Della Hudson takes us through the details of the deal and highlights what extra costs you should budget for.
Since I sold my business through an accountancy broker I had some assistance in working through the sales negotiations. The broker provided me with a shortlist of six possible buyers and I spoke to the two firms that I thought were a good fit. Competition always drives the price up but after meeting with both firms it was clear that one would work out better than the other.
There were several things to consider as part of the negotiations:
Price as a multiplier of GRI
The market rate is between 0.8 and 1.2 times gross recurring income (GRI), ie regular annual fees excluding any one-off work. A higher factor is used if you can demonstrate that your business can run independently of you, due to excellent systems and well trained staff.
The percentage of GRI will also be affected by the nature of the clients including their age profile. If your clients are all at an age where they are likely to be retiring themselves, then they are of less value to somebody interested in acquiring future business.
It is normal for acquisitions to be paid for over a period of one or two years although I have heard of much longer. If you want payment up front you may need to take a drop in price.
If clients do not stay with the new buyer then there is usually a provision to clawback the payment on these fees. Clawback can be on individual fees or on total fees. Any lost fees can be offset by increases on other clients’ fees. As we applied a regular annual increase to all clients this would be in our interests as a 5% fee increase would offset the few clients that might leave as a result of the sale.
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Some sale contracts insist that fees are not increased during the clawback period for fear of clients being priced out of the new business by unscrupulous buyers, but it also puts an unnecessary pressure on buyers who need to cover inflationary cost increases over the period.
The clawback may be 100% of the lost GRI in the first 12 months or there may be a further 50% clawback for 12-24 months. This reflects your diminishing responsibility for keeping the practice intact
There will be a period during which you cannot act against the interests of the business by offering an alternative accountancy service to your former clients, either directly, or while working for somebody else. This must be a reasonable restriction overall but you should also bear in mind what you intend to do afterwards, to ensure that there is no conflict between your old and new work. You probably won’t be allowed to approach existing clients or staff for a period too.
Assets or shares?
Another important factor is whether you will sell the assets of the business or the shares of your company or partnership. There are tax and liability issues to consider for both. We opted for a share sale as the bank accounts and office lease were in the company name. This allowed the buyer to transfer everything at his convenience. The alternative is to assign all the relevant client and supplier contracts to the new owner with the agreement of the other party.
You will be required to pay run-off insurance for a period of time after the sale. This is six years for ICAEW members. You can expect to pay the normal fee for the first 12 months insurance and less for future years, assuming no claims are made in that period.
There will be some negotiation over other details on the contract and I would recommend using a good solicitor as the sums involved will be quite large.
About Della Hudson
Della Hudson was part of the class of 2009. She built up Hudson Business Accountants and Advisers from her kitchen table to a small team of flexible workers with independent premises in Nailsea, near Bristol. The firm ran regular Money Matters seminars and other training and webinars. Della sold the firm in 2017 in order to focus on the business consultancy side and to write her first business book. ,The Numbers Business: how to build a cloud accountancy practice’ will be published 10 September 2018.