If you want to sell your accountancy practice, there’s good reason to feel positive: the general consensus is that it’s currently a market for sellers. So, whether you’re looking to sell a block of fees or the entire practice as a going concern, the odds are stacked in your favour that you’ll find more than one interested prospective buyer.
However, finding a suitable buyer is just the start of the process. Despite the favourable climate, accountancy sales transactions managing to secure the seller’s holy grail of a clean exit on completion are few and far between. So, if you’re a retiring accountant, dreaming of heading for the hills with your cash on completion, divested of all responsibility for the business, we hate to break it to you, but you may need to adjust your expectations…
Clawback: what is it and how can it impact on the sale of your accountancy practice?
More commonly with the sale of accountancy practices or fees, we see deal structures where the purchase price is paid in tranches – for example, 40% on completion, 30% on the first anniversary, and 30% on the second anniversary – with payment being contingent on the fees that are sold actually materialising for the benefit of the buyer. In other words, in the event the fees sold don’t materialise within a specified period of time, the buyer is entitled to deduct the fee from the outstanding purchase price. It’s a mechanism referred to as ‘clawback’ and, for the unwary seller of an accountancy practice, can make a significant dent in what, on paper, looked like a healthy purchase price.
Clawback provisions can vary hugely in their terms and may apply to individual clients or to the aggregate sum of the fees sold. As a simple example, the seller may be required to pay 100% claw back if the new business owner loses a client straight away, 50% if they get one year’s fees from the client and no claw back if the client leaves after 2 years. However, the bigger and more complex the transaction, the more sophisticated the clawback provisions can be.
The good news is that that there are steps you and your professional advisers can take to help ensure that clawback provisions are not triggered.
6 steps to limit your exposure to clawback:
STEP 1: Be choosey about your buyer
It may be obvious, but don’t make the mistake of going with the first buyer who makes you an acceptable offer. Take time to find the best match possible for your clients. Choosing a buyer who shares the same values and ethos and who has a similar outlook and objectives will significantly reduce the likelihood of clients taking umbrage with a new owner.
Using the services of a good business broker is invaluable here. He or she should be able to introduce you to a number of potential buyers, all of whom they will have screened and vetted a) to ensure that they have the necessary funds to buy and b) to establish their ethos, values and objectives so that you can find the best possible match for your clients and any staff remaining in the business – all of which will save you a lot of time and stress.
We have worked with a number of excellent accountancy business brokers whom we are happy to recommend. Contact us for further details.
STEP 2: Structure a deal with no clawback provisions
Okay, we’ve said it’s rare, but it’s not impossible. You may be able to agree a deal with 100% payment on completion and no clawback provisions. However, there are drawbacks to this arrangement. As your buyer would be assuming a greater share of risk, the expectation would undoubtedly be that you reduce your asking price. Whether or not this is a price worth paying for a clean exit will depend entirely on your personal circumstances. The buyer will likely also place more focus on stronger warranties and indemnities.
STEP 3: Agree a cap on fee increases
Of course, there are many reasons why a client may choose to part ways with their accountant and a sudden hike in fees is likely to be fairly high up there on the list. So, if your sale contract contains clawback provisions, it makes sense to negotiate a clause which restricts the new owner from increasing the fees above a certain percentage – often the rate of inflation – for the duration of the clawback period. You may also be able to agree a limit on the amount of turnover that must be lost before clawback applies.
STEP 4: Continue working for the new owner
Okay, this isn’t workable in all circumstances but, if your departure is carefully pre-planned and you have the time, financial security and inclination to downsize before leaving the business altogether, you may be able to negotiate that you continue to work in the practice, perhaps on reduced hours, for an agreed period of time. Not only will you be able to support the new owner’s transition, but it could be another factor that reduces the likelihood of fees being lost during the clawback period.
STEP 5: Implement your right to discovery
In the event the new owner informs you that s/he wishes to make a claim for clawback, you do have the right of discovery to satisfy yourself that the claim is legitimate. In effect, this gives you the right to look at the relevant clients’ files, and even to speak to clients, to establish that the loss of business is genuine. This right can be further enhanced by building in additional positive obligations on the buyer to share detailed monthly figures or notices of proposed terminations by clients; this may allow you to intervene and assist if there is a danger of income leakage.
STEP 6: Seek advice from specialist solicitors!
Of course, we would say that wouldn’t we. But it’s true. Agreeing a deal structure for accountancy practices is not a case of one size fits all. This is not a time for DIY contracts or self-led negotiation. If you fail to talk through the possibilities and ramifications of the deal structure with an experienced adviser, you could lose out in a significant way.
Accountancy practice sale agreements tend to be complex, including clauses (such as clawback provisions) that are specifically tailored to reflect the parties’ business intentions and objectives. By using a solicitor with specialist expertise in buying and selling accountancy practices and fees, you can have peace of mind that all avenues for maximising your purchase price have been investigated, that the contract is watertight and that your exposure to ongoing risk is minimised. And if you use solicitors, like us, who will give you a fixed price fee for their services, you will have certainty about your budget from the outset.
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The sooner we become involved in the process of helping you to sell your accountancy practice or block of fees the more likely it is that your sale will be successful, so please contact us today.
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We look forward to hearing from you.