Accounting Practice Acquisitions | Purchasing Clients to Speed Growth
It is possible to expand business rapidly if you have extra funds or can borrow/finance a ‘fee parcel purchase’ or ‘practice acquisition’.
Points to note:
- Finance: Lending institutions do not typically allow you to borrow against the business you are purchasing. You will need to borrow against an asset that you own – for example your house. Sometimes the lending institution will consider the business in part or whole if two or more accountants are purchasing together. However for a sole operator they usually do not as the risk is too high should something happen to that operator. If you want to buy clients sort out your lending capacity straight away. If the vendor wants a fast sale they may choose someone over you who can settle quickly.
- Up-front Cost and Balance: The seller will typically require 50-120% up front. In general 85% is the up-front settlement cost. For example, if a practice is valued at $150,000, you will need to be able to finance $127,500 ($150,000 x 85%) on settlement if the vendor requires 85%. The remaining $22,500 would usually be payable at the end of the 12 month period following purchase. On some occasions the balance can be paid over a two year period. The balance of $22,500 is reduced by clients that do not transfer. If out of the $150,000, at the end of the 12 month period following purchase the transfer rate was $140,000 due to some losses, then you only pay a balance of $140,000 – $127,500 (already paid) = $12,500.
- How Practices Valued Are: Most practices are valued based on the type of client base with business clients being $1 for $1 and individuals being valued at 85c to $1. It also depends on the composition of the practice. For example a practice with fees of $300,000, with 50% business and 50% individuals is likely to be valued with both business and individuals at $1 for $1 value. This means the asking price would be $300,000.
- How Flexible are Sellers: If you are a procrastinator or bargain hunter or want special conditions, this is not for you. It is a seller’s market with up to 70 applicants for each practice that becomes available. Even paying $1.20 is not out of the question as the benefits of purchasing fees are considerable.
- Taking Over The Office: It is 50/50 as to whether this is a deal breaker. In some cases the vendor will not sell to you unless you take over the vendors premises. The obvious benefit of this is that the clients are used to the premises and location and this assists with the client retention. Where you are allowed to relocate the clients this needs to be done within 5-10 km’s from the vendors office.
- Due Diligence: If you purchase a practice, you conduct a sample check of the files and client base. This is done prior to settlement.
- Process: Make an offer subject to finance and due diligence. If the vendor accepts and you conduct due diligence and find problems or concerns and do not proceed, the process ends. If you are happy with the fees then it proceeds to settlement.
- Advising The Clients: This is done prior to take-over. A letter is sent by the seller to the client base advising of the seller’s retirement etc. and endorsing and encouraging the clients to return for services to the new owner.
- Does the Vendor Stay On: Sometimes they will voluntarily stay on for a short period purely to introduce you to business clients and take other steps to assist the transition. It is not recommended that the vendor stays on for long periods of time as this makes it more difficult for the clients to adjust to the new owner with their former accountant still being present.
- Terms of Restraint Clauses: Terms of restraint are important in the contract of sale to ensure the vendor does not service the clients they have sold. Terms of restraint are typically for a two year period. This gives you plenty of time to build rapport with the client and win them over.
- Finding Practices for Sale: Options include general Google searches for ‘accounting fees’, ‘accounting practice’ for sale, business broker web-sites, registering with www.Practice4sale.com.au, www.seekcommercial.com.au, professional body web-sites such as CPA, NTAA etc.
You can also direct mail local practices (within a 5-10 km range) to see if they are interested in selling any fees.