When a buyer buys accountancy fees they are looking to minimise their risk but at the same time maximise their return. I have yet to find a buyer that pays out a significant amount of money without wanting a good return on the investment.
We have come across a few pitfalls that buyers find when they buy fees. In our experience, when a vendor approaches us telling us that they have a certain amount of fees for sale, we take their word for it. We do not question the amount of fees they are selling because they are accountants after all and should know what their fee income is. However, you may be surprised at the number of times we have to amend the amount of fees for sale after the due diligence has been carried out by the buyer. The figure is always reduced and never increased. This used to surprise me but now it doesn’t. This reduction can make the difference between the fees for sale being a profitable proposition and one that the buyer would not want to take on. We have lost deals because of this in the past.
At the due diligence stage, buyers will want look at the competence of the work done for the clients and the will also want to make sure that everything is compliant. If a buyer is taking on a large client base then it is impossible to check every single client so most buyers will assume that competence and compliance are at least adequate. This is not always the case. We had one instance where a vendor had not removed clients from the client listing for sale that were no longer alive and had died several years previously. Yes, I was shocked that this had happened but the vendor’s rationale was that he was hoping for probate work to be allocated to him by the executors. This is not good practice on several counts, the first and most obvious is that these fees would not be GRF (Gross Recurring Fees) so should not be included in the sale, but mainly because it is not morally correct. To cap it all, the vendor called me a year down the line to ask why his clawback was so high and I had to tell him that several (no, not just one) of his clients had died and so could not be included in the sale. The deceased clients were not found in the due diligence stage but it was noted by the buyer at the end of the first year that no work had been done on these clients and the reason soon came to light.
Buyers should not assume that the vendor has the right to sell the fees. We have had a case where we were approached by a vendor to find a buyer for their fees, we dutifully did this, the buyer put in the offer and it all proceeded to due diligence. It was at this point that the authority of the vendor to sell the fees needed to be verified and the vendor was found not to have the authority to sell so the sale could not proceed. In this instance the buyer was acting in good faith, reasonably assuming that the vendor could sell the fees. Within a very short space of time the buyer was sent a solicitor’s letter stating that if the buyer proceeded any further he could and would be sued because the vendor had no legal rights to the clients. The buyer pulled out immediately. This is not the only time this has happened to us and to this day I can’t understand how a vendor thinks they will get away with it.
We had another case where the vendor sold her fees and moved abroad with no handover. This was all agreed beforehand with the buyer and the multiple paid was duly reduced to reflect the fact that there was to be no handover. At due diligence the buyer was shown a sample of files and was happy to proceed with the purchase on the basis that the files all looked fine and proceeded to pay an up-front discounted amount with no clawback. Within 3 months of the sale the buyer found that the seller had made up a lot of the clients on the list and that the clients did not actually exist. The buyer tried to find the seller had moved to Bulgaria and the address given in Bulgaria did not exist. The buyer was swindled and had no means of redress. These cases are rare but they do happen. The buyer needs to be wary.
We have a lot of experience when selling fees and so we know what we are talking about. If you are thinking of selling your fees or if you want to buy fees then please 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.