If you’re selling an accountancy practice, or a block of fees out of one, what you’re really selling is a set of client relationships. The buyer is paying for fees which recur each year, so a lot of the legal work is about what happens to the price if some of those clients don’t stay.
I’ve helped many accountants with selling part of their client bank or selling their whole practice, and I also act for practices looking to buy. The deals I’ve done include a £30,000 client book and the sale of a £100,000 practice.
A whole practice or a block of fees
There are two ways to do it. If the practice is a limited company, you can sell the shares under a share purchase agreement, in which case the company carries on under new ownership with its engagement letters, staff and history. Otherwise it’s a sale of the goodwill and clients, with or without the staff and premises, under an asset purchase agreement. Sole practitioners and partnerships can only sell that way, and a sale of part of a client bank is always done that way too. I’ve written about how buying or selling a book of business works in practice.
How practices are usually priced
I’m a solicitor and I don’t value practices, but I can tell you what I see on the deals I act on. Prices are usually set as a multiple of recurring fees, commonly somewhere between 0.8 and 1.5 times annual recurring fees, or sometimes as a multiple of net profit, in the region of two to four times. That is only what I’ve seen on my own deals and it isn’t a valuation of your practice, as the range is wide and the quality of the client base makes a big difference to the figure. If you need a proper valuation, that’s a job for a broker or corporate finance adviser who works in this sector.
Transferring the clients and how the price is paid
On an asset sale the clients don’t move across just because the agreement says so. Each one has to agree to engage the buyer, and the buyer has to carry out its own client due diligence under the anti-money laundering rules before acting. The sale agreement therefore needs to set out who writes to clients, what the letter says, when it goes, and how the files and data are transferred lawfully. I’ve covered the data protection side in can I transfer my client list when I sell my business?
On a share sale the engagement letters stay with the company, which is simpler, but clients can still leave and the buyer will be well aware of that.
Because of that, buyers rarely pay everything on day one. In a typical deal part of the price is paid at completion and the rest over one to three years, adjusted (the usual word is clawback) for clients who don’t stay. Most disputes on these deals come from this part of the agreement, so it needs to be clear about what counts as a lost client (one who leaves, or one whose fees drop), what happens if the buyer puts the fees up by a third or changes the person the client deals with and the client then goes, and when retention is measured and whether that’s on fees billed or fees paid. If the agreement doesn’t answer those questions, you could be arguing about them in two years’ time while the buyer is still holding part of the price.
As the seller you should also look at what stands behind the promise to pay, which means who the buyer actually is and whether there’s any guarantee or security. There’s more on that in my article on deferred payments.
Staying on, and what you can do afterwards
Most buyers want the seller around for a handover, as an employee or a consultant, because clients follow the person they know. It’s worth being realistic about how long you’ll want to do that for. What I know from experience is that one year goes by very fast, but three or more years tied in to working for someone and, potentially for the first time, having a boss to report to, can be difficult for many. There’s a fuller discussion in should the seller stay on as a consultant or employee?
The buyer will also want restrictive covenants, which will say that you won’t set up in competition, act for the clients you’ve sold or take the staff with you. They have to be reasonable in length and scope to be enforceable. If there’s anything you might still want to do, such as keeping a handful of family clients or doing some non-competing consultancy, it should be carved out of the covenants at this stage.
Staff, old liabilities and your professional body
On an asset sale, employees assigned to the practice transfer to the buyer automatically under TUPE, on their existing terms. There’s a duty to inform, and sometimes consult, beforehand, and a tribunal can award up to 13 weeks’ pay per employee if that isn’t done. Dismissing someone because of the transfer is a separate problem, and is likely to be automatically unfair. On a share sale TUPE doesn’t apply, because the employer doesn’t change.
The agreement also needs to deal with work in progress and unpaid bills at completion (who finishes the job, who invoices and who collects), and with responsibility for work already done. Complaints and claims about past advice normally stay with the seller on an asset sale, which is why run-off cover under your professional indemnity insurance needs to be sorted out before you complete.
You should also check what your institute or association requires when a practice changes hands. Depending on the body and what the firm does (audit registration is the obvious example), there may be notifications to make, eligibility rules about who can own or control the firm, and requirements about continuity and run-off insurance. The buyer will need its own anti-money laundering supervision in place. The requirements differ between bodies and they do change, so I’d ask yours directly and early on. If the practice also holds FCA permissions, that’s a separate matter which I cover on my financial services page.
If you’re buying a practice
I act for practices buying a client bank or a whole firm as well, and most of what’s above applies from the other side of the table. As the buyer you’ll want the deferred part of the price to be adjusted for clients who don’t stay, so the clawback or retention needs to be drafted around how you’ll actually measure it, using figures from your own billing which the seller can check. You’ll also want the restrictive covenants to be wide enough to protect the clients you’re paying for, including any the seller looks after personally.
The due diligence on an accountancy practice is mostly about the clients and the work. You’ll want a fee analysis client by client, the engagement letters, the complaints history and any professional indemnity claims or notifications, and some comfort that the seller’s anti-money laundering records are in order, although you’ll still need to carry out your own client due diligence once the clients engage you. If you’re buying the shares, the company’s past work comes with it, so the warranties, any specific indemnities and the company’s insurance cover matter a great deal more than on a purchase of the client bank alone. I’ve explained how I approach this generally on my due diligence for buyers page, and there’s more on the buyer’s side of a deal on buying a business.
How long it takes and what it costs
A sale or purchase usually takes two to three months, and sometimes longer, although a small block of fees with no staff can be quicker.
I work on fixed fees, with a written scope of work agreed before I start. The fee depends on the size of the deal and how much work is involved. On a sale or purchase between £500,000 and £5m it’s usually between about 1% and 3% of the price, and the percentage falls as the deal gets bigger. Most full sales and purchases start at around £10,000 plus VAT. Franchise resales, client bank deals and most management buy-outs usually cost less, as there’s less to negotiate. I leave the tax side of the sale to you, as you’ll know it better than I do.
Next steps
If you’d like me to act, get in touch and send me the details, including whether you’re buying or selling, whether it’s the whole practice or part, the recurring fees, the price and how it’s to be paid, and who is on the other side.
