Mentor and Speaker for accountants BookMarkLee
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Are you buying or selling?

1st Feb 2016
Mentor and Speaker for accountants BookMarkLee
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Mark Lee explores the options available to accountants who may be looking at retirement and selling their practice in the next few years.

This article was inspired by two unrelated conversations on the same topic in one week. I have checked and note that the last time I wrote anything on this topic was back in 2011: Will you be able to afford to retire?

Everyone has their own reasons for selling their practice. Among the most common are voluntary or forced retirement, being offered an attractive full-time position or giving up on efforts to grow the practice alone.

It is also clear that some accountants choose not to retire or to sell their practice – ever! They just keep going until the inevitable happens when they are well over retirement age. I have spoken with many ‘mature’ practitioners over the years and others have shared similar views in the ‘Any Answers’ pages on AccountingWEB.

The reasons that so many accountants keep going are quite varied. Some just do not want to stop working. It’s their life. Or they need the continued income. Others tried to sell but either didn’t like the offers they received, the purchasers or the brokers/agents involved. Or maybe they fear the fruits of their labour being broken up or the disappearance of their practice name and branding. And many are perhaps aware that the current ‘sellers’ market’ is probably here to stay – so what’s the rush?

To outsiders the position in our profession seems quite strange. There are plenty of ambitious growing firms keen to buy blocks of fees or to take over smaller practices. And there are plenty of ‘mature’ practitioners who should, in theory, be looking to retire. But potential acquirers often complain that vendors try to negotiate unacceptable deals or are too set in their ways to permit their practice to be taken over. Why is that do you think?

I suggested in my earlier article that one reason for this could be that accountancy practices do not attract high enough sale prices. Too low and the vendor doesn’t consider it a good enough deal to warrant selling. Too high and the purchaser doesn’t feel the investment is worthwhile and would prefer to grow organically.

One innovative approach was recently described to me by Hammad Farooqi who founded iPlan Accounting in 2003. He looks for accountants who plan to retire in a few years time and offers them a three year exit strategy. This is possible, in part, because he has arranged bank funding for a younger partner to acquire the goodwill from the vendor. 50% is paid when the deal is done and the remaining 50% after three years. During that 3 year period the vendor remains a consultant to the practice and works with the new partner to reassure and retain the client base. This also gives the vendor time to come to terms with their retirement and to gain confidence that their practice and clients will be well cared for after they leave. The amount of time the vendor spends in the practice can reduce over time.

I understand that Hammad had success with this approach when taking over Antrobus accountants and is keen to find others who would like to do the same.

I am sure that some AccountingWEB readers will be itching to tell us why this wouldn’t be an attractive deal for them under any circumstances. And brokers/agents will warn of the challenges of having the vendor remain involved (whether voluntarily or compulsorily) for any length of time after, effectively, selling the practice.  Especially where the purchaser’s preferred operating model includes outsourcing much of the back office work, as in this case. Why would a vendor want to adapt to new working practices for a three year period pre-retirement?

I would imagine that the idea might appeal where the value of the deal ends up being far more profitable for the vendor than a conventional sale. I also do not know whether the finance available here is available on more attractive terms than from the multitude of finance houses who provide funds for the acquisition of goodwill.

Given the choices there are numerous factors to consider and compare when looking to sell your practice. These would include:

Financial issues

  • How will the value of your practice be determined?
  • What will be the ‘post-tax’ net proceeds, taking account of both capital gains tax and income tax etc on consultancy payments.
  • Over what time period will the sale proceeds be paid and subject to what caveats and clawbacks?
  • Tax cashflows vs capital and income receipts – will CGT be paid on the full value of goodwill even though this is to be paid for in instalments?
  • The level of income you will receive during any earn-out period.
  • Will your consultancy be treated as employment income, self-employed or partnership income?
  • How reliable are the necessary income projections?

Practice/client issues

  • How long will you remain the main client contact?
  • How well do you get on with your new partner(s)?
  • What terms does the agreement contain to address the possibility of your premature death/incapacity or that of your new partner?
  • What are the options re the current office facilities?

Personal issues

  • How long do you want to continue working in the practice?
  • Is it the work or the income that is the main driver for you to continue working?

When the time comes to sell your practice what sort of deal would appeal to you? Have you considered whether anyone would be interested to acquire your practice on such terms?

Further reading:

Mark Lee is consultant practice editor of AccountingWEB and helps individual accountants who want to be more successful in their practice or career. 

Replies (10)

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By johnjenkins
01st Feb 2016 11:39

I like this

article Mark. Probably because it is what I have been thinking about for a few years. I'm 67 next week and really do not want to retire. Why? Well over the years I have lost clients to retirement and seen friends retire. Most, not all, have problems coming to terms with the "culture change" (I use this phrase when advising start-ups). Most Accountants that retire normally don't have financial issues so I would discount that side of things. I certainly would opt for the 50% plus 3 year arrangement. The main reason being that it shows your clients that you are not abandoning them, especially if they have been with you a long time (which is highly likely given your age). It also allows you and your clients to meld in with the new regime. Obviously the best case would be that you have someone that you have trained to take over and then you can still have fun with your clients.

