Most offers are based around tranche payments of the gross recurring fees (GRF). Care has to be taken to define what are gross recurring fees but everyone does agree that one off fees are not included in the GRF.
Most vendors will look carefully at the client listing they are selling and will take off any clients that are going to be leaving in the next 12 months. It is common sense to take these clients off the sales listing. Admittedly not all vendors will know all the clients that will be leaving, some clients may not know themselves.
However, we have had lists of clients for sale where the vendor knows that some have already left the practice. In one situation the vendor contacted us a year after completion to tell us the second payment was a lot less than he had expected. We contacted the buyer to find out what the problem was.
We were told that some of the clients had already left the practice prior to it being put on the market and there were letters from the accountancy firms they had gone to asking for information about the clients. But the vendor had left them on the client list and they had been included in the sale. In this example, there were also three clients that had died within the prior three years. When asked why the vendor had included them in the sale, he said it was because he thought there may be some probate work from the estate.
You could say it was up to the buyer to check these clients during the due diligence. But if a buyer is buying 300+ clients it is not reasonable nor time effective to check every single client during due diligence. However, with the tranche payment method any clients not staying will be identified and clawback will apply. In this case we were able to explain to the vendor why the second payment was a lot lower than expected.
When getting ready to sell fees please check each client that is included in the list and make sure that they are expected to be there for at least 12 months post sale. If a client leaves within the payment term, then clawback will apply and the buyer is secure in knowing they are only paying for the clients that have stayed.
If you want to discuss the possibility of selling your practice, then please get in touch for an initial chat. Remember everything we discuss is confidential. You can contact me, Nicola Draper, on 01788 816440 or email me at firstname.lastname@example.org.