Essential Guide to Selling a Practice

Five things you can do to ensure you get the best possible price when selling your business

1. Look at your charge-out rates. Make sure they are competitive. If you are undercharging and the new owners have to put them up, they will lose business.
2. Try to ensure your client spread is not concentrated in any one industry, which could put potential buyers off during a downturn. For example, in the current climate, many buyers would be wary of getting involved in a practice that has a large client spread from the construction industry.
3. Make sure you do not have an ageing client base. A buyer will see no value in a business made up of clients who are going to retire or die within a couple of years. A steady stream of new clients is more attractive.
4. Look at your internal structure and ensure there is no dead wood. A few years ago, when practices were busy, they took on more staff, but as practices have become less busy any excess staff can be a real problem for buyers who don’t want to get involved with having to make redundancies.
5. Get your own house in order, and make sure your books are up-to-date and add up.

Is now a good time?

Times are tough and you may be considering your position. So if you are thinking of selling your practice sometime in the future, you need to start planning now.

We are just coming out of one of the worst recessions in memory and the new government is warning us things will be tight for an awfully long time. But if you’re looking at selling your accountancy business, it’s a good time to act, according to experts.

Jeremy Kitchin runs Jeremy Kitchin Practice M&A which trades as APMA (Accountancy Practice Mergers and Acquisitions). He agrees, saying: There is significant demand out there in the market place. People have been holding back on selling for the past 18 months. Now things are back on an even keel. The practices that we are selling are attracting a very good level of response.

Other experts say clear signs‚ of renewed confidence began to emerge towards the end of last year. It has always the case that there are more buyers than sellers. Four or five years ago there was a lot of activity, but it dropped off in September 2008 for a good year, explained one broker. But there was a significant increase in the number of sale instructions received in the final quarter of 2009 than had been seen in the earlier part of the year.

Even in difficult times, good accountancy businesses don’t stay on the market for long.
A year ago, Mr Kitchin took on a general practice and found 106 would-be purchasers, while others say each new sale generates serious interest from 10-20 firms, with some attracting well over 30.

Experts agree that the one casualty of the economic downturn has been the first-time buyer, because banks and financiers are being more careful about who they will lend money to. But even this isn’t a problem, according to most of the experts.

Mr Kitchin says: These first-timers may be at a senior level in accounting currently, or may have gone into industry for a while and now want to run their own accountancy firm.
They have all the credentials, but they are not being seen as a good risk because they have no track record. However, the loss of the first-time buyer is being off-set by established firms who need to make up for clients they have lost or whose businesses have gone under.

Is the price right?

So if it’s a seller’s market, you should be able to dictate a premium for your practice, right?

Unlikely, say those in the know. Accountancy differs from other sectors in that there is an accepted going rate and buyers are not prepared to pay more.

The current going rate is between 1 and 1.2 times the annual recurring fee income of a business. It dropped slightly, to 0.9 times the annual recurring fee income in 2007, but hasn’t changed for some time and is unlikely to do so for the foreseeable future. The last time it was higher was 20 years ago in the late 1980s and early 1990s, when the multiple was up to 2.5%.

One broker says: Historically, the multiple was around 1.2. The current trend is for prices to return to their pre-2007 level, with good quality practices with a turnover of less than £350,000 attracting multiples of between 1 and 1.15 and some above that. However, at the moment 1.1 is top whack for many deals.

DIY or call in an expert?

So you’ve been through your books, you have got all your ducks in a row, and you know how much you could sell your practice for. If it is a seller’s market, you would think it would be pretty straightforward to get out there and find a buyer yourself, saving money on broker/agency fees. This can be a false economy, however, and in the long run, it can make a lot more sense to use an expert.

Jeremy Kitchin says: We call it objective professionalism. The sale of the goodwill of an accounting firm is probably the biggest financial transaction that will ever be undertaken by the principal(s) of a practice. The selling process is vital and professional advice is fundamental to a worry-free experience.

As a seller you will be concerned, understandably, that the purchaser may not retain your clients, giving rise to a claim under the clawback‚ clause, which could cost you dearly.

He adds: You need advice with marketing your opportunity so that you can be confident that your anonymity will be retained so that your staff, clients and competitors will not be made aware of the sale until the point when you can introduce the new owner to them in a controlled manner.

Expert objective advice is vital in the selection of a shortlist of suitable buyers because you may move forward with a selected buyer only to find you have no immediate replacement if he drops out. If you sell to the wrong buyer, you may get the highest sale price but suffer extensive clawback claims at the end of the first year.

