propose that would solve the problem and I am still hopeful that somebody out there may have an idea.

Thanks (0)
avatar
By Carolynne
11th Jul 2014 15:31

One years turnover

When I have looked at practice sell offs, they have usually asked for 100% of one years turnover, which is paid in stages, with the final payment being reserved, for any customers who have left within the year, that don't qualify for payment to the seller.  Basically, the work you do for his proportion of clients would be done for free for a year!  Hard work, but after that the money is all yours.  You might need a practise loan to tide you over, but as it is an established business, hopefully the funds would be there to pay for it.

Thanks (1)
avatar
By FCExtraordinaire
11th Jul 2014 15:54

Opportunites

I would say that you have bought into a small shareholding with much bigger opportunities that you could not have carried out on your own.   You could think about any decline in the original client base,  ie % of new clients to ones that were existing when you joined,  and come up with an agreement on that basis for your hard work with new clients.

In theory you will have arrived at a good point re client base and income  much quicker as you have benefited from the existing trade,  and so from your partners point of view,  he should recoup for that also.  He took the risk originally and yours was minimal it seems.

 

 

Thanks (0)
avatar
By Mallock
15th Jul 2014 12:22

Buy some each year

If you think you are worth more then why not agree with your partner that you receive a bonus each year (if you bring in more than an agreed amount) which you can then use to buy more of his shares. If the bonus is less than £11K net and your partner doesn't have any other capital gains then he will receive the proceeds tax free. There will be an NI cost but you will take ownership of a bit more of the company each year.

It is all about negotiation but remember that this was his practice built up by him at what was probably significant personal and financial cost. You don't have those worries because of the costs he has borne and as such you should pay a premium to take ownership - that is effectively what your arrangement is doing.

Just remember that he is inviting you into his firm and like he did when he started, you are going to have to put much more in than you get out in the early stages. I've been there and done it - just don't fall out about it and don't make him feel you are trying to steal it from him.

The next thing you need to think about is how are you going to manage one he has retired. Do you need to bring in someone like yourself further down the line?

Thanks (2)
avatar
By agknight
15th Jul 2014 12:46

Life in the Old Dog may be Undervalued

Writing at the sprightly age of 54 I am amused that the poster feels that we are somehow in terminal decline and will just slip into the office of our own company for a quiet life over the next ten years, rather than continuing to build it - for the prize of a higher final selling price.

Don't undervalue the old dog or his commitment and contribution (including hidden value) to the end. Also as has been mentioned, don't undervalue the longevity of the practice as a selling point to new clients, alongside what you feel are your superior lively sales skills.

Although the point is made that you should have thought of this before buying in, it sounds that there is sufficient % left to negotiate upon, if and when you buy in further. Each time you buy in, the way I see it is that total goodwill should be valued (with mention of 1x fee income above), then you agree your contribution to that gooodwill, by looking through and discussing the clients you have introduced. The net goodwill left is the next tranche of shares purchase price.

As you had to discuss formally your first introduction, I guess there will be future opportunity to have a formal discussion, without it seeming confrontational. Take that opportunity to suggest mapping out a long-term plan, with steps along the way agreed at the outset.Don't buy up to 49% without mapping out the end game before hand.

 

 

Thanks (2)
avatar
By dhughes1975
15th Jul 2014 16:12

Thank you Mallock and agknight, you both make a lot of sense.

To agknight in particular, I apologise if I gave the impression that I believe all people of a certain age begin to slide into 'terminal decline', that was not my intention.

The owner, in this instance is, by his own admission, becoming tired and would like to gradually take his foot off the gas over the next few years.  I would not for a second, however, doubt that I will be able to benefit from his knowledge and experience.  I just know that it is extremely likely that I will generate a lot more new business than him in the coming years.

Your suggestion of deducting a proportion of the fee income I have generated from the calculation of goodwill is an interesting one and something I think both myself and my partner could come to an understanding on.

Thank you both, once again, for the feedback, it is most appreciated.

 

 

Thanks (0)
avatar
By asillahi
15th Jul 2014 19:49

If you're that good

why didn't you start your own practice?

Thanks (0)
By ShirleyM
15th Jul 2014 20:29

Regular pay

Getting a regular salary while increasing your own share of the clients is very advantageous, and this is a fantastic opportunity for you.

It's a sellers market at the moment so he could easily get another buyer ... so tread with care.

Thanks (1)
Share this content