Twenty Fatal Mistakes to Avoid When Selling Your Practice - Business Brokerage Incorporated
Any one of them could save you a bundle!
Business Brokerage, Inc., founded by David Smith (Founder-Retired), specializes in selling accounting and tax practices throughout California. Business Brokerage, Inc. has sold an incredible 1,400+ accounting and tax practices worth over $250 Million. During these eventful years, we have been exposed to practically every scheme concocted by a buyer to minimize his investment and maximize your risk. Many of these buyers have the motto “sell me your practice for nothing down, and I will pay you back with a percentage of your profits…” If this phrase seems like an all too often reality in your life, you owe it to yourself, your family and your pocketbook to read this report. We have learned how to combat these “money stealing” tactics.
Here are just some of the mistakes for you to avoid…
#1. MISTAKE: You think you’ll be a good guy and turn your practice over to your employees (they plan to buy-in using “sweat equity”). This is our most common complaint 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.
Case History #1: Employee refuses to sign paperwork: We got a call from a CPA who turned her practice over to two of her employees with no down payment or written agreement. Two years later she was ready to retire. She asked the 2 new partners to sign a buy/sell agreement and a promissory note to pay for the practice. The employees were affronted by the request and refused. That’s when she called us for our advice. Unfortunately, the clients’ loyalty had already been transferred to the employees and the seller had lost control of her practice. There was nothing for her to do except hope she could convince them to perform. She had no leverage. By the way, this practice grossed in excess of $600K!
Just remember “nothing is ever valued so much as those things that we have to work and strive for”. This is why people win millions in the lottery and have nothing left several years later. They didn’t work for it so the money had no value to them. The same thing often happens when you give your practice (or your estate) to your kids. The greater the commitment (as evidenced by a buy/sell agreement with down payment and promissory note), the greater is the chance for a successful transaction.
Case History #2: Seller refuses to follow through on admitting employee as partners after 7 years of the employee contributing sweat equity. Employee leaves and takes 60% of the business with him: This was a foolish attempt by an older CPA to take advantage of a younger CPA. The younger CPA had most of the client contact and did much of the work. After 7 years, he knew the clients’ problems and situations better than the older CPA. When the older CPA wouldn’t admit him, the younger CPA came to us to buy a practice, and eventually took 60% of the older CPA’s practice with him.
#2. MISTAKE: 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 to naught.
Case History: We were approached by the owner of a large firm that had admitted a junior CPA as a partner on a no-down payment and extended term buy-in with sweat equity arrangement. The new partner is not handling all of his responsibilities as an owner would. The A/R’s for his clients have ballooned and he’s not collecting them. Now they’re looking for a replacement with some cash up-front!
#3. MISTAKE: 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.
Case History: We were asked to help in the sale of a tax practice in L.A. It seems that the seller had been contacted by a local accountant who had offered to buy her practice. The buyer asked the seller what she wanted for a down payment. When she told him, he then told her he didn’t have any down payment but he would pay it back with her profits over time. That’s when she called us for our advice. (P.S., that buyer also didn’t disclose that he had recently gone bankrupt.)
#4. MISTAKE: 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.
Better to call Business Brokerage. We can usually find a motivated buyer that wants it all?your practice, furniture, equipment and lease.
#5. MISTAKE: 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.
#6. MISTAKE: 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.
Case History: I think it was my 4th or 5th accounting practice sale back in 1979. I listed a very “primo” practice for 1.5 times gross. I quickly found a buyer for it and the deal was consummated. In only about 5 months, the buyer was strapped for cash, couldn’t make the payments and bailed out of the deal. The practice was not recoverable and basically was dissipated to nothing. LESSON LEARNED: Give the buyer a chance to pocket some profit after debt service, even if the gross drops by 15%.
#7. MISTAKE: Selling your practice too cheaply. 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. Better call Business Brokerage if this is you. You can’t possibly convey any enthusiasm to a buyer when you’re in this state of mind.
Case History: I’ll always remember this sale. After I got 5 offers on this man’s practice, he said: “Dave, you are really a pro. I can’t believe that you got me this many offers for full price on this mess!” He would have sold for half the price I got him, he just didn’t know what he had. He was burned out and over his head in the accounting area. The place really was a physical mess!
#8. MISTAKE: 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.
Case History: When I told the two owners of a bookkeeping practice that I could sell their practice within 30 days for about 1.10 times gross they really didn’t believe me. The practice was 88% single entry accounting and 12% low-level tax return preparation. Additionally, many of the clients had only been on-board for 3 years or less. Fact is, we got 11 offers, most at or near full price for the practice.
#9. MISTAKE: Not paying attention to keeping your fees at market level and maintaining excellent workpapers (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.
#10. MISTAKE: 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.” Imagine the poor accountant that sold his business on an “earn-out” in 1989 just as the recession was starting. Most all of the firms that I know of, lost 20% to 30% of their gross from 1989 to 1995 due to bankruptcies, firms going out of business, mergers, and people moving out of the area.
#11. MISTAKE: 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).
Case History: 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. NOTE: Hardly ever does the buyer disclose this information. You would never know about his credit problems without the credit report. In most years, because of our credit checks, we discover several buyers that had severe credit problems, which of course we immediately disclosed to the seller.
