Typical buyout structures

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#1
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I was just wondering what kind of structures y’all typically have when buying or absorbing another firm. What is the typical purchase price based on, how long is the payout and under what terms, etc.

Also what advice on things to look for would you recommend to someone looking to purchase a firm
 

#2
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So I sold my practice in NY in 1995 and again 3 years ago I divested myself of about 75K of billings and both were structured very similarly.

1 to 1.25 times billings was the price

10 to 20 percent down

Remainder paid over 3 tax seasons

ANY client who the buyer did their tax return once, had to pay for that client. If the client did NOT stay for one "cycle", the buyer was not held accountable.

In both scenarios, I was paid in full, no issues. Choose carefully the buyer. I NEVER used a lawyer. Both sales were small. The NY sale was about 100K. I learned a long time ago. Small deals are only worth the men signing them. If they stiff you, a lawyer written document vs a GOOD self written document isn't going to matter. The cost to litigate etc.. Obviously bigger deals might need a lawyer.

I'd be happy to e mail you the 2-3 page agreement I used.
 

#3
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In both instances were you selling to someone who already had their practice, or Someone just starting out and that was the base of their new practice? Also, was there any interest charged on the subsequent payments?
 

#4
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TaxMan2020 wrote:In both instances were you selling to someone who already had their practice, or Someone just starting out and that was the base of their new practice? Also, was there any interest charged on the subsequent payments?


In both instances, the buyer had a "modest" practice and I felt that they were the right fit for the clients. I did NOT charge interest as the payments were variable. i.e. Depended on collections.
 

#5
ATSMAN  
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Just to chime in on what is already posted. I was the buyer and client retention was a big factor in my agreement. I had to collect my billing for me to pay the seller. Often times you will see sellers make side deals with clients not to charge the full bill or waive certain charges etc. When the client wants you to honor those deals with the seller it may not fit your business model.

I lost quite a few clients from a seller because I could not commit to those deals. It did not fit my business model.

If you bend your business model to make someone happy, believe me neither of you will be happy in the long run. So if your business model is working for you, stick to it!
 

#6
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ATSMAN wrote:Just to chime in on what is already posted. I was the buyer and client retention was a big factor in my agreement. I had to collect my billing for me to pay the seller. Often times you will see sellers make side deals with clients not to charge the full bill or waive certain charges etc. When the client wants you to honor those deals with the seller it may not fit your business model.

I lost quite a few clients from a seller because I could not commit to those deals. It did not fit my business model.

If you bend your business model to make someone happy, believe me neither of you will be happy in the long run. So if your business model is working for you, stick to it!


I would be the buyer in this scenario. What would you say your retention rate was? Did you only buy clients to add to an existing practice, or did you buy the practice employees and all?
 

#7
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I have no personal experience in this, but the area interests me greatly due to the state of flux of my personal life/practice right now.
I have been watching the Joel Sinkin webinars for Accountants World the last few years, they are very informative.
I emailed Joel directly about my situation, but his firm/services are not affordable for small shops. He typically won't work on a deal for less than $10k.
He did write back to me, and his website has a great deal of information available for free that is worth reading.

The 2020 webinar
https://www.youtube.com/watch?v=DMeeAkBalZk

2019
https://www.youtube.com/watch?v=96gSV2kqQCs

2018
https://www.youtube.com/watch?v=7c87kBEWN6c

It makes sense to me that the retention rate is set based on the 2nd year client list.
The first year you have to assume the client will come out of american lazyness, and if they come back for the 2nd year then they are now your client. They saw the change, accepted it, and are now your client to keep or lose depending on how you service them. A client retention based on the first year only is greatly in the sellers favor, as most people will not make a change until after that initial year, based on articles I have read.

Retention rates can be at or over 80%, but you usually want the seller to stick around to help clients stay, and the seller should want that as it makes the buyer and seller the most amount of money.
Be wary of buying clients that won't be alive to resell in 10 years. You spend 3-5 years paying for them, and then they age out, or no longer need your services.
 

#8
ATSMAN  
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I would be the buyer in this scenario. What would you say your retention rate was? Did you only buy clients to add to an existing practice, or did you buy the practice employees and all?


I did this twice to add clients to my existing practice. Both sellers were older long time established accountants that were retiring due to health issues. I did not hire any of their employees. In one transaction I purchased some office equipment and furniture that were in very good shape for next to nothing!

