Avoid the pitfalls of selling your practice
In my first two articles on practice disposal, the seminal decisions of taking the plunge to sell and how to market your practice were covered. This instalment is about understanding the nuts and bolts of what is at stake when selecting and negotiating with a buyer.
Fundamentally there are three issues at this point, all of which are intertwined:
- What do you want
- What does the buyer want
- What will work in the best interests of your clients
Arguably the case could be made for the third point being the main driver because, aside from any ethical issues, if the clients feel abandoned the deal will unravel within the clawback period and you’ll be mired in a nightmare that could drag on for years.
This means that whatever you and your buyer negotiate, the needs of the clients, and indeed, whether all clients will be transferred, will run through everything like a stick of Blackpool rock.
Consider the following:
- Do all the clients meet the buyer’s requirements such as minimum fee threshold
- Do you wish to continue servicing a large client or close friends on a part time basis
- Would many clients have issues with the buyer, perhaps on ethnic grounds
This means that from the outset you need to know whether you are striving for an outright sale or a fee block sale.
If the reason for selling is due to illness or bereavement the overriding issue will be speed of disposal, firstly because the passage of time will diminish the urgency and hence the value of the “asset”, and secondly because clients are more likely to support your decision if taken sooner rather than later, even if only out of sympathy.
Your clients use you to manage their financial affairs because they trust you, so it stands to reason that they will trust your judgement to pick a successor who will continue where you are leaving off, hence the importance of getting everything spot-on.
Both your interests and theirs are aligned – theirs in that you have chosen a successor who can relate to them in a manner similar to you, and yours because you need the clients to be on board so as to avoid a clawback situation.
At all times you must never forget that you are not selling your clients - slavery was abolished in the early 19th century , but you are selling goodwill.
Avoid the pitfalls
Now that we’ve seen the issues, what about the pitfalls that could be lurking unseen right behind you?
Like any negotiation an impatient or desperate (or motivated as they say in sales talk) seller is likely to make sub-optimal choices, whether it is taking the first buyer that comes along or in the terms and conditions of the sale.
Unlike selling a property, where it is often possible to paper over the cracks without taking responsibility, the sale of goodwill is a different beast due to the “C” word – Clawback.
Typically this means that if a client has left prior to the next billing cycle (usually the next year end accounts) you have to reimburse the buyer, or the buyer will be entitled to make a reduction on the next instalment.
Just as day follows night, if you botch the sale, it will be costly both financially and mentally. Buyers will want to know the reason why you are selling, so if there’s an issue that will affect the sale, now is the time to come clean.
It won’t necessarily scupper a sale buy but it may well be reflected in the terms. After all, as I am fond of reminding people, “everybody has their price”, so a problem that you view as a deal-breaker may be an opportunity to somebody else.
The next big pitfall is actually quite basic. Can your buyer actually handle your practice or have they bitten off more than they can chew?
Some buyers will talk a good talk and present well, but fail to grasp the magnitude of what is involved. Even with the best staff support the initial weeks and months will involve meeting clients and understanding fully how the practice operates, which is very time consuming and that’s without travel considerations.
But it’s not all about the buyer’s responsibilities. You, as the seller, need to be clear on your duties going forward to affect introductions and infuse your clients with confidence in the buyer, whether in an agreed ongoing consultancy role or simply in a handover capacity.
A recent sale I conducted saw the seller jet off into the sunshine immediately on completion, before the ink had dried on the contract, because she ran her own practice as a lifestyle business, and left the staff to interact with clients.
One could argue that she had “trained” her clients well in terms of their expectations of her availability. Things got very messy even before her plane touched down in Alicante, not least because the buyer was expecting a round of meetings whereby he would be introduced to clients by the seller, not the accounts junior.
You also have to do your utmost to prevent large fees leaving as they can have a disproportionate effect on the practice, especially the staff.
If you have doubts whether they will stay post-sale then provision may be needed to make special mention in the contract or you may have to stay on longer simply to service this one client until they have confidence in your buyer.
Due diligence needs to be carried out by you as the seller, not just by the buyer. In many respects it is far easier for the purchaser to undertake due diligence because they know what to look for, but the seller’s checks on the buyer are more nuanced and subtle, often only achieved by letting the deal move slower than they wish and perhaps having more meetings with the buyer than are necessary, and possibly even visiting their practice.
As ever, the rules of engagement in a business sale are always the same – the deeper you dig, the more you will build up confidence or the more you will worry that something is amiss.