Practice Purchase

[Zee]

I'm considering purchasing a small, CPA practice which includes some write-up, and tax work. The seller is moving out of state mid-Dec which creates tight time constraints. They're asking for 70% upfront of the average of last three years gross revenues with the balance paid monthly for 18-months.

Have any of you purchased a practice? What are the normal terms? I'd prefer a straight payout of 50% of revenues monthly for 24 months (but, of course, I'm the buyer). I'm concerned about attrition and would hate to lose money through no fault of my own. The timing also bothers me. It leaves little transition time for client introductions, etc. It's my understanding the norm is for the seller to work 90-days at no cost with the sale and often for a reasonable hourly rate thru the tax season. Obviously, that won't happen here. As such, I'd think some kind of discount would be appropriate.

What do you all (that's southern, huh?) think?

Your input would be greatly appreciated.

[Deborah]

How about this?

I have seen discussions on this topic in other forums and it has been suggested that rather than a price based on past revenues - the price be based on continuing revenues. I suppose the % might be higher - but it would still be more fair to you since this business is service based, of course, and clients may stay or go just based on personality. Hope this helps.

[Uncle Sam]

Practice Purchase

A 70% UPFRONT deposit is quite exhorbitant and unreasonable.
You're paying out practically 1 years' fees without even earning it, let alone paying income taxes on it.
The more reasonable arrangement would be an upfront of no more than 25%, and the 75% be paid based on retention over a 2 or 3 year period.
This seller sounds quite desperate for a last minute deal and places you under an untenable burden.

[JohnH]

Who's in the drivers seat?

Who's under the time pressure here - you or the seller?

If the seller is committed to leave in Dec then it seems he/she is in a poor position to be requiring unusually risky (for you) terms of sale. With no transition period, this deal becomes even more risky for you. What is the seller offering that justifies the premium terms?

Unless you just MUST make this deal, it seems you'd want to counter with a considerably smaller upfront payment and a reasonable percentage of future billings. Maybe the seller has other eager buyers waiting in the wings, but if not then it seems it's time for you to educate the seller about what's possible and what's fantasy.

[Zee]

Who's under the time pressure here - you or the seller?

If the seller is committed to leave in Dec then it seems he/she is in a poor position to be requiring unusually risky (for you) terms of sale. With no transition period, this deal becomes even more risky for you. What is the seller offering that justifies the premium terms?

Unless you just MUST make this deal, it seems you'd want to counter with a considerably smaller upfront payment and a reasonable percentage of future billings. Maybe the seller has other eager buyers waiting in the wings, but if not then it seems it's time for you to educate the seller about what's possible and what's fantasy.

At this point, my conversations have been limited to email exchanges with the selling broker with one sentence responses. The terms were in a practice summary submitted to the broker. I couldn't even reach the broker with a phone call. So, I called the seller and we talked very, very, briefly in a cell conversation. The seller indicated they're planning on leaving the state mid-Dec. I suggested we meet and was to receive a return phone call in an hour or so...that didn't happen.

So, I'm not sure "who's in the driving seat". Perhaps there is another buyer willing to meet the terms of the offer. My primary interest is because of the service mix and premium pricing for services.

Apparently, the terms do seem unreasonable to those here. I'm just trying to confirm that. I really don't know what the norm is....and have found only limited input on the internet. I do know they seem unreasonable to me, but if I were the seller I'd think differently.

The lack of availability for a 3-6 month transition concerns me greatly. I think that's essential to ensure a reasonable retention.

Hopefully, the seller will return my call tomorrow and we can meet and discuss things further. I might add the practice is home-based and over an hour from my home. The mix is about 40% write up, 40% business returns, 20% individual tax. I'd probably have to find a virtual office to meet & service the tax clients.

Please keep the suggestions coming, they're greatly appreciated!

[DTS]

Zee

Not to be nosey, but what does the 70% represent? Let's say it's $70,000. You pay this to the person upfront. Before he would get one dime from me, my question to myself would be what guarantee do I have for this $70,000? Possibly, more than likey, no guarantee. Also, the fact that you can't seem to keep anyone nailed down for more than a few seconds, tells me something is very fishy. Maybe, this sounds like paranoia, but I'd really listen to my radar, if this were me.

