Know Your Risk
Accounting Practice Sales believes that sellers have virtually no control over the success or failure of the practice after the day of closing. The seller's job is to stop servicing the clients, to recommend that they use the buyer and to get out of the way. The buyer's actions with regard to selling himself or herself and providing quality service will determine client retention and practice success. For this reason, we often do not sell practices in such a way as to require the seller to be at risk for that which he or she cannot control. In many cases, we sell practices at fixed prices rather than prices contingent on buyer experience after the day of closing.
However, when we say that the seller should not carry the risk, we do not mean to imply that the transaction is risk free. There are risks involved with the purchase of an accounting practice. This article is written to alert you, the buyer, to the significant risks in the hope that you will assess these risks properly when buying a practice and take the correct steps before and after closing to increase your chance of success.
To help you keep your focus and to insure that you pay heed to the major risks, I would like to suggest three significant risks to a successful practice transition. These are 1) employees, 2) large clients and 3) apathy. Concern yourself with these three areas and you will be 90% of the way to success with your new practice.
Employees: We have found that buyers and sellers alike worry too much about clients in the transition process and too little about employees. Clients will transition to a buyer. We worry that they do not like change, or we overly concern ourselves with what will happen to the long-term relationship , or whether they will go somewhere else. All of that worry is overblown as we have covered elsewhere in this web site. Clients do not want change, but they have no choice. If the seller refuses to do their work any longer, they will change accountants. The only question is, To whom? If you have their file and the seller's recommendation and if you know your business and are the first one to talk with them about their needs, virtually all of the clients will give you a chance. Client transition is not a big problem.
That is, it is not a problem unless an employee sets up shop down the street and solicits their business. Case: Two weeks before closing the sale of an accounting practice, a long-time employee of the practice, a bookkeeper who had just taken her CPA exam quits. Virtually all of the bookkeeping clients she worked on and a good number of tax returns went with her. Case: A buyer buys a practice grossing $210,000. The only employees were the seller and a seven year CPA. The long-term employee had left earlier in the year (before the buyer offered to buy the practice) to go to work with her husband in his CPA firm. The buyer does not see this as a major problem because the seller says, since the lady is having a baby, she and her husband will be too busy to take on more work. A year after closing, the practice gross is down 50%. Case: A seller puts his practice on the market because his long-term CPA, whom he had been grooming to buy the practice, leaves to go work for someone else. The ex-employee takes some clients, but by closing, it has been almost a year and he hasn't lost any more clients in the last couple of months. Buyer's gross is down 40% in first year after that employee sends letters out to all of the practice's clients following the sale.
At Accounting Practice Sales we do not want to see buyers of accounting practices fail. We have seen some serious transition failures, but in most cases this is due to actions of employees or ex-employees of the practice. This risk must be taken seriously as you investigate the practice.
We recommend that if you are investigating a practice that you become thoroughly familiar with the current and recent-past employees of the practice. Learn their ages, their credentials, and the degree of their client contact. Carefully assess the possibility of their leaving the practice and taking clients with them. Often practice sellers wish to keep the sale confidential from employees until after the close of the sale. We sold a practice last year where there was another employee that had been there for fifteen years and had an interest in buying the practice. Just imagine how that initial meeting must have gone with this employee when he was introduced to the new owner.
We believe that it is burying your head in the sand to ignore situations like these until after closing. When there is any uncertainty, we believe that you have to face the issue before closing and face it with the employees. We recommend getting a valid non-compete agreement or a client purchase agreement from any employees that can take business from the practice. Your attorney must advise you on how to fashion a valid agreement. You might find that some compensation must be paid to the employee in exchange for this agreement in order for it to be valid. This means that you or the seller are going to have to take part of the purchase price and write a check to the employee for his noncompetition or client purchase agreement.
This is money well spent. We believe that it will not be difficult to get this agreement before the sale. Most employees are not currently conspiring to take all of your business. It just becomes an overwhelming temptation with all of the other upheaval caused by the practice sale. We believe that most employees will be glad to sign a non-competition or client purchase agreement in return for a modest payment.
Large clients: As we have often said: virtually all of the clients will give new owners a chance to be their new accountant. However, a real risk occurs when the practice has one client representing a unusually large share of the business. Let's say a practice has 300 clients and you keep 299 of them. Normally that is a good transition. What if the one client you lost represents 35% of the gross of the practice? That is why our second area of due diligence is to look carefully at the 10 largest revenue producing clients from the prior year. Are any of these clients so large as to represent a significant blow if lost? Are these clients still with the practice or have they already left? Are there any indications that they are selling or going away? Most clients represents such a small part of the practice, you can lose one to two percent in transition and not feel it. Pay attention to the big ones.
Apathy: Here we mean your apathy as a buyer. We believe that the most successful practices are marketing oriented. By marketing we are not here referring to marketing for new clients but rather marketing to current clients. Successful accountants constantly sell themselves to their current clients. Any interaction with a client is judged in terms of the impression that it leaves on the clients. Are we increasing the client's confidence in us? Are we building the client's confidence that we are giving him good service and that we are attentive to his needs. Do we make he fell that we are competent and that he is being cared for? To be successful in accounting it is more important that the client believe his taxes are being done correctly than it is to actually do the return correctly. Too often we think that the job is done when we get it right. The job is done when the clients thinks it is right.
In the area of client transition, it is especially important that we take an active, marketing approach. When you buy a practice, you need to budget a lot of time to sell yourselves to the clients. This is not the seller's time; it is your time. You need to go see the large clients. You need to take them to lunch. You need to impress new clients with your level of service and concern and understanding of their needs. If you purchase a list of tax returns, do not be content with sending a letter and then burying your head in the sand. Do not think that your job is to wait for the clients to come in and then prepare their taxes accurately and correctly. Instead bury yourself in the task of selling yourself to your clients. Call them up before the end of the year. Talk to them about their tax situation; see if there is anything that can be done to help them before year end. Tell them about the new tax law. Talk to them about how they like to bring in their return information. Suggest this year that they allow extra time to visit with you so that you can get to know them.
The danger here is further enhanced by a misunderstanding of the seller's role in transition. Many buyers and sellers think that the seller needs to be around for months or even years following the sale to help in transition. This is a mistake and shows a lack of understanding of the process of transition. When the seller is around after the closing, the danger is that this will lead to the buyer being less intense about his need to sell himself to the clients. We recently sold a practice that closed February 1st. The buyers already owned a nice sized practice. One can imagine how much time they had during February to April to market themselves to the new clients. They had none. To get the work done, they worked out an agreement with seller to work through tax season and perform most of the service for these clients. The buyers buried themselves in their former clients needs and did little to sell themselves to their new clients. These clients cannot be ignored for ever. They had substantial loses.
When you purchase a practice, it is very important that you realized the need to spend a considerable amount of time getting to know the new clients and marketing yourself to these clients. Do this and you will successfully sell yourself to ninety-nine percent of them. Fail to do it and you are putting your investment at risk.
Before closing on the sale make sure that you have addressed the issue of employee risk. During due diligence, make sure that you look closely at the top ten revenue producing clients from the last year. After closing, commit large amounts of time and effort to selling yourself to your new clients. There might be a lot more things that you can concern yourself with as you purchase an accounting practice, but we believe that concerning yourself with these three areas will solve 90% of your potential problems.
Photos by Periklis Ripis