#12. MISTAKE: 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? That’s what happened in a deal I handled in Long Beach. Luckily, in this case the practice was still intact and the seller was able to take the practice back. Now, we insist on life insurance on the buyer with the seller named as beneficiary.
#13. MISTAKE: 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).
Case History: 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.
#14. MISTAKE: Not being able to substantiate the value of your practice with market search.
Tip: 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 1,400 practices worth over $210,000,000 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.
#15. MISTAKE: Not interviewing several buyer prospects to be sure to pick the best buyer for your clients.
Case History: A few years ago, we had a very anxious seller that had tried to sell her practice to one of her employees. At the last minute, the buyer backed out. Meanwhile, the seller had already taken a job in industry. She listed with us and we had a buyer within a week. The trouble was, she was so anxious, she jumped in the chance to get it sold and accepted the offer from the first buyer. She didn’t take advantage of the most important part of our service: producing multiple buyers. Unfortunately, the deal didn’t work out as well as planned.
#16. MISTAKE: Not always striving for a “WIN-WIN” deal so both buyer and seller can live with the final deal. The most common situation is where the seller demands a high down payment and stiff payment terms. After the close, the gross goes down a bit and the buyer is strapped.
Case History: Most buyers are very enthusiastic about a practice they are bidding on. Further, they are highly confident in their own skills and “sales” ability to hold the clients. The problem is, they don’t always realize that their personality may not be as attractive to the seller’s clients as to their own clients. If a few clients leave, the gross goes down and the buyer doesn’t have adequate working capital, then there will be a problem. Usually, the ego of the buyer won’t accept the blame and he blames the seller. Thus, a win-win deal requires terms and conditions that both parties can live with if the gross goes down a bit.
#17. MISTAKE: Not being objective in your analysis of the potential buyers. It is only human to give highest consideration to the person most like yourself. Often the best businessman or woman for your practice may be a little more dominant than yourself (it goes with the territory).
Case History: Have you ever heard of “mirroring”. It is the technique of more or less mirroring just what the other person says to get agreement and understanding. I once sold a practice wherein the prospective buyer said yes to everything the seller said and wanted. He just kept on nodding yes providing the seller with a tremendous boost to his ego. After the deal closed, the buyer did whatever he wanted to do. He had a hidden agenda in that he was a general partner on a commercial building project and needed investors. Well, he got them alright: from the clients he purchased. After he “worked” the clients for investments, he gave the practice back. Thank you very much, eh!
#18. MISTAKE: Thinking that you will save the commission by doing a For Sale By Owner deal.
Case History: Let’s face it, our clients are not unaware that they might be able to sell their own practices. But, these clients realized that the inducement for a “for sale by owner” situation is the saving of the commission by the Buyer. You know from your own experience when you shop for a house or car that a “for sale by owner” will sell far below the market! And you, the buyer, expect to pocket the savings.
#19. MISTAKE: Not using Business Brokerage’s proven Buy/Sell Agreement.
Tip: About Our Buy/Sell Agreement:
How would you like to be able to hire 600 attorneys to put their heads together and write your final buy/sell agreement? When you engage Business Brokerage that’s what you get; a contract that has been picked apart, piece by piece, by hundreds of attorneys. In over 1,400 sales, we have provided a model buy/sell agreement to both the buyer and seller to take to their attorneys. These attorneys have fixed the loopholes, weak verbiage, and uncovered situations. They have incorporated the needs and peculiarities of CPA and accountant practice sales. Don’t get me wrong, our contract is not designed to be extremely one-sided, but rather, it’s very comprehensive. It covers all of the situations that most attorneys never think of, since they don’t have experience in writing accounting practice buy/sell agreements. For example, here are just a few of the points covered (missing any one point could cost you more than our fee alone)
* Protection from a buyer “cherry picking” your clients by jacking up the fees
* Protection from your gross going down due to buyer lowering your fees (this actually happened to one of our sellers wherein the buyer thought the seller’s billing rate of $150 was too high so he lowered it to $100)
* A clause allowing the seller to refer additional business to offset any loss of clients
* A clause allowing the seller to stay on as a consultant to drum up new business for a handsome compensation
* Protection from the death of a buyer (6 months after a deal closed, the buyer ran his car into a truck and died; now we include life insurance in every contract)
* A 3 credit report (from all 3 national credit reporting agencies) on buyer prior to signing contract
* A clause equivalent to “signing off” on the books and records so the buyer can’t come back claiming fraud
* A covenant not to compete that is strict enough to protect the buyer but not so restrictive to keep the seller out of the market place in case his plans don’t work
* An Independent Contractor agreement to cover your consulting arrangement if you desire to stay on in a “phase-out” scenario
* A Partnership Agreement if you desire to stay on in a “phase-out” as a partner
#20. MISTAKE: Not checking our Web site at www.go2bbi.com on a frequent basis to see what practices are available.
Tip: Many practices are often sold before people hear about them via our mailers. Buyers who are serious about purchasing a practice check our website frequently for new listings. Listing ads always are posted on our website before mailers or email marketing is done.
Please call Business Brokerage, Inc. to discuss. We look forward to meeting with you and we will answer any questions you may have.
BUSINESS BROKERAGE, INC.
Lee Ribolin, Broker
Craig Van Laningham, Agent
David C. Smith, Founder (Retired)