This is a cautionary tale to all vendors and this is a case that has actually happened.
Just over a couple of years ago, we were approached by an accountant in the Leeds/Manchester area who ran a very successful practice. He was growing it organically year on year and wanted to reach the magical milestone of a million pound turnover. He was about £250k short of this goal.
He enjoyed giving advice to clients and watching their businesses grow, so his main emphasis shifted from compliance work to consultancy/ quasi FD work. He found this to be much more lucrative and satisfying.
As a consequence, he contacted Draper Hinks, asking for our advice as to how he could divest himself of his compliance only small end clients. He estimated that he had around £150k of fees to sell, which would free up a lot of time and resources to be able to concentrate on how he wanted to grow his practice.
Draper Hinks went through the process of finding buyers for him to meet which subsequently led to him having a number of offers. He chose one offer and proceeded to complete the deal. The buyer took over the clients, as agreed, and the vendor was paid the first tranche of money. It was agreed that the vendor would be paid in three tranches of £50k subject to the retention of the clients. It was not agreed that the first payment to the vendor was to be guaranteed.
On day one the vendor received his £50k payment. All was good. At the end of 12 moths the vendor was expecting a second payment, only to find that there was no money to be had, a third of the clients had left within the first 12 months. This upset the vendor and I got a phone call. Unfortunately there was nothing we could do.
At the end of the second year, when the vendor was expecting the third and last payment the vendor received a letter from a solicitor asking for some of the original payment of £50k to be paid back to the buyer because most of the clients had left and the buyer wanted to recoup some of the original payment. I got another phone call and suggested that the vendor speak to a solicitor. The vendor was not happy.
Could this have been avoided?
The best check a vendor can make, when selling fees, is if the buyer has bought before and the buyer is still in touch with the vendor from whom fees have been bought. This is not always possible because most vendors do not stick around after the first 12 months of the sale. If you are an accountant considering selling some accountancy fees, always try to speak to a previous vendor. However, not all buyers have bought before so this is not always possible.
Also, ask the buyer to agree that the first payment is guaranteed. So that if the buyer decimates your practice/ tranche of fees, you will at least keep the first tranche of money paid to you.
Does this happen often?
No, we have never had this happen before and we have brokered over 315 deals, but knowing it can happen should make you very careful when selling any accountancy fees. We try our best to find buyers of quality for our vendors, but we were taken in just as much as the vendor. We could not have known that the buyer would only keep around 20% of the clients bought.
Please remember this is a very rare occurrence. We do have a lot of experience in helping sellers to sell accountancy fees and for buyers to buy accountancy fees. If you want to talk to someone who knows their “stuff” then contact me, Nicola Draper on 01788 816440 or email me at firstname.lastname@example.org.
Let’s have a chat and see how we can help you to get what you want.