Getting ready to sell the checklist

Get your own books in order. Make sure everything is up-to-date, such as compliance with current Money Laundering regulations and that senior staff have suitably worded restrictive covenants in their employment contracts preventing them from setting up in competition with the new owner.
Be realistic about the price. Currently, a multiple of between 1 and 1.2 is achievable.
Decide whether you want to sell up and get out, or sell up and remain with the purchaser for an agreed period of time. You may even wish to take a small block of fees and service them from your home. Different buyers are attracted to different options.

Ready to take the plunge?

There follows an overview of the selling process through market leaders APMA (also known as Jeremy Kitchin Practice M&A).

1. Contact APMA and we will take details of your practice, such as the number of years trading, number of clients, how much you charge and any unique selling points. A good agent/broker will visit you, often at your premises if these are to be included in the sale, to get a better understanding of the business and of your requirements from the sale.
2. You’ll sign a draft contract with details of firms to be targeted, a valuation and cost. The contract should govern the service provided to the Vendor by the broker/agent.
3. The broker/agent will check their current database and also put out feelers for interested and suitable buyers. Interested parties will be screened and a list of suitable buyers drawn up.
4. You will be asked for more in-depth details of your clients so the interested buyer(s) will have all the information about your business (but retaining your anonymity) to enable them to make a decision on whether or not they wish to move forward.
5. You will choose from a list of suitable buyers which ones you are interested in having a meeting with.
6. From this initial meeting, you will produce a shortlist of two or three firms to meet with again, usually outside business hours, to enable them to carry out due diligence on your client files, etc.
7. Once you have made your decision on who to sell to, you will need to draw up a draft sale agreement and other legal documentation. Your broker or agent will assist you, often by providing you with the appropriate draft documentation or by providing details of legal experts, if you prefer.

Two into one does go

For various reasons, a merger may be a more suitable option than selling your business or completely acquiring a new one. There are as many reasons for merging as there are types and sizes of accountancy practices, says Jeremy Kitchin of accountancy practice brokers APMA.

Mergers take place for a variety of reasons, he says, for example, to increase the overall profits by achieving economies of scale; to create a bigger critical mass, thus enabling a more structured workforce to be put in place, as well as the establishment of specialist value-added departments; to dilute the amount of practice administration per partner or, in some cases, to transfer the practice administration to a new partner; to enable the partners to play to their strengths or to amalgamate offices.

Additionally, merging firms together often provides a logical solution to the problem of succession he adds.

While selecting a buyer is important enough, selecting a suitable practice to merge with is even more so.

After assessing the situation, many accountancy practices come to the conclusion that a merger is in the best interests of the business, but then comes the sticking point: they don’t know where to go from there.

You could try to put the word out among your network of contacts. However, as is the case with selling, to get the best chance of finding a suitable match it pays to register with a broker or agent to see if they already have a practice on their books that is looking for a merger. For a variety of reasons, practitioners are happier replying to an independent third party, complete with the confidentiality and advice that this gives, than they would be responding directly to an approach by the first party (i.e. the owner who wishes to merge), says Jeremy Kitchin. However, a successful outcome relies on a suitable firm, also seeking to merge, declaring their interest to that same agent or broker, at a similar time (which is why the marketing aspect is such an important factor…)

A more proactive appproach is to ask a broker to go out and look on your behalf, writing to a variety of companies, giving an overview of your requirements, and inviting them to respond if they are interested. The broker will then help with key considerations, including the best strategic fit, the value of interested parties and the legal and administrative processes.

APMA will not charge a fee, apart from the agreed marketing costs, until a partner is found and a merger has taken place/been agreed to.

And finally…

A word of warning: experts say there is a fine line between a merger and a takeover, which can happen if one party is particularly strong-willed and the other hasn’t done their homework.

Planning is essential, preferably with an experienced, unbiased expert from outside the company who can cover every base.

Another consideration is that a merger does not automatically imply both parties own equal equity, or that they earn equal profits. If the profit share is not equal, neither will be the responsibility for any losses and this issue needs to be ironed out before you sign on the dotted line.

Bosses of merged companies need to treat all staff and partners equally and not to underestimate the emotional and psychological effect such a move can have.

Mr Kitchin says: If you do anything during the post-merger period, make sure you talk with each person, new and old, in the firm. Everyone will be concerned about what the merger means to them. If you are reducing staff, do it before the merger happens. Take as much of the unknown away so that everyone is dealing with facts not fiction.

He adds: Set up transition teams to cover the major areas, such as benefits, salary structure, systems and scheduling.

The better your internal communications, the smoother the post-merger phase will go.

