Discussion:Purchasing a practice
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Discussion Forum Index --> Tax Questions --> Purchasing a practice
| 8 August 2007 | |
| CPA practice is for sale....I have helped this person with taxes and accounting services and would like to purchase it. Could someone please give me some tips on negotiation? I meet the broker in the AM and I know the asking price as well as the terms, but would like to negotiate it since I don't need "turnkey".....
Late in the day so if no response, I understand...please keep me in your thoughts and prayers!!! Sandy | |
| 8 August 2007 | |
| lots of people buy practices based on retention of the client: i.e. $1.00 on the $1.00 of collections, 20% down, 20% of whatever is collected year 1, 20% of whatever is collected year 2, etc. That way you are not paying for clients who leave. Of course, referrals are yours because of your work, not his. The broker usually makes 10%, so you've got to give them at least that amount down. | |
| 8 August 2007 | |
| This situation is different because I bought my practice from my old employer and I had worked for him for about 15 years. But my terms were basically 100% of the prior year fees on the clients that I retained. As Kevin said, new clients were mine, and I only paid on the clients who stayed. I paid nothing down (my situation is different, it was just between me and my old boss) and I paid 25% of the gross on the clients I retained, and I did that for 4 years. If the fee went up I paid on the old fee not the increased fee. | |
| 8 August 2007 | |
| The deal he is stating is an earned buyout. 50% down and 12 mo revenue on the retained clients. However, I don't need the lease or the office equipment since I have my own. My current clients I have to give him a F/S in the am for what I billed the last 12 mos as well.
Thanks again! | |
| 8 August 2007 | |
| Sandy, are you saying the price is $1.00 or $1.50?
Also, you are moving the clients to your office? How many do you think you will retain? If it is more than 20 minutes drive, you won't retain many at all. If it is under a 5 minute drive, you will probably retain many. If it is across the street, you should retain most. | |
| 9 August 2007 | |
| Thank you Kevin :)
I met with the broker this morning. The deal is 50% down, the additional is earn out so it is dollar for dollar on the 1st year revenues. I would like to move the office since her office is about 1000% more than mine costs (I have an inside...hehe). I need to make an offer by Monday morning and want to negotiate this appropriately. Do you have any reference materials that I can peruse in order to make a qualified decision? I want to negotiate the asking price, the terms, the mileage for the non compete. The seller wants to continue working so I would have to pay a salary as well for at least a year. Then again, I want to negotiate this. My office is on the same street about 2.5 miles south, so it takes about 3 minutes to get to my office.... I googled for some negotiation sites for the purchase but I don't find what I am looking for. Thank you again!! | |
| 9 August 2007 | |
| The guy who sold my practice in Georgia through wrote a book about buying & selling practices - his website is www.cpasales.com. I did not buy the book. But I have talked with many who have bought & sold. Some used a broker, some not. | |
| 10 August 2007 | |
| Very very bad idea to have the seller stay and work at the firm the first year. You WANT the clients to "No Show" the first year if they are "in love" with their preparer and do not want a change. Can you stay at the sellers location for 12 months? Look at some of the tax files to see how organized she is. Per kevin, try 20% down with balance with note to be paid off over 4 years with 10% int, no prepymt penalty.......pay off early!!. Make sure note gets restated (at edn of first year) with new interest and principal portion of each pymt to account for reduced purchase price due to lost clients.( this alone will save you thousands of dollars!!). | |
| 10 August 2007 | |
| WOW; thank you DZ!!! She insists on staying the first year...she doesn't want to leave I don't think, but she doesn't want to continue being the responsible party. She is very organized. I have done some per diem for her and her files are impeccable!! She has had the firm for 23 years, wants to keep her name in the window as well as mine and work for the 1st year for income and for transition as well as to pick up additional clients since she knows everyone!!
Any reasons I can give her to support her not staying? | |
| 10 August 2007 | |
| (you don't want to pay her?)
Ideally, there should be a transition period where both buyer and seller meet the clients together, and the seller hands them off to the buyer. If I were the buyer, I would want the retainage to be based on what stayed AFTER the seller was gone (as DZ wisely pointed out). When I sold my practice in Georgia, I stayed 3 days a week during 1 tax season, then left. Why does she need to be there longer?
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| 10 August 2007 | |
| Yeah, I DON'T WANT TO PAY HER FOR A YEAR!!! hehe
Yes, I agree with the transition period so I can meet the clients and if they stay, they stay. Price will be negotiated with the retainage. But yeah, AFTER she is gone makes sense.... Broker says to guarantee her 20 to 30 hours a week for the 1st year with open ended if she wants to stay longer. I don't think I need another CPA to stay that long. I could use a para or an admin person, but she wants to stay to have a salary coming in and as well wants to work. At the present, she is only working part time as it is but due to emotional and health issues she doesn't want to own it any longer. See? I am certainly NOT a gifted negotiator...hehe | |
| 10 August 2007 | |
| I wouldn't want to even guarantee her ANY hours outside of tax season. You will be in charge, not her.
