Distressed Sales; Do They Occur, For What Prices and With What Conditions?

One issue for people on the cusp of retirement is, “What will happen in I die at the desk”? I can understand such people wanting to continue to work, it adds to the retirement savings and keeps the brain functioning. Some accountants have a written Disaster Plan with arrangements in place for someone (a colleague?) […]

One issue for people on the cusp of retirement is, “What will happen in I die at the desk”? I can understand such people wanting to continue to work, it adds to the retirement savings and keeps the brain functioning.

Some accountants have a written Disaster Plan with arrangements in place for someone (a colleague?) to come in and run the practice until a fast smooth sale can be made. You don’t have to be on the cusp of retirement to need a Disaster Plan, what would happen if you were seriously hurt in an accident, or suffered a sudden significant illness?

For those with no Disaster Plan, a practice can still be sold, provided someone moves quickly. Clearly the better the practice is set up, the easier it is to sell. Items that help a sale include

• Documented systems
• Client lists
• Lodgement records
• Up to date WIP and Debtors
• Permanent files
• Signed employment contracts with restrictive covenants
• Signed engagement letters with clients
• Adequate back-ups (especially important in the case of a fire)

If we assume the practitioner will not be around to introduce clients to a purchaser, then continuity of staff may become critical. Are staff likely to leave and take clients? Will they willingly sign new employment contracts which include a restrictive covenant?

A purchaser will usually collect any Debtors and pass to the vendor. WIP will be billed where possible, and the amount received remitted to the vendor, depending on the arrangement, either before or after tax. It is important to determine what will happen to provisions for staff leave, including Long Service Leave. This includes the vendor’s accrued leave. Other assets may include equipment and furniture, generally this has a low value, unless some is quite new.

There is a floor price for Goodwill, it is around 25 cents in the $1 of renewable gross fees. Most purchasers in the case of a Distressed Sale, are willing to make some initial payment, then the balance over say 2 – 3 years, based on the fees realised by the purchaser. So a high Goodwill price may eventually be paid, but over a number of years and only on those fees/clients transferred and maintained for at least 2 – 3 years.

Yes, Distressed Sales do occur, it just takes a while to collect all the money and top dollar may not be realised.

Jadeja Parnters – Call for an obligation free discussion
Phone:         1300 523 352
Web:            www.jadejapartners.com

Magnus Yoshikawa
Mobile:         0408 885 944
Email:          magnus@jadeja.com.au

©  Jadeja Partners, www.jadejapartners.com

First published on: http://www.foraccountants.com.au/