Confidence has a great impact when selling or buying an accountancy practice.
The vendor has to be confident that the buyer can look after the practice post sale or no deal with ensue. We once had a buyer with a turnover of £10k looking to buy a practice with £300k. The vendor was not confident the buyer would cope with the staff, the premises, the clients, compliance and all the other factors involved in the sale. We did not introduce the buyer to the vendor because there would have been no confidence in the buyer’s ability to manage the workload. It does not matter how confident the buyer believes themselves to be, or how much they protest that they have the money, drive and ability, if there is too much perceived risk on the part of the vendor the deal will not go through.
The buyer has to have confidence that the accountancy practice/fees being bought will give a return on investment within a reasonable period of time. Where a vendor works from home and passes the resultant cost savings onto the clients in the form of a reduction in fees, the buyer may have difficulty that the deal will be viable. Without this confidence there will be no sale. A buyer will normally reduce the multiple offered or pull out altogether.
During due diligence the buyer needs to have confidence that the work done by the vendor is correct. Buyers will check for compliance and competency. We had a situation in the past where a buyer was carrying out due diligence and wanted to check a sample of client files. In each file the buyer found that the computations were wrong, wrong advice had been given and the wrong amount of tax had been paid, in some cases going back several years. Confidence in the quality of the rest of the client files was affected. As a result the multiple offered was significantly reduced to the point that it was less than half the original offer. The buyer still proceeded to buy the accountancy fees on the basis that many of the clients were good quality clients. Remedial work was done, at no cost to the client, to rectify the mistakes and three years on from completion the buyer was pleased they had proceeded with the purchase.
The buyer needs to have confidence that the seller actually has the fees they purport to be selling. It is not common practice for every file to be reviewed during the due diligence process. It is normal for the buyer to ask for a sample of files to check. Once confident that all checks have been carried out and the vendor is selling what they say they are selling the buyer will continue to completion. We did have a case where the vendor was not honest about the number of clients being sold on the client listing. The buyer was given a sample of files to review prior to completion and was happy with what they looked at. The deal went through and the seller moved to Romania with no forwarding address. The buyer later found out that many of the clients were spurious and did not exist, the buyer had been duped. Note of caution – the buyer should always choose the client files to be reviewed.
General market confidence is important when it comes to buying an accountancy practice. If there is a recession, buyers will be far more cautious about taking on extra fees. A recession will normally mean that the businesses of the clients will be shrinking, many will go out of business and many will retire early. So, the Gross Recurring Fees of the seller’s practice will be shrinking and as a consequence a buyer will be more reluctant to buy. Remember the buyer’s practice will also be shrinking and so revenues will be diminishing all round. However, in this situation we have had buyers take on fees to make sure their staff are kept busy. Rather than make staff redundant the buyer brings in more fees. So although it is counter intuitive, a recession can lead to a buoyant market.
Poor market confidence can mean a lack of funding available. Many buyers rely on borrowing from banks and if that line of credit dries up it will have an impact on the market place. This will normally mean a reduction in multiples offered.
So, if you want to sell or buy, talk to us. We have lots of experience with selling and buying accountancy practices. We know what we are talking about, contact me, Nicola Draper on 01788 816440 or email me at n.draper@draperhinks.co.uk.
Please remember everything discussed will be kept in the strictest of confidence.