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The Key to Due Diligence

10th Dec 2020
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When you buy a practice one of the key steps in the process is carrying out due diligence. It might seem obvious, but a surprising number of buyers get caught out because they haven’t undertaken a thorough due diligence exercise. It’s not about catching the seller out but more about making sure that you fully understand the business you are buying, before you sign the contract.

Here are some of the things you should be looking at:

  • The figures that make up the Gross Recurring Fees (GRF). Your seller should provide you with a list of clients and their GRF for the previous 12 months. This is the starting point for calculating the price you will pay for the practice and any potential clawback. You should ensure that the figures do not include one off fees.
  • Take a closer look at a sample of clients, particularly large fees and ensure that the clients are still active, haven’t ceased trading, are deceased, or are in the process of being wound up or are insolvent.
  • Check the payment history of clients. You are looking for serial bad payers or extended credit terms that have become the norm. These types of clients can be difficult to move to more commercially acceptable payment terms, affecting the cash flow of the business.
  • Look at a sample of the files to determine the quality of work and the client relationship.
  • If there is anything that makes you feel uncomfortable at the prospect of completing the negative WIP for any of the clients then now is the time to discuss this with your seller and agree a solution.
  • Check that all the clients have had the necessary money laundering checks carried out.
  • Think about how the practice will dovetail with your working methods. For example if you use cloud technology and pricing software to determine fees can you successfully transfer clients who usually turn up with a carrier bag of receipts on the 30th January every year? You will need to take an overview of the practice to determine the value of the client base to you.
  • Examine the wider financial data of the practice. Check the statutory accounts and more recent management accounts if possible. The aim is to get a true picture of the practice as a whole.
  • Check that the seller has been compliant with the necessary regulatory bodies and that there are no outstanding PI claims. Also, check the history of PI claims.
  • If there are staff in the practice you will need to look at their contracts. Remember that employment contracts and accrued rights are automatically transferred under TUPE.

There is a lot to think about when carrying out your due diligence and sometimes it’s tempting to cut corners or think everything will be ok. Our advice is make sure that you give this part of the deal the time and effort it deserves.  You could even consider appointing an independent accountant to carry out the exercise for you.

The team at Practicesales.co.uk are happy to offer you advice on the best way forward and will always be available to support you with any challenges or disputes that may arise during the due diligence process to make sure everyone is happy with the final deal.

 

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