#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 partner 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 on 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 what ever 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 calling the Business Brokerage
AUTO-FAX or checking our Web site at www.go2bbi.com
on a frequent basis to see what practices are available.
Tip: Many practices are sold before most people hear
about them. This is for 2 reasons: 1. Our practices
are now listed on the Web at www.go2bbi.com, and 2.
Hot buyers are calling our AUTO-FAX system on a weekly
basis to see what's new. You may call our AUTO-FAX
at 800-446-8707.
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.
David C. Smith, Broker
Southern California
1-(800)-274-4272