I had to weed out a lot of the former clients because it did not fit my business model so I would say I probably lost 20 to 30% but I did not pay for those because my agreement was that they had to stay with me for a year at my billing rate.

I can emphasize enough to have a client retention contingency so that you are not paying for junk and this will be the most difficult term to negotiate if a broker is involved or the seller just wants paid pronto and get out. I had to reject a lot of opportunities until I found the right one.

It makes sense to me that the retention rate is set based on the 2nd year client list.
The first year you have to assume the client will come out of american lazyness, and if they come back for the 2nd year then they are now your client. They saw the change, accepted it, and are now your client to keep or lose depending on how you service them.


If you weed out the clients that don't meet your business model the first year you can be reasonably certain that they will stick around for the second year unless there is some other issue. I try to set clear expectations so that we both are not blind sided later on. If I see behavior that does not fit my business model later on, a price adjustment or disengagement analysis is done after tax season and appropriate corrective action taken. The key for me is to stick to my business model and not make exceptions that cause me additional expense or anxiety.
 

#9
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I did my first purchase about 6 years ago. 20% down and the rest paid as a % of collections for 3 years.

Started my second one this year. This time no money down and pay a % of collections for 5 years.

You can tell what I learned from the first one...Much easier to pay back over 5 years as opposed to 3 years. Also reduced my risk by not putting any money down.

The first transaction turned out great. Luckily I put a maximum in the contract for the percentage of collections. I increased the fees buy about 30% over the buyout period. The fees were too low to start with. If I didn't put a maximum in the contract I would have paid them another 30k or 40k.

Biggest word of advice. Try and get the seller to work with you for a year or two to transition the clients.
 

#10
ATSMAN  
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The longer you can stretch out the payment the better it is for you BUT the seller wants to get out quickly and get paid so that is a serious point in negotiations. Also if the seller has engaged a broker, I can tell you from personal experience stretching out payments may not be a option that is negotiable.
 

#11
jon  
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The quicker the seller wants to be paid the BIGGER the discount he has to give.
 

#12
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I used a broker on my first deal and they wanted 80% cash up front. I declined, waited two weeks then offered 20% down. They accepted because they had no other better offers. The seller took half the money they received upfront and wrote the broker a fat check. Looking back at that deal, I had to take out an 80k loan for the down payment. It worked out great, but I would never take out a loan to buy a practice again. Too risky. Clients may leave, key employees may quit, too many variables.

I'd avoid a broker at all costs. They add no value for the buyer.

Do a search for CPA's still practicing over 65 and contact them. Or place an add in your state society publication and they contact you. Best way to find potential sellers. Many of them have no exit plan.
 

#13
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ReckedCPAEA wrote:I have no personal experience in this, but the area interests me greatly due to the state of flux of my personal life/practice right now.
I have been watching the Joel Sinkin webinars for Accountants World the last few years, they are very informative.
I emailed Joel directly about my situation, but his firm/services are not affordable for small shops. He typically won't work on a deal for less than $10k.
He did write back to me, and his website has a great deal of information available for free that is worth reading.

The 2020 webinar
https://www.youtube.com/watch?v=DMeeAkBalZk

2019
https://www.youtube.com/watch?v=96gSV2kqQCs

2018
https://www.youtube.com/watch?v=7c87kBEWN6c

It makes sense to me that the retention rate is set based on the 2nd year client list.
The first year you have to assume the client will come out of american lazyness, and if they come back for the 2nd year then they are now your client. They saw the change, accepted it, and are now your client to keep or lose depending on how you service them. A client retention based on the first year only is greatly in the sellers favor, as most people will not make a change until after that initial year, based on articles I have read.

Retention rates can be at or over 80%, but you usually want the seller to stick around to help clients stay, and the seller should want that as it makes the buyer and seller the most amount of money.
Be wary of buying clients that won't be alive to resell in 10 years. You spend 3-5 years paying for them, and then they age out, or no longer need your services.


Thanks for the links I will definitely check those out. I definitely want to factor client retention in, as well as look at the age breakdown of the clients to make sure they aren’t skewed in such a way that I’d lose a lot relatively quickly
 

#14
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Taxman40 wrote:I did my first purchase about 6 years ago. 20% down and the rest paid as a % of collections for 3 years.

Started my second one this year. This time no money down and pay a % of collections for 5 years.

