Draper Hinks was first contacted by a vendor three years before he decided to sell his practice.  He was looking to retire because of health problems.  His fees were under £30,000, there was no office and no staff – so were fully portable and could be moved to the buyer’s office.  So far so good, what could go wrong…..

A meeting day was set up and the vendor met with five potential purchasers.  Three buyers made offers and one was accepted.  Completion was due at the end of November.  In view of the time of year, the vendor promised to be available for a hand over.  The vendor wanted a quick sale because he was moving to a new part of the country within 7 weeks of completion.

The buyer had not bought before. The first impression the buyer had of the vendor was that he was a lovely chap and everything done was in the best interest of the clients.  He did mention that he had been ill and the practice was in a bit of a state.  The buyer appreciated the honesty and she thought “How bad could it be”?  She was soon to find out.

In order that everything could be dealt with in time before Christmas and the tax return deadline, the purchaser worked hard to get a schedule of what work needed to be done by when.  She was dealing with her own busy practice.  All her staff were informed of the purchase and procedures were put in place to cope with the extra work.

The vendor then announced that the sale of his property had been moved forward and he was going to be moving before Christmas instead of at the end of January.  This meant the deal was to be done in three weeks instead of eight. The vendor was going to be moving to a  remote part of the country, where there was not going to be any internet access for weeks, there was no land line and only intermittent mobile phone coverage.  The purchaser was assured that all information would be given well in time and all files would be handed over intact.

Due diligence was delayed because the vendor cancelled meetings. The vendor was under pressure to get his house packed up.  The purchaser had to push hard to get the vendor to arrange meetings with clients.  There was little in the way of information given other than name of client and name of business.  Due diligence just did not happen.  She turned up with a van and three members of staff to move files but little had been done about getting files ready for the purchaser to pick up.

It transpired that the original client list did not match up to the client files taken away.  There were three files for the same person and no files for others.  She would find a file and not know who the client was and could not ask the vendor because he had moved house and could not be contacted.  She did not know which clients had had their tax returns done, which still had work to do or even which ones had moved away from the practice.  When she did manage to speak to the vendor he admitted the removers had packed the computer into the wrong container and it was in storage so there was no way he could check anything and none of the client information could be transferred electronically.

Before the move, the purchaser got the vendor to write a letter explaining that he was retiring and that she was going to take over the practice.  She then printed off all his letters for him.  She wrote her own letter of introduction and put both letters in the same envelope and sent them to the clients.  The response to the letters was fairly positive though some clients had already left, so she did not have a chance to speak to them and introduce herself.  Some clients did not have a letter because they were not on the list.  Most people were spoken to.

She had a phone call from a client saying his last two VAT returns had not been filed, neither had his last two CIS returns and so he had been given a fine.  Another client said he had been fined £3,000 for not submitting his accounts.  Yet another client had been fined £4,000 for late submission of tax returns. This last client had been assured by the vendor he was resolving matters with HMRC. The purchaser said there was a file full of letters and emails from the client asking what was happening and why were things not done.  The vendor had said he was dealing with everything but he obviously was not.

All the clients the buyer has spoken to are grateful to have someone who is proactively looking after their affairs.  It is very unusual for a buyer to buy a practice without being able to do due diligence, with little or no access to the vendor, not to have a full client listing, not to be aware of what work has been done and what work is still to be done.

I was present at the meeting day and there was no way of knowing that the practice for sale was in such a bad state.  I put forward a proposed deal to both the vendor and the purchaser that was a combination of tranche payment and earn out.  This was to give the vendor a lump sum and to protect the buyer in case she was inheriting a mismanaged practice.  She has since been in touch and would like to buy more fees, so her experience has not put her off.

If you want to talk about this, or any other matter please email me at n.draper@draperhinks.co.uk – quoting reference Blog 150210