$how me the Money WITH SELLER GUARANTEES: 1 Collection Pricing When the seller receives payments based on collections or billings over a period of time, this is referred to as a “percentage of collections” or “percentage of billings”. The down payment, percentages, and payout terms vary widely. Traditionally, however, the buyer would pay a down payment of 20% of the estimated price and then pay 20% of collections each year for the first 4 years. This particular 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 there is an “up-side” 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 involved in calculating the 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, addressing such issues as whether new clients or referrals will be included in the collections, and how “collections” will be applied and accounted for. 2Look-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 adjustments may be applied only after a 10% decrease or increase in actual collections; upward and downward caps may be placed on the adjustment, and so on. As you can see, there is room for creativity. This structure is similar to the first method in that the seller guarantees the revenue, but the seller’s risk is limited to a shorter period of time. 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 twelve month look-back, the seller guarantees each client will show up at least once. In the collections scenario, the seller must rely on the buyer’s ability to keep the clients coming year after year. 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 implication of each arrangement. WITHOUT SELLER GUARANTEES: 3 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 ten years rather than the 3-5 years we see when sellers finance the sale; and since most sellers prefer cash at close, this option is a win-win. The cash method has become more and more common in situations where healthy firms in desirable geographic locations change hands. An increase in institutional money available for accounting practice acquisitions, and a marketplace flush with buyers due to broker marketing, have both contributed to the increase in cash sales. 4 Fixed Seller Financed Pricing In this final method, the sales price is determined prior to close 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 an offer, it is important to make sure the buyer is actually considering a fixed price. In view of the fact that traditional deals involve seller financing and an adjustable price based on collections (as described above), 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 1) it is much easier than the bank application and underwriting process, 2) it keeps the seller “in the game” and motivates them to put forth more effort in the transition process (or so the buyer believes), and 3) it often comes with more favorable interest rates. Sellers are more attracted to fixed financing than to guarantee options, but they will still be concerned about collecting full payment. Sufficient down payments, good credit, excellent experience, and proper credentials will be required of the buyer. Today, accounting and tax practices are sold in each of these four ways. As you can see, the premium offered to the seller lies within the deal terms themselves. Sellers need to present their practice in a way which attracts the largest number of quality buyers, and since the number of buyers affects the type of deal structure, using an experienced broker is the way to get the best price and terms! delivering results - one practice at a time Cal l The Holmes Group Today! 800 397 0249 COMMON MISCONCEPTIONS IN SELLING A PRACTICE Selling an accounting practice is a once-in-a-lifetime experience for most practice owners. Because it is such a rare event, sellers need to be aware of some key misconceptions about the process. MISCONCEPTION NO. 1: THE SELLER NEEDS TO STAY AROUND FOR YEARS TO ASSIST THE BUYER IN THE TRANSITION. Experience with countless practice sales has shown us that a shorter transition is muchmore effective for both parties. For one, the buyer does not need the seller nearly as much as one would expect. In fact, the seller can be a hindrance to the transition if he or she sticks around for long after the buyer takes over t e practice. It is comm nly believe that the best scenari is for the seller to eng g in extended and/or repeatedmeetings between the buyer and the clients. However, experienced b yers know that the tendency in such meetings is for the former owner and client to do all the talking and for the buyer to be an outsider. Similarly, if the seller stays around the office, clients will want to talk to the seller rather than to the new buyer. However, if the buyer meets the clients without the seller, the ’s a much better chance f r t buy to get to know the clients and to establish good relationships. The only way to completely avoid the issues of a long transition is to get the seller out of the office and preferably out of town. Another reason the seller should not stay on for an extended transition may be a lack of sufficient work or money. In the typical sale of a small tomedium-sized practic , the buyer usually wants to retain all staff. The buyer is energetic, hard-working, and fully capable of stepping into the shoes of the seller. This leaves nothing for the seller to do. Worse yet, there is no money to pay the seller for his or her work. Money