I think if you have a hobby that you enjoy and want to persue then it is a different kettle of fish.

I know I moan about HMRC and the way Accountancy may be going, however I still enjoy my work (even though I'm not as sharp as I was). There will obviously come a time when I am no longer able to work (for whatever reason). I hope that I realise when that time comes and am able to make the correct decision.

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By Andy Reeves
02nd Feb 2016 12:46

GRF multipliers

The 50% plus 3 years is fine, and I can see that it would maximise client retention rates, so fewer clawback issues, but so many questions remain, not least:

- What was the GRF multiplier?

- Is the vendor's consultancy position paid on a flat salary or fee, or on hours worked?

- Is the vendor's involvement on a gradually reducing basis over the three years?

- What if the buyer finds that the vendor will not let go of the clients when told to, and will not adopt the working practices of the buyer?

- Is there a clawback provision if clients still walk at the end of three years?

 

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Jennifer Adams
By Jennifer Adams
02nd Feb 2016 14:10

I tried to buy a couple of years ago...

and my experiences can be viewed here:

https://www.accountingweb.co.uk/article/how-get-broker-process-right/544815

I found that the accountants approached were all of the opinion that the value of their business was much greater than the going price (usually double) and wouldnt or couldnt go lower. I received some very good advice as I went along from contacted Nicola at Draper Hinks.  

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

https://www.youtube.com/watch?v=92HM1r40pfg

But in the end I decided to spend the money by increasing my business generically and on advertising.

The owners of the businesses I was in discussions with all expected to stay on for a change over period - one wanted me to employ him full stop.

Claw back provisions are the norm as you will see if you visit Nicola's site

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By Andy Reeves
02nd Feb 2016 14:31

Other agents

Thanks JAA - We seem to have used just about everyone apart from Draper Hinks, so I might give them a call.

- Foulger Underwood have at least kept in touch, and we did a deal through them nine years ago.

- Vivan Sram put us in touch with one that we thought was close to a deal but the vendor pulled out once, came back again four months later, and then went cold again.

- Retiring Accountant have passed a couple on, neither of which were suitable.

- 2020 were slow to respond, took quite a large upfront payment (£2250+VAT) and one of the two they have put my way we met one a couple of years prior to 2020's involvement, and they had already been told that when we took them on. Not impressed so far.

 

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By mabzden
02nd Feb 2016 14:52

Going rate?

So what is the going rate/market price of a general practice?

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By johnjenkins
02nd Feb 2016 15:59

@mabzden

Professions normally go for between 1 and 2.5 times turnover. However these days it's what someone is prepared to pay. It's interesting though that courts use the "trusted" formular for valuing a business.

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Richard Sergeant
By Richard Sergeant
05th Feb 2016 16:28

Price multiples

Last year the average was around 80p in the pound.

1:1 was considered pretty good.

Anything over  was still coming in around 1.2 :1

I haven't heard much evidence that this has shifted, and I think this AW article backs that up https://www.accountingweb.co.uk/article/practice-succession-what-selling...

There are different models out there, but straight sale valuations have been this low for some time.

 

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By mabzden
02nd Feb 2016 19:22

Thanks for that

1 to 2.5 is quite a big range. Presumably it depends on the type of business (in particular how labour-intensive it is) and the growth rate of the practice?

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By johnjenkins
02nd Feb 2016 17:53

I have found

that it totally depends on the client base. A friend of mine specialises in dentists and he has been offered above average for his practice. Those that specialise in CIS won't get as much. Location also plays a part. If the practice is in an affluent area and the client base reflects that then they will expect to get at least 2* turnover.

 

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By Glenn Martin
02nd Feb 2016 18:27

Interesting article.
With the benefit of hindsight I would have preferred to stay in employment with funds in place to buy a suitable practice when it came along, as oppose to starting with a few clients and trying to grow from there. The first few years have been quite stressful money and I would have sat better with a ready made business from day 1 able to pay a decent wage and a loan sitting in background payable 5 years.

Since starting on my own I have been involved in trying to buy 4 fee banks some with agents involved some with a direct approach and non have managed to get over the line.

They are difficult transactions to get on and do.

The biggest problem is matching expectation as seller value their fees a lot higher than those buying them. I am shocked at the 2.5 multiplier mentioned above, as a potential buyer there is no way I would pay anywhere near that for fees. 1:1 is going rate for nearly all deals I have seen.

2 of the deals I looked at just wanted quick deals as one was in ill health and the other just wanted the money to retire overseas with. neither expected any deferred payments nor were they expecting to be involved much in handover. Because of this the deal became a massive punt on my part and the deal I offered I felt was very generous but was rejected from the other side.

Another problem I found was matching clients as with a retiring accountant I found most of the client base was also quite old and could see many of them either retiring also or not engaging that well with an accountant 25 years there junior.

As a sole trader I suppose another thing that could be difficult is the absorption of say 50 clients into your own practice and that logistics of that.

I would still consider buying a small fee bank, but have resigned myself to self generating or organic growth as I find it more manageable.

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