Key Questions for Sellers (part 4)

In this 4th and final article in the series on Key Questions from Sellers, APMA examines some of the key questions which vendors typically ask as they put into motion the sale of their goodwill –

How long is the normal clawback period for and how does it work?

Because demand outstrips supply, the vendor is often in a strong position to dictate terms to would-be purchasers. It may be unwise for a vendor to agree to a clawback period extending beyond the first year post-sale. Having said that, where a particular client represents a significant proportion of the risk, it may be necessary to extend the clawback for that one client (only). In some cases it may also be necessary to build in a longer clawback to cater for any clients whose survival during/following ‘lockdown’ is less certain. In the event that a purchaser makes a claim under the clawback clause, the vendor has the right of discovery. (S)he may look at the appropriate client files and, if necessary, speak to the client to confirm that the loss is genuine. The agreed shortfall in fees billed, x the multiple, may then be deducted from the relevant payment to the vendor.

Should I sell to a firm whose chargeout rate is much higher than my own?

This must be a commercial decision for you and you alone. If you are concerned that higher charge out rates will be applied to your clients during the warranty period, there is a solution: that is for the purchaser to undertake not to raise the fees to any of your clients for similar work by more than, say, 10% during the agreed period.

What are my options with regards to the freehold/leasehold of the premises?

The overriding rule is that the more flexible you are able to be when offering your practice for sale to the market, the better the level, and therefore quality, of the response. In some cases it may be necessary to insist that any would-be purchasers take over the lease, however this is likely to detract from the interest shown by existing local firms, just as would any heavy contingent liability in the lease. In the event that you have freehold premises which will no longer be required post-sale, it is better if the practice can be marketed with the option for the new owner to enter into a rental agreement with you, or to purchase the freehold, or to service the fees from elsewhere. These 3 options will appeal to 3 different sectors of the market.

What are the advantages of my firm joining a consolidator?

There are many. First, you would have access to the necessary funds to enable you to upgrade your systems, particularly your IT system. You would be able to crystallise your goodwill, being immediately bought out with a mixture of cash and shares and, unless any of you wish to retire, you would be invited to join the management team and earn an income stream. Improved career opportunities would be available to your staff right across the group, and substantial value added services would be available to your clients. Joining a Consolidator would take care of any succession problems.

What happens about my work in progress and debtors?

It is normal procedure for the vendor to collect his/her own debts and to agree the level of W.I.P. at the point of completion, and for the purchaser to finish off the W.I.P. and bill it, remitting the vendor’s share on an as collected basis. Any under recovery is normally apportioned.

What is the difference between an agent & a broker?

An agent acts for only one of the parties. While at first sight this may seem desirable from that party’s point of view, unless both parties enter a ‘win-win’ arrangement, there could well be dissention during subsequent negotiations. Thus the final stages could become protracted which would be likely to drive up the solicitors’ fees. Without both parties being given ‘arms length’ advice on the structure of a workable deal, advice which gives them confidence, disagreements over everything from Heads of Agreement to the reconciliation at the end of the warranty period might well create rancour. And who is going to bring their experience, and above all impartiality, to any disagreement over the merits of a claim under the ‘claw back’ clause? The Broker. (S)he is the meat in the sandwich and is responsible to BOTH parties. (S)he charges both and has a duty to make the deal work.
> Contact Lucinda Kitchin for advice on your options.