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When buying fees, what is the buyer actually acquiring?

 

Accountancy practices typically have four main components.  They have been set out here by Lucinda Kitchin of A.P.M.A., and they may be adjusted according to what is actually being bought by the purchasing firm.

 

In most instances accountancy practices have four constituent parts –

  1. The goodwill of the practice is, in effect, the client files and the right to offer services to that database of customers.  Often, although not always, the practice “name” will be included in this.  Usually the website will also be part and parcel of the arrangement at no extra cost.  Since the purchaser will be acquiring the goodwill (which itself will automatically generate new clients), any new clients who come to the practice after the sale has been completed will not represent an additional cost for the purchaser – the new clients will simply be a benefit of the acquisition to the purchaser.  Payment for specific new clients who come to the practice post-sale almost never happens, however if it did it would be called a claw forward.

In some cases a purchaser may wish to incentivise a vendor over the next few years to introduce new clients to the practice after the sale has completed.  This may be done by offering the vendor a percentage of the fees billed to a new client during their first year with the practice, thus benefiting both parties to the sale – the vendor and the purchaser.

2. Debts. These represent completed and invoiced work. More often than not debts will be collected by the vendor who may wish to employ his/her usual approach to debt-collection, thus not upsetting the apple cart with the transferring client.  Sometimes, however, the buyer will agree to collect any debts and hand them back to the seller (very occasionally in return for a handling fee, depending on what has been agreed).   The agreement reached with regards to debt collection may depend on the payment culture of each of the two parties as well as the track record of those clients who are in debt.  Whether or not the client is deemed likely to be lost during the transition will also be a consideration.

3. W. I.P This is usually valued at completion of the sale with the job to be finished off, billed and payment collected by the purchaser who will then remit the vendor’s share, often at the end of each month, at sale price.  Any under recovery would normally be apportioned.  It may be in the vendor’s interests to get the W.I.P. down as low as possible before completion takes place; however this may not be practicable in reality being influenced by the specific factors surrounding the sale itself.

Regarding the payment for the W.I.P. – the payment will be over and above the payment received for the goodwill itself, however it is not an extra expense for the purchaser because the purchaser will finish off the W.I.P. and bill it, remitting the vendor’s share on an as-collected basis. Ergo the purchaser will pay the vendor for his/her share only once they have billed it and been paid for it themselves by the client.

If a job is in progress at completion date it will stay on the client schedule of expected fees, because this year that income has occurred and it is expected to recur in the future i.e. next year.

4. Other Assets – this will include items such as equipment (e.g. PCs and associated software such as any licenses being transferred), phone systems and office furniture. These are typically sold either by agreement or at arms-length valuation and don’t tend to achieve anything like what they would have cost when new.

In complicated acquisitions the buyer might also acquire the borrowings or other liabilities of the vending firm which may be traded off as part of the sale price.  The partnership might also own property or shares in subsidiary companies (such as an IFA firm or a book-keeping entity).

Pre-payments: there are two ways of dealing with prepayments (this is money paid by clients to their accountant for work which has not yet been done or billed):

  1. The amount received but not yet billed could be calculated and netted off from the initial tranche of the purchase price (paid on completion by the new owner to the vendor), or if appropriate:
  2. They could be passed to the bank account of the new owner together with the accumulated prepayments.

 

By Lucinda Kitchin of A.P.M.A.

Telephone; 01623 88 33 00 at anytime

Contact: Lucinda@apma.co.uk 

 

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