Ten Questions You Must Ask Before You Sign
1. Did the buyer try to get outside financing? If not, why not? The assumption is often made that the seller must always do the entire financing. That simply is not true. There is more than one way to finance a sale. It is usually to your benefit to have potential buyers check out bank financing as a first option. And it may be that they need to go to more than one reliable financing source. Before you finance you need to know why a buyer could not get outside financing.
2. Is the down payment I am getting adequate? It is easy to answer this question simply from a cash flow need. However, you should also consider the question: Does the buyer have “skin in the game” or am I the only one taking a financial risk? Down payments should be large enough to help ensure the buyer will not bail out early.
3. If half the clients leave next year who will absorb that cost? Buyers often like to buy a practice based on how much they collect over the first few years. If you are considering that type of deal then you need to know you are taking most of the risk of client loss even if clients leave because they don't like the buyer or if the buyer is incompetent. Certainly there is risk in the sale and purchase of an accounting or tax practice. The question is: Who is going to take that risk and is there a way to mitigate and/or share the risk? Practices are actually sold in different ways and you should know the alternatives.
4. Am I committed to helping make this buyer succeed? One major reason for unsuccessful transitions is a seller who goes back to doing work for the clients. You are selling your business and the ability to do service for the clients. Despite the wording of the non-compete clause or the performance of the buyer it is unethical to continue to work for any of the clients you have passed on to the buyer. In fact, if you cannot feel confident enough in a buyer to encourage clients to try and continue to use that buyer then you might be better off not selling to that particular person or company.
5. Did I investigate the buyer? Is their license current? What is their credit history? What is their experience in running and growing a practice? Too often we think the buyer is the only one that needs to check out the other party. The seller, too, is advised to do his or her own investigations. That is particularly true if you are holding a note or guaranteeing any of the future income.
6. Am I getting Fair Market Value? If you answer "No" or "I don't know" then you might want to reconsider. Would you sell your home for below fair market? Fair market value for these types of transactions is sometimes hard to determine but you are doing yourself no favor to rely solely on what the buyer says or what you heard from your buddy. If you only talked with one or two potential buyers then it is possible that you are not getting the best price and terms that are out there. You are likely selling yourself short.
7. Do we have a plan in place for a smooth transition? To make the whole deal successful the buyer and seller need to work together to notify clients and make sure they are taken care of. It should be clear even now what your duties will be, how much you will be working and what, if any, you will be paid. The buyer may be the lead on this but your assistance and suggestions can be invaluable. Be flexible and understanding of how the change affects the buyer, the clients and employees.
8. Did my attorney review the agreement? It is easy to skip this part by relying just on your own legal skills or that of the buyer. But you may want to have a third set of eyes and someone to represent you.
9. Does my agreement protect me in case things go wrong? Good agreements will deal with not only the hoped-for successful outcome but will also address other unfavorable scenarios. You need to work with your broker and attorney to foresee workable solutions to common problems. Certainly any advisor should have experience in this type of transaction.
10. Do I really want to sell? This may seem like an odd question this late in the process but it may be a vital one. Owners at times think they want to sell but really do not. Do you have something else you want to do with your life? Are you financially able to leave this practice and not go back? When you wake up the day after the sale will you feel you made the right decision?
Accounting Practice Sales has the experience and market savvy to help you make sure you have the right answers to your questions.