I would go with a MUCH lower upfront deposit, whatever your comfort level is if you lost it and the rest paid out in percentages based on the invoices you're able to bill over a couple of years.

I would not just hand $70,000 (?) over to someone without a strong guarantee for myself. Protect yourself, first and foremost!

If this fellow thinks he can get it somewhere else, call his bluff and let him! Something tells me you may be able to swing this deal the way YOU want.

Dennis

[RLymanC]

Purchase

Has he furnished a profit & Loss report,,,balance sheet,,,bank records of deposits, copy of prior year business tax return gross income,,,,,a client list with average price per client,,,,seems like a whole bunch of "Hurry up give me the money" I gota go.

BE CAREFUL.....VERY CAREFUL

[JohnH]

Another warning sign

The broker has a commission at stake (probably 10% - 20% of the final deal) but yet won't get involved in a subsantive manner - chances are he knows something not so pretty about the situation & doesn't want to waste a lot of his time on it, assuming he's a legitimate broker. Worst case is that it could be an internet scam. Your next clue would be if the seller somehow implies that you & he can work together to cut the broker out of the deal in order to "save the commission". My first step might be to check out whether or not the seller really is a CPA. You contacted him by cell phone - does he have a business phone listed? How did you get the cell phone number - did the broker "accidentally" let it slip through in some of the paperwork? Most brokers would throw up a firewall and not allow any contact between buyer & seller until a fairly clean deal is under way.

If the seller is legitmate but is this diifficult to contact and maintain a substantive conversation with, I'm betting he handles his clients in the same manner. Given the distance and the fact it's a home -based business, I wouldn't be surprised to find that over half of the client base will disappear immediately.

The terms you are looking at are simply the opening terms of a negotiation - the seller's dream deal. Once you get some reliable info about what you are buying, you should counter with a deal & terms that you can live with. Like any negotiation, the only way you will get a good deal is if you negotiate with a sincere willingness to walk away if you don't get a final result that is to your liking.

Whenever you're not sure who's in the driver's seat you have two choices - either 1) assume you have the upper hand and negotiate accordingly or 2) throw up your hands and pay whatever the seller demands. I don't recommend #2 unless you have money to burn and a high tolerance for risk.

[Black Bart]

Buying a practice

...I'm considering purchasing a small, CPA practice...The seller is moving out of state mid-Dec which creates tight time constraints...What are the normal terms?...The timing...bothers me. It leaves little transition time...I'd think some kind of discount would be appropriate...What do you all (that's southern, huh?) think

Zee (love that name) -- I don't know anything about the pricing, but your questions and thoughts above are exactly the same as mine. I agree with the others that the December-departing seller is the one under the gun, but I'm guessing that you also are probably pretty anxious to do the deal. Still, the inability to reach the broker and the seller's broken promise to return your call are ominous warning signs -- if you're puzzled about that now, imagine how you'd feel later if they had your money and wouldn't call you back.

I've had a practice buyer/seller broker writing me (and other Arkansas accountants) business solicitation letters occasionally for about four or five years now and, although I don't know this person, the tone of them seems sincere, somewhat personal, and down-to-earth (doesn't strike me as high pressure/hustling). If I ever do decide to sell out, I'm going to contact her. Anyway, what I was thinking is that you might consider giving her a call and asking if maybe she'd advise you (for a fee, I assume) as to what the "normal" terms and conditions of such transactions are. I don't have any idea whether or not they do such things or would consider it, but it couldn't hurt to ask (all she can do is say no). So, here's the information if you think you might want to give it a shot:

Accounting Practice Sales
Kathy Brents, CPA
P.O. Box 70
Cleveland, AR 72030
(501) 669-2505
kathy@AccountingPracticeSales.com
Fax: (501) 669-2291

P.S. The correct usage is y'all (one word/ a contraction of "you" and "all"). Only in Hollywood are the words pronounced separately. However, I (ha-ha) forgive your error, commend your intellectual curiousity, and thank you for your interest.

