Buying a practice / Valuation and Deal Structure??

[bbrownatl]

As a practioner with a side tax practice for 10 years now, I’ve been presented with the opportunity to buy a tax practice of a retiring sole practioner. The firm has gross billings of approx.. $220K and a net cash profit of approx. $165K. If you have done a deal in the past, I would welcome any suggestions. I’ve done quite a bit of research on multiples x gross billings and multiples x gross profit. What did you use and what would you use for such a transaction? Did you use a broker to assist with negotiating the purchase? I’ve reviewed numerous ways for structuring the deal. However, for such a practice, I’m still a bit uncertain of the best method. Also, the current owner is open and would like to work part time in the future if mutually beneficial. Perhaps, just during the peak tax period or to assist with certain clients. Any insight is much appreciated.

[Roland Slugg]

Most brokers try to structure deals whereby there is a sizable DP, then monthly, quarterly or annual P&I payments for between five and ten years. Since the broker usually represents the seller, this works out well for the seller and the broker ... but not necessarily the buyer.

IMO the best way to BUY a practice is one where the price will be based on production, such as 20% of the gross for each of the first five years ... no interest. The inflation/higher fees factor will make up for the lack of interest. Under such an arrangement I would still be willing to make a DP of, say, 20% of the estimated final cost, but to be applied against future payments.

When buying a practice it is vital that you secure an iron-clad non-compete agreement from the seller. I favor NC agreements that specify the exact boundaries of the restricted area, rather than a radius expressed in miles.

Buying from a practitioner that wants to retire but continue to work part-time for the buyer is actually a good thing. His presence can go far to provide a smooth transition with clients who might otherwise be inclined to jump ship. He can also tutor the buyer regarding the various requirements and idiosyncrasies of the clients.

If the seller already has a broker representing him, that's fine, but I wouldn't use one of my own if I were a buyer. Just remember that the broker represents the seller, not you, and everything he recommends will be designed to protect the seller's (or his own) best interests.

[Roberts]

IMO the best way to BUY a practice is one where the price will be based on production, such as 20% of the gross for each of the first five years ... no interest.

Client of mine just did this with a sales firm (which my dad owned 20 years ago). Sold it for 5 year end payments based upon sales of existing contracts. 18 months in he's realized it was a HORRIBLE decision to go 5 years out and not 3. The buyer cut staffing, eliminated sales positions to save money and isn't overly interested that he's about to lose 2 major contracts. It's pretty obvious that in the final 2 years, his payout will be far less than expected as the buyer is eliminating lesser profitable contracts while using the corporate name and history to attain new clients that aren't covered by the sale. If the deal had been 3 years, this wouldn't have been a realistic business model but at 5 years, it was.

[bbrownatl]

Roland & Roberts, much thanks for the insight. I really appreciate it.

Have a great rest of the week.

Regards,
Brian

[mastertaxguy]

buying a practice or buying more audits?

BE CAREFUL:

Do your best to determine if you are buying someone else's audits or problems. Look especially at prior Schedule C returns or returns with high 2106 expenses.

[JoshinNC]

Buying a practice doesn't make you the preparer of record on those prior returns

BE CAREFUL:

Do your best to determine if you are buying someone else's audits or problems. Look especially at prior Schedule C returns or returns with high 2106 expenses.

You would in no way be held liable for any deficiencies related to those returns.

[Roberts]

You would in no way be held liable for any deficiencies related to those returns.

Unless there is something dramatically valuable about the name of the business, typically you don't structure it that you buy the BUSINESS, you buy the client list "usually" to avoid buying lawsuits. New owners would still be held liable for fraudulent practices of employees of a firm or false representations made.

What if they sold audit protection where they would cover the audit for free? Did you just buy that potential liability?

[Zee]

You've already received good advice. $220,000 with $165,000 net profit seems a little high? Perhaps the bulk of the client's are corporations or complex 1040 returns? Or, am I "out of touch" with earnings of sole practioners?