We had two instances last year where buyers thought that they could not afford to buy a practice we were selling. One practice was in the Midlands and had fees in the region of £200,000. The other practice was in the North East, north of Newcastle upon Tyne and had fees in the region of £185,000.
In the first instance the practice being sold was a two partner practice but one of the partners had fallen ill and had been in hospital for several months. The remaining partner was bearing the brunt of the work load and was working six and a half days a week, 12 – 14 hour days. We all know this is unsustainable. Draper Hinks was contacted and asked to find a buyer as a matter of urgency. A meeting day was set up and the vendor met with three seriously interested buyers. One of the buyers pulled out because they thought it was not right for them. One of the buyers put in a good offer and showed proof of funding. The third buyer said they were keen to buy but could not commit to making three tranche payments for the practice. The vendor wanted to have 50% paid on completion, 25% paid after 12 months and 25% paid after 24 months.
The purchaser was about to pull out from the purchase until Nicola Draper spoke to him to say there was another way to buy a practice and that was on an earn out basis. That is where the purchaser does not make a payment on completion and pays the vendor from monies received. When the work has been done for the client, it has been invoiced and the client pays then a percentage of the money received is paid to the vendor. This agreement usually lasts for a longer period of time and is very popular with buyers. There is no borrowing on the part of the buyer so there minimal financial risk. If the work is not done it is not invoiced so there is no clawback. From the vendors point of view it can be quite advantageous because if the buyer increases the fee by offering other services then the vendor gets a share of the increase in fee.
The buyer was very happy with this solution. They put in an offer to the vendor (via Nicola at Draper Hinks) and the offer was accepted. Without the intervention of Nicola then this deal would have fallen through.
The other practice in the North East was on the market because the vendor wanted to retire. The buyer had just bought a practice and his money was tied up with that purchase. The buyer knew he could not afford to borrow any more money from the bank. Nicola suggested that he pay for the purchase through an earn out, which the buyer had not heard of, and he put in an offer that was subsequently accepted.
There are many different ways to structure the payments for buying a practice. It is always best to talk to someone who has knowledge of how to structure a deal.
If you want to talk about this, or any other matter please email me at email@example.com quoting reference Blog 150301
Draper Hinks works with accountants that want to sell accountancy fees or buy accountancy fees. We are business brokers for accountants and deal with no other types of business, so if you are thinking of selling your accountancy practice, then please contact us on 01788 816440 or email us at firstname.lastname@example.org