So you draw up the list of what YOU want (your offer). She has to either accept, negotiate, or ignore you and try to find another buyer who will offer more/closer to her wish list. | |
| 10 August 2007 | |
| i.e: 20% down; 30 hours a week during tax season (at X/hour or y% of work done and collected); note for the diff at 9% for 5 (or more) years; final price to be determined 1 year from when she leaves based on prior 12 month collections from her clients - adjustment made to what was P & I for earlier payments based on final numbers; etc.
Maybe I should hold a workshop? | |
| 10 August 2007 | |
| Please DO Kevin.....I am an accountant; not a sales person.....
I always worked for others; my practice is new and I wear my heart on my sleeve too often. This information has been sooo valuable. I will draw up 2 different scenarios tomorrow and see if on Monday it flies!! Thank you so much!! SMOOOOCHHHHH!!!! hehehe | |
| 10 August 2007 | |
| Sandy
Have you crunched the numbers? I believe you know what the gross income this business has received in the past few years. Don't forget to look long-term. It may be tight dollar-wise in the first years - especially if you keep the seller on board - but if you can retain that client base by keeping the seller on -- in the long-term you will have a very profitable practice. Project out - don't just look at the first year. You know I know the situation....but... I hadn't thought about the location change - despite you being only 2 miles away - that's a big change in our small town.....consider where most of those clients are coming from.....if they are beachside - driving to the south end of the county may be a big deterent to you maintaining them as a client....it's hard enough to just get them over the bridge!!!! Do you have any logistic info on the clients? In crunching your numbers - I think I'd take into consideration the additional rent - the new office is in a good location. | |
| 10 August 2007 | |
| WOW...thank you my friend :)
I am frightened as you may know. Yes, I know the gross for the past 2 years. This of course is with very few hours involved. Yes, to get the "dollars" from the island is tough, even to Publix!! You as well know my situation VB; if I can keep the budget within means, then I can work with anyone!!! hehehehe No logistics on clients yet...being that I am working per diem I wanted to let them know that I will NOT steal clients so I have only looked at the clients I am working on. Yes, the office is quite nice and in a good location...I have some reasons I need to be here at during day hours but perhaps I could keep both offices for the time being. Meet clients at one, work at the other to keep a commitment I made to a friend. I will obtain due diligence reports and possibly a quickbooks file to work from in order to "crunch" my numbers. Prayers please my way? hehehehe | |
| 10 August 2007 | |
| You wrote "due to emotional and health issues she doesn't want to own it any longer", If she still wants income and wants to stay........she is NOT ready to sell. I would walk away from this deal. | |
Death&Taxes (talk|edits) said: | 11 August 2007 |
| DZ makes a great point: it sounds like she wants the money but without the responsibility.
You are going to have to consider putting in writing what would happen if her product for prior years brings problems. | |
Bottom Line (talk|edits) said: | 11 August 2007 |
| DZ read my mind. I'd be very cautious due to your comment regarding emotional and health issues. There may be serpents out there waiting to bite you. Sounds like she has some money issues at least, ie wants to sell her practice but keep working. | |
| 11 August 2007 | |
| I must thank each and every one of you for your input. Still it is not clear how this will work out, but I think I have at least a starting point to work from. I know this person briefly and know in my heart that this person is not trying to scam me at all. I DO think however that they are not quite ready to give up the ship.