You can tell what I learned from the first one...Much easier to pay back over 5 years as opposed to 3 years. Also reduced my risk by not putting any money down.

The first transaction turned out great. Luckily I put a maximum in the contract for the percentage of collections. I increased the fees buy about 30% over the buyout period. The fees were too low to start with. If I didn't put a maximum in the contract I would have paid them another 30k or 40k.

Biggest word of advice. Try and get the seller to work with you for a year or two to transition the clients.


I am hoping to do structure the deal closer to your second one, but I do like the idea of not paying them for the increased Billings. I am pretty certain they’d be open to staying for 2-3 hours on a part time basis after year one
 

#15
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ATSMAN wrote:The longer you can stretch out the payment the better it is for you BUT the seller wants to get out quickly and get paid so that is a serious point in negotiations. Also if the seller has engaged a broker, I can tell you from personal experience stretching out payments may not be a option that is negotiable.


As far as I know there is no broker involved so it should be pretty negotiable
 

#16
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Taxman40 wrote:I used a broker on my first deal and they wanted 80% cash up front. I declined, waited two weeks then offered 20% down. They accepted because they had no other better offers. The seller took half the money they received upfront and wrote the broker a fat check. Looking back at that deal, I had to take out an 80k loan for the down payment. It worked out great, but I would never take out a loan to buy a practice again. Too risky. Clients may leave, key employees may quit, too many variables.

I'd avoid a broker at all costs. They add no value for the buyer.

Do a search for CPA's still practicing over 65 and contact them. Or place an add in your state society publication and they contact you. Best way to find potential sellers. Many of them have no exit plan.


I don’t believe there is a broker involved, or that one would be brought in. I think he would be willing to stay on part time for a few years. Not sure if a down payment will be required, or if they’d be willing to do a payout for 100% of the price, but I will remember this and take it into account during negotiations
 

#17
ATSMAN  
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A down payment is generally required to cement the deal. How much that has to be negotiated. I would go no more than 20% if the quality of the clients is acceptable to me. Generally I try to stay under 10%. If you are also keeping staff then it is an added risk because they may quit in the heat of the tax season and go down the street to a competitor if things don't work out. That is why I don't keep the staff. Too much work to retrain them in your business model.

Do use the seller to make all introductions, and smooth out the transition as best you can. I have had the seller sit with me in client meetings with difficult clients so that expectations are clear. I don't like any SURPRISES :oops:
 

#18
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ATSMAN wrote:A down payment is generally required to cement the deal. How much that has to be negotiated. I would go no more than 20% if the quality of the clients is acceptable to me. Generally I try to stay under 10%. If you are also keeping staff then it is an added risk because they may quit in the heat of the tax season and go down the street to a competitor if things don't work out. That is why I don't keep the staff. Too much work to retrain them in your business model.

Do use the seller to make all introductions, and smooth out the transition as best you can. I have had the seller sit with me in client meetings with difficult clients so that expectations are clear. I don't like any SURPRISES :oops:


That is one thing I’m struggling with. If you get in there and the employees may not be bad per de, but just aren’t the caliber of employee you want, how do you handle that?
 

#19
ATSMAN  
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That is one thing I’m struggling with. If you get in there and the employees may not be bad per de, but just aren’t the caliber of employee you want, how do you handle that?


I don't have the time to teach "old dog new tricks!" especially during busy tax season. Therefore I don't take on the employees of the business I am purchasing. I am very selective and I only look for motivated accountants that want to retire and find a good home for their client base. I am NOT looking for complicated operations or store fronts. So it is a different business model for me.

I like to grow my business organically with little help from selective acquisitions!
 

#20
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ATSMAN wrote:
That is one thing I’m struggling with. If you get in there and the employees may not be bad per de, but just aren’t the caliber of employee you want, how do you handle that?


I don't have the time to teach "old dog new tricks!" especially during busy tax season. Therefore I don't take on the employees of the business I am purchasing. I am very selective and I only look for motivated accountants that want to retire and find a good home for their client base. I am NOT looking for complicated operations or store fronts. So it is a different business model for me.

I like to grow my business organically with little help from selective acquisitions!


I don’t currently have a practice, so this would in turn be my base to start out, and grow from there. I know I couldn’t do all the work myself but I think I could cut down on number of employees with better ones.

Side conversation, but how do find is the best way to grow organically? Asking for/receiving referrals? General networking?
 

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