Misconception Number 8
New proprietors won’t borrow to buy in
Well they are going to have to for working capital aren’t they? Unless you have an extremely highly geared practice, of course. Agreed some accountants now say “my spouse does not want the house mortgaged for my buy in, he/she works in corporate, has great conditions and our house is not on the line for that. Fair enough, so you have to come up with an attractive deal. An accounting practice is quite secure, little retrenchment of proprietors, potential for capital gain, etc. Practices that are run along corporate lines, require a buy in based on the profitability of the practice, just like buying any other asset. This is paid off over time out of super profits. Houses don’t have to provided as security.
Misconception Number 9
Young people often don’t dress well and their table manners are sometimes awful
OK develop a corporate dress policy. Accept for some professional men, ties are seen as unnecessary, depends on what you consider your clients expect. Arrange staff training in professional manners and courtesy, include table manners, meeting people, introductions, paying for drinks, thank you letters, behaviour at meetings, appropriate language, etc.
If you want more information on what happens with sales and purchases of practices and fees, “Jadeja Partners are always available for a discreet conversation” they advise, call 1300 523 352.
Misconception Number 10
We tried a new partner and it didn’t work, no one will be like us
I heard one partner say “my partner and I have worked well together for 15 years, we tried admitting a new partner, it was a disaster, so we are stuck”. Well no, though it is quite possible a first attempt at succession planning will backfire.
Maybe the person had the wrong characteristics, did not understand or accept what was expected of him or her, or did not negotiate properly on the price? It is possible to try again and with a clear idea of what you want in a new partner and how they will work. Prepare a list of desired characteristics eg Business Management Skills, Positive Mind Set and Social Skills, in addition to Technical Competence, etc. There are many other actions to take to get the best possible new partner.
Misconception Number 11
Purchasers can take over and wreck a practice
A practitioner said “a mate of mine sold out, the purchaser doubled the fees, clients left and then the purchaser refused to pay the bulk of the purchase price”.
Yes, it can happen. Mostly it doesn’t. It is critical to do a careful review of the intending purchaser. Check references, ask around about his or her character, are there any Court actions in which the person was involved? Compare fees charged for similar work. If possible, try to work together, maybe share space for a while, so you can assess the purchaser’s way of doing business.
Most practice brokers suggest a clause in the agreement saying the purchaser must not increase the fees by more than 10% for the first two years, or similar. Then there must be a penalties clause, so if they do increase fees substantially, the purchase is voided and you can take back your clients, or whatever. Be guided by your solicitor.
Misconception Number 12
I have been told purchasers won’t pay for unbilled WIP
Generally purchasers prefer you to bill the WIP, but if that is not possible, then it can be billed by the purchaser as jobs are finished. When the cash is received, the appropriate amount is remitted to the vendor. This is what occurs with internal sales. Be sure the WIP is clean, there can be disputes about who is responsible for write offs.
In addition to WIP, check other items such as the IT system, it may need to be significantly upgraded. What about likely leave payments due to long serving staff members, including Director/Shareholders?
If you are looking for people who may be interested in buying into your firm, try the practice consultants or brokers, they may be experienced in judging people and helping determine who will fit with you. Also, they will have ideas of ways to make your firm more attractive to purchasers.
Misconception Number 13
If I buy into a firm I will have to pay all the goodwill money up front
Maybe, but the deals do vary. In a situation where someone has worked in a firm for years, they may be able to negotiate vendor finance payable over time (3 to 5 years), for all or part of the purchase price. When a vendor is staying on in the firm for a few years, they are able to protect their investment, so may accept payment over say 2 to 3 years.
I am hearing stories of some vendors who fit into the “10% of all business people are crooks” category, so it is wise to try to pay over time, so as to protect your investment. Practice brokers used to demand at least 90% of the purchase monies up front, that has changed. It all depends on the circumstances of the deal.
Misconception Number 14
You can’t trust vendors, I heard of a situation where a vendor sold his firm, waited six months then set up again and took back the clients
As I said above, I think approximately 10% of business people are crooks. I used to think that did not apply to accountants who were more ethical, moral and honest. The world has changed. If you are buying fees or a firm, you need to carefully check the bona fides of the vendor, sometimes they have previously sold the clients and taking them back is a repeat pattern.
All contracts have a restrictive covenant limiting the vendor from going back into practice and taking clients. The difficulty is, sometimes there is no penalty for such an action. That is why it is critical purchasers now keep some consideration aside, so if the vendor begins to remove clients, the purchaser has the right to retain the outstanding monies.
In most sales a purchaser wants to retire or move on, so has no wish to pull back clients. I know of a situation where the vendor continues to refer new clients to his old firm. The purchasers have a great business relationship with him.
Of course if you are buying into a multi partner existing firm, then there is protection for you. Be sure though to have a properly executed Purchase Agreement, Shareholders’ Agreements and Employment Contracts.
Misconception Number 15
I am not willing to pay for goodwill, so does that mean I can’t ever buy into an accounting firm?
No there are other options. Some of the national firms offer a path to partnership where you pay only a contribution for Working Capital. The firms do not charge goodwill on practice purchases and sales. You have to receive an offer of partnership, so must be a good operator.
Some of the other more corporate firms require a capital payment to buy into the firm/company, but it is based on profitability and a return on investment.
In other firms you work your way into partnership via foregone profits, that is, you take a reduced profit share for say 5 years, then go to a full profit share, based on your equity ownership.
Thea Foster BCom FCA| PO Box 366 Mosman NSW 2088 Australia t. 61 2 9968 1130 f. 61 2 9968 23572
e. thea@addedvalue.com.au www.addedvalue.com.au ABN 48 061 111 144
For the last 20+ years Thea has been providing professional practice management and marketing facilitating, presentations, and consulting. Thea’s clients are mainly accounting firms or suppliers of products and services to accounting firms.