I have some ideas (thanks to many of you) about an offer on Monday. It may or may not fly but I think my level of anxiety will be lower once the offer is on the table. Hope you don't mind if I post the ending to this saga!!! hehe | |
| 12 August 2007 | |
| OH, one thing that I would recommend is that the seller is responsible for any cost (including penalties or the value of any free representation or amending) that you have to do within 3 years of buying the practice - he is responsible for his mistakes, and it will come out of the money you are paying him. | |
| 12 August 2007 | |
| Another great point Kevin!! Now...anyone have a sample form that I could use as a template for drawing up an offer? Sure I could use just a simple word format but I get very wordy sometimes (like you didn't notice..hehe). I believe in K.I.S.S. but I am not very good at that...hehe
Also, is it appropriate to send my offer via email? I believe they want an offer on the table in the morning and to get it to them both timely so we can set a meeting I thought it might be appropriate. If not, please also let me know.... Thank you again for allllllllll your input :) | |
| 12 August 2007 | |
| I wouldn't send it email, although it isn't a binding agreement yet anyway. The broker will eventually want something in writing, but you are not at that point yet. What you want to do is just have a legal pad list of the important points you want, then if agreed to, you have an attorney draw up the purchase and sale agreeement. The legal pad list will not be all-inclusive (the attorney will have other things to add), it will just state the major points like:
Price, and how it will be computed (1 x prior 12 month's collections + FMV of assets, or 1.2 without additional for assets or whatever). Seller Financing or dependent on geting SBA loan, home equity loan, etc Non-compete duration and distance what purchase includes (clients, equipment, non-compete, etc) Mention of keeping seller on (and compensation - maybe 1/3 of whatever he does during period of employment or $x a week/hour and expected hours) Due Diligence time frame for reviewing books records and tax returns of seller as well as client files (at location of seller). Understanding of when closing to take place and what expenses will be paid by seller until that time (I got into a big argument with my buyer because I was ready to close at Thanksgiving and she wasn't ready, therefore by the time we closed the last of January, I had already paid for software renewal, hiring and training of seasonal employees, etc., and she walked in just at the best cash-flow time). Understanding of Work In Progress - who will collect it and how do you value a partly finished project Who will own seller's receivables (him - you don't want to pay real $ for the hope of collecting a $).
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| 12 August 2007 | |
| The due diligence is where you walk away if the practice isn't as it was represented, as well as compute the 12 months gross collections. | |
| 12 August 2007 | |
| Kevin? What DON'T you know? You are all encompassing....
I will make a word document with bullets as a legal pad.....thank you again!! | |
| 12 August 2007 | |
| Once the sale goes through, you want to use the seller's time wisely: In my opinion, the best use of his time is to teach you EVERYTHING you need to know about the most important clients. The worst use of his time is to do the work. You are buying the clients, and your profit will depend on their loyalty to you, therefore there has got to be a very good hand off.
Because it was already tax season when we closed, my buyer had me doing tax returns, so she never got a good hand off. I would estimate that, 4 1/2 years later, she would be lucky to still retain 50% of what she bought. If she had used my time to meet with me and ask "what do I need to know about the clients coming in tomorrow?", then meet WITH me and the client, then go over the tax return with the client, that loyalty would have transferred to her, and she wouldn't have lost so many clients. As a seller, I had a STOP/LOSS limit on how much the price could be reduced for non-retention. As a buyer, I wouldn't want a stop-loss, I would want to figure out who I really wanted, get rid of those I didn't within the retention period, and adjust the price accordingly. I once bought a practice for 1.20 x gross receipts, with 24% down, and 24% of collections from that group of clients/year for the next 4 years. The sell was that, if I went up on prices, the seller would participate in the price increase. For me it was great, because it honestly took over a year to weed out the unprofitable clients (mostly the bookkeeping) and re-size the staff. | |
| 12 August 2007 | |
| Sometimes you amaze me Kevin...you simply DO!! I have drafted an offer and would love to send it to you (or another kind soul). I don't have any personal information attached, it is only a draft of my offer. Another pair of eyes so to speak helps a bunch since I don't know much about negotiating.
All these items have been so helpful!! If it does not fly, then it doesn't and I will still work my practice and build it based on my work and my ethics...but it sure would be nice to cut down on several years of referrals!! Thank you again...can I smooccchhh you one more time? hehehe Sandy | |
| 13 August 2007 | |
| We're all rootin' for you Sandy.
Hope everything works out. | |
| 13 August 2007 | |
| AWWW Thank you again. I have bitten one bite off the elephant sitting on my desk (sent the offer in Sandy speak)...hehe
No word yet. I spoke to the broker and today has been a busy day without even this item cropping up. We shall see if he responds or not. I am helping the CPA in her office tomorrow so by then I am certain the offer will have crossed her desk. As my bf said, this is nothing more than buying anything else. A home, a car, a boat, etc. Thanks to my kind friends here I at least did not hear immediately ***ARE YOU NUTS????*** My anxiety is still high but how do you eat an elephant? ONE BITE AT A TIME.... Thank you again my friends/comrades!! Sandy | |
| 13 August 2007 | |
| Sandy, after the dust settles on your impending purchase (I have confidence you will be able to work it out if the seller is really interested in selling), let's collaborate on writing an article on buying/selling a practice. We can get it published in the EA Journal or the NATP Taxpro quarterly journal or some other scholarly but practical venue. | |
| 13 August 2007 | |
| Thank you Kevin...I would be honored to help with collaborating on something with you. I think this is information that in a concise format would help others when they are contemplating a purchase...
3 hours and counting......hehehe | |
| 16 August 2007 | |
| Negotiations done....:(. I only regret that I was poised for a meeting and the meeting was canceled without ever notifying me...so I was left with my face hanging out....is not a real good feeling....