[BOB W]

[QUOTE=Zee;44142]. I might add the practice is home-based and over an hour from my home.
QUOTE]

Zee> Please visualize how the seller's clients could fit into your practice. You need a list of towns by type of engagement (business or tax return). You may find that some are one hour going futher past the seller client base, meaning 2 hours from your location.

I agree with previous post to watchout> Most brokers like to talk alot with the buyer. THIS MAY BE A SCAM....................

[Zee]

An update...

First, I'd like to extend my Thanks to "y'all" (that's Southern again) for the "sage" advice (who uses that term?).

As background, I'm considering a purchase at an age (64) when most of you would be selling. I had only a handful of tax clients last year after spending about $3,000 on flyers (3x) with large newspaper circulation, and weekly box ads in "freebie news rags". So, I am anxious. This is either a "do it now", or maybe hang-it-up situation. I'm new to where we live, and have no personal network.

Your responses will certainly help me step back and look at things carefully before making a decision.

Yesterday, I e-mailed the broker a signed buyer's agreement and a nice note indicating that I contacted the seller (The seller's name was on the summary sheet provided by broker. I found a web page to the phone number) to try to set-up a meeting and would keep him advised of any progress. This was after 5 phone calls to his office. He didn't answer his phone. I didn't leave a message. I assume he has a caller log. As you recall, it took 5 emails to get his phone number.

This morning, I received a nasty email indicating, "I don't appreciate your contact. I'm the broker and contact protocol is through me."

Obviously, that really ticked me off. I replied that I didn't appreciate his attitude, and that he probably should answer his phone or provide answers to questions in more than one sentence emails. I suggested that now that we've both "cleared the air", perhaps he had a suggestion how to proceed. I also told him I would share his email to me with the seller. He replied, "forget about it. good luck."

So, at this point, the broker has probably killed any future discussions. The seller still hasn't called. It's amazing to me that a broker could have so little customer service orientation. I'd even be more angry if I were the seller. The broker is with Accounting Practice Sales. TX. I suspect it's simply a franchise situation. The practice is in FL. I responded to an unsolicited (or is it spam?) email. I don't remember registering as a potential buyer with this firm.

If we do proceed at this late date, I'll offer monthly payments equal to 1/2 of all revenues for two years not to exceed the three year average.

If that isn't sufficient, the seller can find another sucker.

[Golden Rocket]

100%

Zee, I can't provide authoritative source, but a few years ago, the "going price" for selling a tax practice was 100% of revenues, coupled with an agreement not-to-compete. Payment terms were spread over 2 years. This was described as a "typical" sale.

Sellers and brokers are anxious to find buyers. My guess is that they have found another one already, or they wouldn't have brushed you off the way they did. They certainly didn't conduct themselves very professionally.

[Zee]

Zee, I can't provide authoritative source, but a few years ago, the "going price" for selling a tax practice was 100% of revenues, coupled with an agreement not-to-compete. Payment terms were spread over 2 years. This was described as a "typical" sale.

Sellers and brokers are anxious to find buyers. My guess is that they have found another one already, or they wouldn't have brushed you off the way they did. They certainly didn't conduct themselves very professionally.

I suspect you're right. I can't imagine they'd treat a potential buyer this way, unless they were pretty close to a sales contract with another and it still wouldn't make sense. That's a hell of a way to generate future business.

That's life...maybe it's for the best.

[thomtax]

Kathy Brents

I dealt with Mrs. Brents one time. Because of outside factors, I did not purchase the business, but found her to be very open and, in my opinion, honest. She told the good and bad facts.

LT

[Zee]

I dealt with Mrs. Brents one time. Because of outside factors, I did not purchase the business, but found her to be very open and, in my opinion, honest. She told the good and bad facts.

LT

The broker email's I received didn't provide a last name, and identified the broker only as TIM. The Buyer's Confidentiality agreement he attached had a Texas address, with no phone, fax, or email address. The letterhead indicates, "see individual agent information for phone & fax numbers". No contact info.

I still haven't heard from the sellers, so I will not initiate contact again.
Again, I suspect Accounting Practice Sales (APS) is a franchise-type situation so the sales broker's probably vary substantially in quality and professionalism.