Checklist

1. Identify the reason behind the proposed merger as this will help you achieve a better fit with a merger partner who is looking in the same direction.
2. Define your target market place, including the type and size of company you want to merge with, its geographical location; and your future plans.
3. When you get a match, be sure that you will be able to work with these people and that you have the same goals and work ethic.
4. Will the merged parties own equal equity or will one own more?
5. Plan every detail of how the merged company will work, preferably with an unbiased, third party expert who can give guidance.
6. Don’t keep staff in the dark. Get them involved and, post-merger, treat everyone (new and long-serving) equally.

The next generation

Whether you want to sell your business now or in 10 years‚ time, it is important to turn your attention to succession planning now.

You’ve put your heart, soul and endless hours into ensuring your business is a success, but have you thought about what will happen to it when you decide you want to step down?

Every accountancy practice should have a succession plan in place but many don’t.
It is not a decision that should be taken lightly. You need to be clear about how you will pass the practice on, who to pass it to, and how all your hard work can provide you with a secure retirement fund.

The first step is to determine what you want to do with the firm (see box on succession options). If you are planning to pass the company down to senior partners, you must make sure they are agreeable and that the process is carried out smoothly to ensure little, preferably no, disruption to the business.

Whatever you decide, you‚ll need to tell your clients about your plans and how it will affect them. And you will have to start taking a less-active role, letting someone else become more client-facing. But be warned, giving up a business you have worked all your life to build is not easy. Succession planning often becomes as much an emotional event as a financial one,‚ says Jeremy Kitchin, of broker APMA.

Using a neutral outside advisor is an excellent way to keep the emotions under control and clarify or develop the proper transition format.

He also advises sole practitioners to ‚at minimum‚ have a continuation plan agreement in place with a local firm, which will protect spouse and family in case of a sudden illness or death.

Succession options

The buy-out: there may be partners inside the business who would be interested in buying the practice. However, you are likely to get more money from an external buyer, because insiders believe they have helped build the firm and brought in or developed business.

Review the buy-out formula every few years to ensure it is still viable and be clear about issues such as how the value of the company is calculated and what would happen if the firm could not meet its commitments in a particular year. An internal buyout can be phased over a number of years, and can take place with as little upheaval to clients as possible.

The merger: a logical solution to the problem of succession, a merger can enhance the value of the practice and enable the owner to retain talented people and potential successors. However, as discussed in the section on merging, make sure you think carefully about what makes merging two practices work.

The consolidation: a number of practices are growing rapidly by consolidating and are inviting independent practices to join them. Advantages include having access to funds to upgrade IT and other systems and, because administrative processes would be centralised, being able to offer value-added services to clients that would not normally be available to smaller practices. Staff would be more inclined to stay, as there would be greater career opportunities across the group.

Transference on death: as well as having an estate plan and life insurance in place, there must also be a plan for transferring the trust, respect and goodwill of the company. Start introducing clients to younger associates now, and give those associates some of the responsibilities connected with such accounts. Get the clients comfortable doing business with the next generation‚ of ownership, with no change in service.

Pay attention also to employees, ensuring they work in a pleasant environment, feel appreciated and are supported.

Seven steps to succession heaven!

Setting up a successful succession plan involves seven steps:

1. Survival
   Once the business has survived the start-up stage, you should consider a business succession plan.
2. Commitment
   You must be committed to the concept that the business must continue to create opportunities for those to come. This commitment must be communicated clearly, extensively and often.
3. Recruitment
   Recruiting good people always pays dividends and is a key area of importance in succession planning.
4. Development
   Investing time in developing family members, key employees, and management team members, and allowing them to exercise authority and control, will be vital to your success.
5. Selection
   Having developed a transition plan and recruited the right people, selecting a successor or successors becomes easier. By empowering a broad range of key people, the selection process is simplified and your options are enhanced.
6. Announcement
   Once a succession plan is in place, you should communicate that plan. Such communication gives key management people and/or family successors a clear understanding of the path to the future, as well as any role they may play in that path. It also allows them to begin setting future goals and objectives for themselves.
7. Implementation
   In implementing the succession plan, you must be ready to step aside and allow the successor(s) to take over. You must be prepared to take on new challenges in retirement, knowing that your financial future is secure.

What is clawback?

It’s vital that you understand this important concept when it comes to buying or selling an accountancy practice.

Most sales of a practice will have a clawback clause, which is a risk-sharing agreement between buyer and seller. It protects the buyer if clients leave during a specified period (usually the first year or two) and the business is not worth its selling price.

When a practice is sold, a percentage (usually 50%) is paid upfront, then the other 50% is paid a year later. In some deals, payment is made in three equal instalments: one third up front, one third on the first anniversary of the sale and the final third on the second anniversary.

If the vendor is selling for £100,000 in a two-year agreement, he will typically receive £50,000 on completion and the other £50,000 a year later. If some clients leave in the first year and the business is worth only £90,000 on the first anniversary, then the new owner can net off this shortfall and pay a lower second instalment of £40,000. In the case of a shortfall, the vendor has the right of discovery‚ the right to look at the files, before he agrees to the lower second payment.

