The Trials and Tribulations of Buying A Practice

Acquisition; the very word conjures up images of late night secret meetings, high-level negotiations and behind-the-scenes political manoeuvrings; it’s exciting, invigorating and financially rewarding.

A typical approach I receive from a potential buyer goes something like this:

“We have this great, young, energetic CA who has been with us for seven years. We don’t want to lose them, so we want to invite them into the partnership, but at present, we don’t quite have a big enough fee base to do so. Can you find us $500,000 in fees to buy to give us the critical mass to admit them as a partner?”

This is just one of the reasons why buying a practice or block of fees makes sense, but there are many others too.

As explained in Stephen Bernhut’s excellent article ‘The Art Of Shingling’ published in CA Magazine’s June/July 2003 issue (pages 28 to 33):

· To take control of one’s career
· To have more time for the children
· To make more money

Whatever the motivation, the one thing that is common to most prospective purchasers is the excitement they feel and the passion they have for the public accounting domain.

However, passion does not pay the bills!

The path ahead of any potential buyer is laden with obstacles, so let’s look at twelve steps in the process of an acquisition and some pitfalls that await you along the way. We’ll look at six steps this issue, and the next twelve next time.

1. Finding The Reason

Growth for growth’s sake is not a good idea. Buying the ‘wrong’ practice for the sake of getting bigger can lead to bigger problems for the practitioner. A great deal of care has to be given to the process, and not all opportunities to grow are equal. Know why you want to do this and if it really does make sense, then you can move on to step two.

2. Finding ‘Nemo’

Finding the right blend of services, clients, industries, staff, salaries and fee scales can be a time consuming exercise. Indeed it can seem overwhelming at times. The task in hand is somewhat akin to Nemo’s fathers in the animated film, ‘Finding Nemo’.

3. The ‘Method’

How does one go about finding that elusive firm for sale? Well there are a number of choices:

· The classified adverts in this magazine
· One could pick up the yellow pages and make cold calls or send mailings to other firms
· The potential to network at CA district association meetings
· You might know an older practitioner in your area that might be suitable for an approach.
· And finally, there is the option to work with a broker

Whichever way you decide to go, you will need to set aside substantial amounts of time. Even working with a broker, while cutting out the calling and mailing, will still require you to have time to attend a number of meetings with different potential sellers.

As a broker myself, you might expect me to be biased toward the last method listed, but no. I often find that my best clients are the ones who have tried all the other options first and then realize the value that a broker brings to the table.

4. The Price

What makes one group of clients worth $1.10 per $1.00 of billings when another might sell for 90 cents in the dollar? It’s mostly about:

· Value
· Age of clients (or perceived potential for longevity post-deal)
· Length of time as clients with the seller
· Return on investment
· Discounted cash-flow (or earn-out period)
· Efficiencies of scale
· Quality of staff
· Quality of services provided to, and additional services bought by, these clients
· Amount of cash required as a down payment
· Niche market penetration
· Potential to up-sell and/or cross-sell clients additional services
· Potential to increase rates over time while holding costs constant

The above list is certainly not exhaustive, but these are the most common issue arising that effect price.

5. Tax treatment

Is this an allocation of income? Is the ‘retiring’ partner joining the acquiring firm for a period to enable this to happen? Is it a capital transaction? The answer is ‘it depends’.

I have seen deals where a sole practitioner rolls their practice into a professional corporation the day before the sale and the acquiring firm buys the shares of the PC instead of goodwill from the sole practitioner, in order to take advantage of any available tax allowances.

Every deal is different and I am afraid that there is no ‘cookie-cutter’ solution.

The tax treatment of the deal should be discussed early in the process so the buyer can calculate the true after-tax dollar cost of the transaction and assess the real value of the deal.

6. Web domain & chattels

The seller has a number of assets that can easily be overlooked in all the excitement, such as:

· Web site address & content
· Association and group membership (such as Principa, RAN-ONE or ReNew Group)
· Chattels, such as computers, desks, chairs, software & licenses etc

These items should be specified as to what the buyer is going to get and a separate price negotiated for these items. As a buyer, you should also have the right not to buy certain assets that might either be obsolete, duplicates of assets already held or simply items that have no place in the new firm (such as a punch-clock – yes some firms still have these!)

Next issue we will look at the next six steps and draw some conclusions.