SHOW ME THE MONEY HOW ACCOUNTING & TAX PRACTICES ARE SOLD BY ACCOUNTING PRACTICE SALES WITH SELLER GUARANTEES Collection Pricing: When the seller receives payments based on collections or billings over a period of time, this is referred to as “percentage of collections” or “percentage of billings.” The down payment, percentages, and payout terms vary widely. Traditionally, however, the buyer would make a down payment of 20% of the estimated price and then pay 20% of the collections each year for the first four years. This scenario is so common that many accountants think it is the only way practices can be sold! Understandably, buyers like these terms because payments are manageable, and almost all the risk of client retention is transferred to the seller. Buyers will explain that there is an “upside” to the seller if the gross revenue increases year after year. However, most sellers are not comfortable assuming retention risk while they have little control over the clients’ experience with the new owner. Sellers also dislike the accounting and due diligence required to calculate collections year after year. If such a method is used, both the buyer and seller need to be sure everything is spelled out clearly from the beginning. Look-Back Pricing: In this type of sale, the buyer “looks back” after a period of time and determines collections or billings; the sales price is then adjusted accordingly. There are many variations to this method. Although dollar-for-dollar adjustments are common, there can be alternative price adjustments, such as allotting 50 cents for each dollar increased or decreased, or perhaps applying adjustments only after a 10% decrease or increase in actual collections, or placing upward and downward caps on the adjustment, and so on. As you can see, there is room for creativity. The look-back method does not require seller financing. The seller could receive all cash at close but then be obligated to refund a portion of the sales price if there is a negative adjustment at the end of the look-back period. In a 12-month look-back, the seller guarantees each client will show up at least once. The look-back approach is a step closer to a fixed price since the seller has more control; however, the variations can be complicated, making it necessary for each party to be especially certain they understand the implications of each arrangement. WITHOUT SELLER GUARANTEES Cash Pricing: This is when the seller receives 100% of the sales price in cash at closing. The buyer may be obtaining cash from personal funds or, more likely, from a third-party lender. Third-party financing can actually be more attractive to many buyers, as the payout terms are often extended over 10 years rather than the three to five years typically seen when sellers finance the sale. Since most sellers prefer cash at close, this option is a win-win. Fixed Seller-Financed Pricing: In this final method, the sales price is determined prior to closing, with the seller carrying a portion of the sales price, and the price remaining static throughout the life of the loan. When a buyer verbally communicates their intent to make this type of offer, it is important to make sure the buyer is actually considering a fixed price. In light of the fact that traditional deals involve seller financing and an adjustable price based on collections, a seller may offer to finance a portion of the sales price and the buyer may interpret that to mean they are willing to be paid based on collections. Seller financing is appealing to buyers because sellers are more attracted to fixed financing than to guaranteed options, but they will still be concerned about collecting full payment. In summary, sellers need to present their practice in a way that attracts the largest number of quality buyers. Since the number of buyers affects the type of deal structure, using an experienced broker with a large pool of qualified buyers will achieve the best price and terms! The experts at Accounting Practice Sales are here to help with all aspects of buying and selling accounting practices. To learn more, contact Trent Holmes at Accounting Practice Sales at (800) 397-0249 or trent@aps.net. 20 Nebraska CPA
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