Payment Options When Selling A Practice
Seller Protection for Deferred Payments
When you decide it’s time to sell your Practice you will understandably want to receive the best possible price. After all, you have invested your money, time and effort to establish the practice and make it successful. However, as cliched as it sounds, your Practice is only going to be worth what someone is prepared to pay for it and what you are willing to accept. Becoming fixated on the price can be the difference between a sale and your practice languishing on the market whilst you dream about retiring and moving on.
Perhaps, what you should be looking at more closely, is not the initial asking price but how the deal is structured so that the final price paid aligns with what you would like to receive.
Probably the most common structure for a sale is an initial payment on signing the deal and further instalments over one or two years on the anniversary of completion. If you sell your Practice using this structure then you need to consider clawback.
What is Clawback?
Clawback relates to the gross recurring fees of the business post sale. Usually, the performance of the business in year 1 post sale (and sometimes year 2), is measured against the GRF figure on which the sale price was calculated.
If, after 12 months of trading post sale the GRF figure has not been achieved the second instalment is reduced. This is calculated by multiplying the shortfall by the original multiplier used to value the practice.
It can be the biggest threat to deferred payments and therefore needs addressing in the sale agreement.
In the sale agreement, you should consider carving out client losses which are attributable to:
- The provision of a poor or negligent service being provided by the buyer.
- The buyer increasing fees above parameters originally agreed with you.
- The buyer not fully engaging with some clients because they do not really want to retain them.
- The buyer changing the previous billing pattern for some clients in order to take some fees out of the assessment period.
- The buyer tying measurement figures to fees collected rather than invoiced so that the seller carries the bad debt risk, even though there is no control over debtor management.
To mitigate these risks a seller should ensure that any contract carries protection clauses. These could be:
- A personal guarantee from the owner of a corporate buyer. This is particularly useful if the the company is newly registered, or the balance sheet look a little lean or the company appears over geared.
- An acceleration of instalment payments if the buyer misses a payment date or becomes the subject of insolvency proceedings.
- A debenture containing formal charges over assets, which are likely to be cash and the debtor book, if the buyer is a company.
- The right to re-acquire the client base for a nominal sum if the buyer is significantly in arrears on any of the instalment payments. You could also include clauses that restrictive covenants no longer apply and you keep any sums already paid.
- A written record of all the information that is supplied during the due diligence exercise, which would then form the core of your Disclosure Letter to mitigate the impact of any warranties.
Using a legal advisor who is experienced in the sale and purchase of accountancy practices can save you time and money. Clawback and the extend payment periods for the purchase of a practice is, although not unheard of in other industries, quite unique to the accountancy world. When someone is unfamiliar with the processes then some of the contractual terms and negotiations can appear to be unfair to some parties. Practicesales.co.uk can recommend experienced legal advisors to help you make sure you are protected and your sale is completed smoothly.
This type of sale is also not the only option when you choose to sell your Practice and PracticeSales.co.uk have become innovators in the way in which Accountancy Practices can be bought and sold. We offer free and impartial advice to help you broker the best deal to meet your goals.
If you would like more information then call us on 01823 765085 or visit our website for more details.
Thank you to Ian Worthington of Consilium 9 Limited for his contribution to this article.