We have sold over 1000+ accounting and tax practices in Southern California. Over the years, we have seen countless buyers try to minimize their risk and your profit. Many of these buyers have the philosophy “sell me your practice for nothing down, and I will pay you back with a percentage of the profit over 5 years." When we hear a buyer say that, it is time to hang up the phone. Again, there are more Buyers than Selelrs so we do not need them..>Here are just some of the mistakes for you to avoid…
Thinking that you will save the commission by doing a For Sale By Owner deal. You are an expert at doing taxes. For you to try to sell your own practice is like us trying to do a complex entity return. When you try to sell your practice you are reaching out to associates or the like. They know you are desperate and will low ball you every-time! The reason we get top dollar for your firm is because we are selling to buyers who approach us and most all of them have been looking for a year or more. They are prepared to buy and we bring them to you. We can sell your practice for far more than you can, save you the hassle and we will more than earn or our fees.
You think you’ll be a good Employer and turn your practice over to your employees (they plan to buy-in using “sweat equity”). This is one our most common complaints we hear from disgruntled sellers’ that have done their own deal. They have a problem receiving payments from their employee buyer. They thought it would be only natural to groom one of their employees to take over their practice. But now, the deal is going sour. Typically, your employees do not want to sign a contract and they feel like you owe them something. More often than not, they try to change the deal or do not pay you.
Thinking that you can turn an “employee” type into an entrepreneur. This mistake is usually tied in with mistake #1. As cruel as this may seem, there are 2 kinds of people in the world: “employees” and “entrepreneurs”. An employee can only cross over to be an entrepreneur by using their own effort. This happens only when a person is driven by his/her own burning desire to own and to run his/her own business. In other words, all your efforts to convert one of your employees to take over your practice will be for naught.
Negotiating with only one buyer at a time. If you are negotiating with just one buyer, he will try every negotiating ploy he can to minimize his risk and investment at your expense. Isn’t it only natural for anyone of us to ask “What would you take for the practice? What is your bottom line? Can we negotiate on the down payment? I read in the CPA MAP Report that the best way to buy a practice is on a 5-year earn-out, can we structure this kind of payout?” Etc., Etc.
Thinking that an associate will give you the best deal. Tip: Usually, when a practitioner decides to sell, he seeks out an associate from one of his peer associations. He thinks that since he has known the associate for a long time, it would be a safe bet. The problem is that this buyer usually doesn’t have a strong motivation to grow and really doesn’t want all that the seller has to offer. For example, if the associate has a successful business, he obviously doesn’t want the furniture and equipment nor the lease. He would want to move the practice to his premises. All of these conditions would be detrimental to the seller. On the other hand, if the associate is not already successful, why even bother selling to him.
Listening to associates telling about the “great” deal they said that they got when they sold their practice. You’ll hear only one aspect of the sale, for example, the full price. Your friend doesn’t tell you about the down payment, the terms, the amount of time the seller has to stay in the practice and for what compensation, etc.
Tip: Don’t put much stock in an associate’s sales story unless he tells you all of the details. This should include down payment, length of note, interest rate, payment terms, guarantee of gross, amount of transitional assistance (free or for compensation), etc.
Asking for “out-of-this-world” terms and conditions. In the long run, it is not to your advantage to try to squeeze the buyer on every term and condition of the deal. Remember, you have a personal service business. An unhappy buyer can reek havoc on a practice, thus, putting your future payments at risk.
Selling your practice for a low Price. For some sellers, they are totally burned out when they decide to sell. They will practically give it away to get out of the stress and strain. Because there are more buyers than seller and we have so many buyers in our system we will get you top dollar for your practice. Most practices sell for 1 times gross to 1.2 times gross. We have been getting 1.3 times gross and even 1.4 time gross for an Orange County and San Diego Practice.
Underestimating the elements of value in a tax or accounting practice. You spend 100% of your time preparing taxes and handling accounting or bookkeeping. You probably aren’t fully aware of the market for practices. Nor are you aware of the value of the various elements of your practice in the marketplace. Since selling accounting and tax practices is all we do 100% of our time, we do know. Again, we get top dollar because we have a host of buyers for every practice.
Not paying attention to keeping your fees at market level and maintaining excellent work papers (for your successor).
Tip: When practitioners get to be about 60 years old, they usually stop raising their fees and get lax in their collection practices. This is because they don’t need the money and they feel a sense of gratitude that their clients have been with them for years. Unfortunately, this situation is not good for the new buyer. He has debt to service along with a need to take money home for the family. It is very hard for a new buyer to change the clients paying habits. BEST ADVICE: Bill your clients bi-weekly or monthly and don’t let the clients slide on paying your fees.
Believing a buyer when he tells you how much money you will make if you sell to him on an “earn-out” basis.
Tip: The story goes like this? “choose us as a buyer and you will really make out. The reason is that we are such a good firm that 1. we don’t lose clients, 2. as the years go by fees will go up; thus you will be getting 20% of increasing revenues paid to you
Not running a credit check on the buyer. (3 bankruptcies only this year.) It has been our policy to run a credit check (by all 3 national credit reporting agencies) on every buyer (after his offer has been accepted by the seller).
Even though most accountants are very credit-worthy, each year we get a few bad-credit risks. Often, the problem stems from either a divorce or a partnership breakup. In either case, we advise the seller of the problem and require the buyer to explain the situation..
Not requiring the buyer to provide life insurance on his life for your benefit in the event of the buyer’s demise.
Case History: What happens when 6 months into the deal, the buyer is killed in a car accident or he gets a terminal illness and dies.
Not having a complete prospectus on your practice for the buyer (thinking you will wing it, and assuming the buyer will know what questions to ask).
We continually get feedback from buyers regarding the good job we do in presenting our sellers’ practices. We provide a complete report answering 90% of the questions that buyers need to make a decision. How can you possibly rely on the accuracy of the information a seller gives in verbal form? Aren’t you immediately concerned over the seller’s failure to document his statements? OUR ADVICE: The more you have in writing, the higher the level of veracity of the seller’s statements.
Not being able to substantiate the value of your practice with market search.
The world of accountants is filled with stories about the pricing, down payments, terms and success or failures of transactions that an accountant has heard about. This is why accountants and lawyers are calling us all the time regarding the real market for practices. Having sold over 1,000 practices worth over $200,000,000 we have some expertise in the area. In fact, many calls even come from buyer’s on our database that have found their own practice for sale and just want validation of their deal.