The vendor can limit his potential loss to a certain extent, by adding a clause in the contract to say the new owner will not raise fees by more than an agreed percentage during the period.

Legal advice should be sought before entering into a clawback contract. It is in the best interest of the new owner to have the longest clawback period possible, while it is in the best interest of the seller to have the shortest.

Any fees that were lost during the first year are normally deducted pound-for-pound. Fees lost in the second and subsequent years were, historically, deducted at a rate of 50p per pound. However, in the current climate, a pound-for-pound deduction is not uncommon in the second year.

Frequently asked questions (FAQ)

All the questions you want to ask ‚ and all the answers, provided by our expert.

Is it a good time to sell?

Experts say there is never a bad time and there is always demand from would-be buyers. Demand has picked up over the past eight months or so and, any uncertainty before the General Election and the new Government’s Emergency Budget has now gone away. (Notes made in 2010)

How much can I sell my practice for?

Accountancy practices differ from other sectors in that there is a going rate, which most potential buyers are reluctant to exceed. The current going rate is between 1 and 1.20 times the annual recurring fees of the business. More potential purchasers, or a buyer who is desperate to acquire a particular practice, will push up the price to the higher end of the going rate. It is unusual to get more than the going rate.

How long can I protect my anonymity?

If you put the word out yourself that you are looking to merge or buy, there is a limit to how long you can remain anonymous. A good broker or agent will ensure the highest level of confidentiality and discretion for as long as is possible, initially giving brief details, such as the general geographical area and size of company, until you give your permission for your identity to be disclosed. However, there is always a risk that potential buyers may be able to work out the identity of a particular company.

Will I have to work in the practice after the sale?

This is always up for negotiation and some buyers require the seller to be involved with the purchaser for a short period, up to the first three months. One advantage is that this will ensure the smooth transition of your clients to the acquirer. Although you‚re unlikely to have direct contact with clients after the sale, they will be comforted to know you are still around if needed.

How long does it take to sell a practice?

Generally between six weeks and six months, although multi-million- pound deals can take longer and some straightforward sales, or urgent ones, such as in the event an owner has died, can be done in less time. The peak holiday times of Christmas/New Year and July and August can mean sales take longer.

What is the best time of year to sell?

There are two main upturns in the market. The busiest is early September to the end of November, while the second busiest is between mid-February and the end of June.

What is the difference between a broker and an agent?

An agent finds a buyer for the seller, or vice versa, but only acts for one party. The broker acts for both parties and has a duty to make the deal work in the best interests of both parties.

Do I need to use a broker or an agent? Can‚t I do it myself?

Some owners do try to sell their businesses themselves, either by paying for an advert in an accountancy publication or by putting the word around locally. However, brokers and agents say they have a greater reach of potential buyers, many of which are already on their books as having expressed an interest in wanting to acquire companies. A broker can also help you get a better deal on your sale and can advise on legal and technical issues, such as clawback.

What about work in progress and debtors?

Normally, the vendor collects his or her own debts and agrees the level of work in progress at the point of completion. The purchaser would finish off any remaining work in progress, bill it and remit the vendor’s share at 85% of sale price. The remaining 15% is a collection charge retained by the purchaser. Any under recovery is apportioned.

What percentage of clients are likely to leave when I sell my business?

Some experts reckon that every practice that is sold loses up to 20% of its business within the first year, as clients see the change of ownership as an excuse to go elsewhere‚ that may be to a cheaper firm or one that has been personally recommended to them.

After what period of time can I expect full payment?

Historically, payment is usually received in two stages for small companies: 50% on completion of the sale and 50% on the first anniversary. For larger companies, there were three payment stages: 50% on completion; 25% on the first anniversary and 25% on the second anniversary. Some brokers say the three-payment stage is now becoming the norm, regardless of size, while others suggest the two-stage option should still be followed for smaller companies.

Can I keep a small block of clients and sell the rest?

APMA advises its clients that, as it is a seller’s market, there is no reason why a seller should not retain a small block of clients. However, the purchaser will require safeguards written into the sale agreement to ensure that clients that are sold on will not be taken back by the seller.

How can I make sure my staff are taken care of?

Most purchasers will want to keep the services of your staff. There are laws to protect employees. For example, a potential seller cannot dismiss staff to make the sale more attractive and the purchaser cannot arbitrarily make staff redundant after acquiring a business. Existing staff must be employed on the same conditions as the previous owner offered and any redundancy programme must follow legal guidelines.
> Contact Lucinda Kitchin for advice on your options.