that had gone solely to the seller in the past now must be used to pay the seller, pay the buyer, AND service the debt. The seller has one big job and one little job. The big job is to quit. The little job is to notify the clients of his or her retirement and to introduce the new owner who is taking over the business. The former owner should endorse the new owner as a wonderful a untant wit whom the clients will enjoy working and then leave t e buyer a one to service them. MISCONCEPTION NO. 2: THE BEST BUYER FOR AN ACCOUNTING PRACTICE IS ANOTHER ACCOUNTING FIRM. While many accounting firms are willing to purchase another practice and often seek out such acquisitions, inmany instances, an existing firm is not the ideal buyer of a practice. This is true for a couple of reasons. First, existing firms often do not have the tim to take on another practice. In a typical sale, the seller is ready to retire. Th buyer must be willing to assume the workload of an experienced owner as well as do all the extra things involved in a transition. A typical buying firm often does not have an individual available who can fill the shoes of the seller. This lack of time ties into the second reason why firms are sometimes not the best buy rs for practices. Frequ ntly, firms are only marginally motivated to buy a practice. Of course, all firms are motivat d if a seller offers generous terms and agrees to continue working at a reduced rate of pay. Compare this to a potential buyer with several years of experience and someone who has dreamed of owning his or her own practice. That buyer brings to the table the willingness to devote much time and energy to taking over the workload andmaking the practice work. Such an individual is much more motivated than the typical firm buyer. MISCONCEPTION NO. 3: THE AVERAGE SELLING PRICE FOR PRACTICES DETERMINES THE VALUE OF A SPECIFIC PRACTICE. Practice owners often ask what practices are selling for; however, knowing the average selling price for accounting practices nationwide can be misleading. Assume that a person lives in Chicago and has a house to sell. Would that homeowner go to a real estate source and inquire as to the average selling price for houses in Chicago? Would he or she be interested in the average sales price per square foot for all houses in Chicago? This information would be useless. Averages such as this tell us nothing about the value of a specific house in its specific location. The same is t ue of accounting practice . While accoun a ts might have the perception that practices sell for around one times annual gross, the reality is that in some locations such a price would be too high and in other locations too low.When considering the value of a practice, realize it has many unique characteristics including location, client mix, staffing, and profitability, among others. These specific qualities of a practice must be addressed to determine v lue, not averages. MISCONCEPTION NO. 4: ACCOUNTING PRACTICES HAVE AN INTRINSIC VALUE THAT ALL POTENTIAL BUYERS RECOGNIZE AND AGREE UPON. If one is selling a gallon of gasoline, this might be true. Most people need gasoline, pur ha it regularly, and have a good idea of what it cost . This is not true of accounting practices. Many people in t e world would not purchase a practice if it were offered to them for a dollar. Ametropolitan area populated by millions might only have a couple hundred potential buyers for a particular practice. Other areas might be considerably less. Suppose a specific practice has 100 interested, potenti l buyers. Would all these buy rs agr e t what the practice is worth? Of cours not! They would not come close to agreement. If a practice is offered at a certain price, all potential buyers might step up to the plate with check in hand. On the other hand, the practice may be priced so only one or two would agree to purchase it. This is because buyers have very different ideas as to value and possess different degrees of motivation and interest. Sometimes a seller urns away a motivated and capabl buyer because, for one reason or anoth r, seller decides the buyer is not quit perfec . His or her misconception is that a large number of buyers exist and that all buyers are equally motivated and equally willing to pay some known price. That misconception could be costly. This same misconception comes into play when sellers think that the only trick is finding a buyer. Pra tic owners outinely say, “Oh, I have a buyer, or I have someone interested in buying my practice.” The implication is that finding a buyer is the hard part. Their assumption is that all buyers are fully willing to pay the same price and terms. If an owner has a buyer, it is possible he or she has the one willing to pay the best price and terms, but that is highly improbable. It is just as likely that the seller may have found the one willing to p y the least. The object in selling a practice (unlike in elli g gasoline) is to first locate all potential buyers for the practice and from that group determine the top 5% or 10% in terms of motivation and ability. It is from this group one must find the buyer if one is interested in finding the true value of the firm. For more information, visit www.APS.net or contact Trent Holmes at Accounting Practice Sales at (800) 397-0249 or trent@aps.net.
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