Oh well, it never hurts to try I guess. I know that sometimes you have to live and learn, but I am a little disappointed... Now back to what I do best....work, work, work... Thank you my friends for your support this last week. I learned a bunch from you on how to give an offer, but with monkey wrenches thrown into the mix, you never know.... Today I will be sad; tomorrow I will be back to myself.... | |
| 16 August 2007 | |
| Negotiations done SUCCESSFUL or negotiations done UNSUCESSFUL at bid to purchase?
No counter-offer? Or did the seller just realize she couldn't afford to sell yet (she needed to continue to work and without a guarantee she didn't want to sell?) | |
| 16 August 2007 | |
| Unsuccessful Kevin...the broker did not show up and the seller did not tell me...I had to finally ask about our meeting....it was postponed indefinitely.
Seller wants a "partner" to purchase a percentage of the stock (you have to incorporate first I would assume :))....but.... I believe that if you have a meeting scheduled and you get no word, nothing...then perhaps it was not meant to be. I don't think I will go the partnership routine...but like I said, my face was hanging out waiting for a meeting that had been decided was not going to take place anyway....live and learn and then get LUVS!!! hehehe | |
| 16 August 2007 | |
| everyone who wrote "she is not ready to sell" above was correct. | |
| 16 August 2007 | |
| Yeppers; I read that today when I got back from the "phantom" meeting.....hehehehehe.
That is why I had to write it here...for future ppl, make sure the seller is serious...you can have a serious buyer, but if you are not ready for whatever reason, please for the benefit of all, let them know that this is testing the waters, that you have other options you are considering (partnership, silent partner, etc.) and that you make the buyer aware that they are holding a party all by themselves so to speak :) On a lighter note, has anyone held a party and noone came? hehehehe | |
| 16 August 2007 | |
| Chapter for your book............How to tell if seller is ready to SELL. | |
| August 17, 2007 | |
| Sorry it didn't work out Sandy, but I, too, am a firm believer in "if it was meant to be . . ." Keep your eyes and ears open. There are other opportunities out there. | |
Victor1530 (talk|edits) said: | 17 August 2007 |
| Kevin, Just found a practice to make an offer on this past monday ....1st time to purchase. This thread is very helpful. Point of clarification .....when the seller is in transition and helping out is he/she paid the hourly rate or is this part of the agreement in the purchase price? I am sure it is done several different ways | |
| 17 August 2007 | |
| You can make your offer either way. Some help (a week to a month) should be included with the purchase price, more than that should be compensated. You could pay the former owner hourly/salary/percentage of collection from his work, whatever you agree to. Good luck Victor!!
The "help" included with the price of the business is not production work, it is "transition the client" work - meeting with the clients and new owner so that there is a good hand-off. Production work should be compensated. | |
| 17 August 2007 | |
| Kevin is correct. All of my deals included 100 to 300 hours of "transition the client" work included in the sales agreement for free. Any additional work I would pay for but, as mentioned before, that has never happened. After the seller sells, I do not want him around dealing with my "new" clients other then introductions and general work flow questions. I also had a deal where a key employee was given a bonus (paid by seller) at the end of 12 months as an incentive to stay. That deal had 100% bookkeeping client retention. It worked great. You want to find out if there are "key " employees. That is very important. | |
Actionbsns (talk|edits) said: | 17 August 2007 |
| One thing I would monitor if I sold my practice again would be the time spent by the new owner on my clients, especially if there is some connection to them and the purchase price (i.e. it can be adjusted at a later date because of clients lack of interest). When I sold my business in California, the buyer was able to adjust the price downward if sales didn't retain a certain level. I thought the numbers were realistic and that all he needed to do was the work that was intended to be done. Turns out for the first two months he didn't do any work at all for my clients, translate that to mean no income, and at the end of the year he was able to adjust the price downward by $10,000. This is pretty much in 25 words or less, but it's something I would watch after the sale if I did it again. I think I would want a monthly list of billed work or something like that. | |
| 17 August 2007 | |
| You certainly live and learn by an experience as buyer/seller. Yes, indeed the seller needs to be aware of the billings and why (if they do) go down...is it because of the clients choice or is it because the buyer did not work with the clients and make a smooth transition?
One thing I will add on being on the other end....make sure the seller is ready to let go and sell, make sure that the buyer will accomodate the clients to the extent possible and make sure that everyone understands the terms of the sale. I understand a reluctancy if the price can be decreased but as well the seller needs to understand that the buyer needs to be able to develop a rapport with the clients in order to service them. I know that my personality can retain many, but I can't guarantee that they will continue to be clients...they may have a family member who uses Joe Shmoe and they love him.... Work with the seller and be honest and forthright and hopefully you have a happy ending!!! hehehe | |
