Buying One of Our Franchises and an Accounting & Taxation Practice or Client Parcel of Fees
Buying a client parcel (fees) or a whole practice in addition to the franchise is an option and a method to grow an accounting and tax business quickly.
As at 2018 there have been over 22 accounting and tax practice, or client fee parcel acquisitions within the Success Tax Professionals network.
What this means is that both the Success Tax Professionals franchise and also clients have been purchased by the franchisee. To be able to do this a franchisee must have finance available to fund this, for example established capacity to borrow against their home, or for smaller client parcels perhaps have cash available for the purchase.
Below are some typical questions:
- Why do some franchisees choose to buy client parcels as well as the franchise?
They do this to dramatically speed up growth and have an established client base as opposed to building up over a longer period of time through advertising and referrals. It is a way of fast-tracking business growth.
- A what point are parcels or practices bought?
This depends on the availability in the market. Accounting and Tax practices come up for sale based on practice owners retiring or perhaps choosing to change occupation. Sometimes they may choose to sell off only part of their client base (a parcel). Parcels and practices for sale are either listed for private sale or with business brokers such as GMO and Zircom.
Internally within Success Tax Professionals parcels or practices also become available from time to time due to franchisees choosing to leave the industry or retire. We publish these on our Careers page. http://www.stptax.com/careers/
Parcels or practices that become available in our group are nearly always advertised to existing members first before being offered with the franchise externally. This provides our franchisees with a unique opportunity to have first call. If an external buyer wants the fees they must also purchase and work under our franchise agreement and become a franchisee.
Fees are however, more commonly purchased after joining the franchise and once a franchisee has settled in. So this means the franchisee buys a franchise and initially commences business through normal advertising activities together with our franchisor campaigns. Then it is a matter of waiting for the right parcel of fees to become available based on location, the franchisee’s ability, parcel size and composition, and what the franchisee can finance. For example, there is no point looking at a $500,000 practice that is too large for the franchisee, or beyond their skill level or completely unaffordable.
- If joining and waiting for a client parcel to become available you buy the franchise at the normal purchase fee ($15,000 or $10,000 each if there will be more than one operator).
- If joining and also buying (or bringing into the group) a fee parcel of at least $100K at the same time the franchise is purchased, the franchise purchase fee falls under special circumstances and is $7,500.
- If joining and buying an internal parcel of fees that are deemed to be geographically remote the franchise purchase fee is $0 and is also considered special circumstances.
- How much does it cost to buy an accounting and tax practice?
Practices or parcels of fees vary in size. In broad terms a practice can be valued at dollar for dollar for all clients or with Individual tax returns – clients valued at 70-85 cents in the dollar and business clients at 100 cents in the dollar. Some practices are even valued at 120% of the practice value simply because they are good quality clients and the leverage created from having a quality client base allows the purchaser to move ahead rapidly and with growth they could not otherwise achieve at that pace.
- As a guide what size parcels are manageable?
Manageable parcels are often $150,000 or less for a lone franchisee or up to $400,000 for two franchisees purchasing together. If the franchisee/s are tax agents they are able to employ staff to assist with the full range of duties. If the franchisee/s are not tax agents then they are only able to employ administrative staff.
It is important not to add staff to the practice before they are genuinely needed as this affects profitability. We provide benchmarking data to help franchisees stay on track.
- What are purchase terms for parcels and practices in the accounting and tax industry?
Generally 60% – 90% of the value of the practice up front and the balance based on client retention at the end of the first year following settlement. This is what makes practice and client fee acquisitions so beneficial and low risk. Part is paid on settlement and the balance 12 months (or later), based on the actual physical retention and transfer rate of the clients.
The vendor will usually help to move the clients across successfully (allowing for normal attrition), as the second part of their payment is affected by the transfer rate. It is beneficial for both parties to have a high transfer rate.
- Can parcels or practices be relocated?
This depends on the terms of sale. In some cases the accountant selling their practice will require the purchaser to move into the office and service the clients from that location. They can however be moved at a later date to a new office location, for example after one or two years or later.
- Do franchisees sometimes buy practices or client parcels together?
Yes they do. This is one of the benefits of the franchise structure. This means that like-minded franchisees who are financial can purchase client fees together, and there are various ways of setting this up operationally for fairness and equity.
The compelling factor here is being able to finance a parcel of fees or practice that would otherwise be unaffordable by a franchisee on their own. It is a great head start.
The arrangement could be long term or may only last until the seller has received payment and no further payments are due. Then one of the franchisees might choose to relocate their share of the clients to a new location and work independently.
- Does the Success Tax Professionals Franchisor provide guidance in fee purchases?
Yes we do. We talk to brokers and vendors and assist in the process. We also provide franchisees with advice and information which is paramount to successful and careful negotiation. We have a vested interest in these transactions being successful. We also help to introduce franchisees to one another who are interested in co-purchasing.
We have a management system that caters for practice acquisitions. We do not however finance the arrangements.
- Does due diligence happen with practice purchases?
Yes it does and is an important part of the purchase process and should appear in the purchase contracts. (Some practices are 100% up front and walk in/take-over with no due diligence and we would not recommend these as a safe option).
- What about fees payable to the Franchisor where a whole practice or client fee parcel is purchased?
There is no fee payble for our assistance in the purchase.
Depending on the size of the parcel or practice the fees payable to the franchisor for client work processed by that practice will be:
- For non-tax agents, either 25% (parcel is under $100K) or 12.5% (parcel is $100K or more). If the fee is 12.5% the franchisee must complete any studies required for tax agent status within 12 months or the fee reverts to 25%.
- For tax agents the fees will be 12.5%, 10%, 8%, 7% or 6% depending on parcel size.
Details and rate explanations are in our Information Package.
You can also complete our Tax Accounting Franchise Questionnaire to find out if joining our franchise and acquiring fees is the right choice for your circumstances.