How easy would it be for your practice to be sold if you were to die suddenly?
Nicola Draper of Draper Hinks explains the importance of forward planning for accountancy practitioners.
It has surprised us that in the past few weeks we have been approached by a number of sole practitioners who have been worried about what would happen to their practice should they suddenly die.
As a going concern, you have a tangible asset and it is a sellers market (i.e. there are more buyers than sellers). Unlike the law of elasticity of demand, this does equate to more buyers and higher prices paid. Accountants are conservative and will only offer what they feel a business is worth.
Now imagine you are a sole practitioner and consider what would happen if you suddenly die. Who will look after your practice? It is inevitable that your client base will find out about it sooner or later.
Unless you have a plan in place to deal with this eventuality, your clients will leave the practice and look for someone able to help them. It does not matter how long they have been with you, it does not matter that you gave them a really good service and were there for them when they needed you. Clients want to be looked after and they need to have an adviser available to help them.
For example, imagine you are selling your practice today. The industry average at the moment is an income multiple of 1 x fees, paid in three tranches of one third on completion of the deal, one third at the end of 12 months and the final third at the end of 24 months.
Once the practitioner has died the income multiple will be reduced to somewhere in the region of 0.7 x fees and the first tranche on completion of the sale will be closer to 20% rather than one third. The second tranche at the end of 12 months will typically be 40% and the third tranche will be 40%.
The income multiple reduces for several reasons; firstly because most sole practitioners hold a lot of client information in their heads and not on the file, so the potential purchaser will be left without significant amounts of information. With no staff to fill in the blanks, this increases the risk of a client not being dealt with properly and leaving the practice.
Secondly, you are not there for a hand over so there is greater risk to the purchaser that the client will not stay. Most sales involve a hand over period where the vendor is available to smooth the transition from one owner to another. This is not available in the event of your death.
Thirdly, if there are any staff in the practice they may take this as an opportunity to take some of the clients and set up on their own in direct competition.
The first tranche of fees is often reduced to 20% to reflect the increase in risk on the part of the purchaser. There will be a clawback provision in the contract taking into account any clients that leave.
The time of year can also make a difference to the price being paid. If you are a sole practitioner and you were to die in January, who would do your clients’ tax returns? You may have an alternate that you have nominated, but your alternate will be busy. Therefore, there is an argument here for a sole practitioner to have an alternate in a much bigger firm. Whatever size your fees are, if your alternate is at full capacity with a similar size turnover, how long would your alternate be able to cope running both businesses, especially if there is any significant geographic distance between the two practices?
Don’t forget, you still have an asset that you can sell but you have to move fast. We are not talking months here; we are looking at a deal being done within a couple weeks. Your alternate may be on holiday for a fortnight or may be too busy to move that fast. If you don’t have an alternate willing to purchase your fees, then you need to find a buyer very quickly. If you want to realise the worth of your practice for any dependents you can’t hang around. Any practice can continue reasonably for two weeks – it’s no different from the owner going on holiday for a fortnight. Remember that if other accountants find out you have died then they will pilfer your client base.
Currently the market place is buoyant and there are buyers out there. The buying and selling of accountancy practices seems to be recession proof. There will always be a purchaser willing to buy fees from a well run practice, but the difficulty is finding the buyer with the ability, willingness and experience to be able to move quickly. By making provision for your practice to be sold as a matter of urgency, your dependants will be taken care of, as will your staff and your clients. It just takes a little bit of forward thinking.
Article written by Nicola Draper from Draper Hinks.
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