Fair purchase price

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#1
3CPA  
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I was offered the tax practice of recently deceased tax preparer. His heirs made no mention of a purchase price for the practice, but they are still rather shell shocked at the loss of their father, and I feel it is my duty to offer them a reasonable price for the practice. I made an initial offer of 20% of gross receipts for 3 years on existing clients, because I had heard of another firm in our area purchasing a tax practice for that amount. They seemed to feel that may be too much, so I was hoping to get some feedback as to whether or not it is equitable.

I am currently employed full time for a public accounting firm, but I'm hopeful this practice will provide a revenue stream that would enable me to become self employed. I think filing the extended returns will provide me with a sample size to help me make that decision.

Thanks for your advice.
 

#2
chris  
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Which country are you located in? The USA?
Site admin and software developer for TaxProTalk.com and https://TheSiteFactory.com
 

#3
3CPA  
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Yes. I'm in the USA.
 

#4
chris  
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I've seen examples of success and failure on transactions like this - and there is some concern as well as to how much goodwill is implicit in the value of the business and without the guy's personal endorsement and help through the transition you may find that the client's are just not as interested as everyone assumed they would be. So you can see a lot of attrition.

I think I would work out a deal that says you pay them a commission or percentage of actual closed business that comes over -- don't make it an outright purchase up front. You could spread it over a couple of years if you wanted too, that way you see what kind of retention you get.
Site admin and software developer for TaxProTalk.com and https://TheSiteFactory.com
 

#5
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I worked with the gentleman several years ago while I was still in school working on my degree. His clients think very highly of him, and his heirs have already pointed a couple of his clients who have extensions in my direction while informing them that I had worked with him previously. The few they've sent seem comfortable with me taking over where he left off.

I don't want to do a cash buyout because 1. I don't really have a lot of cash to offer, and 2. I am also concerned about client retention. The deceased took a much more aggressive approach than I do. I am all for helping my clients save money in taxes, but I'm not willing to risk my licensure to save a client a few hundred bucks in taxes. I plan to have open lines of communication with them and explain the difference in our strategies, but I can easily see a portion of the clients leaving when their tax bill increases.

That's why I proposed a payment system that allows me to pay based on work done for his current clients with relatively low risk to me. If things don't go well this fall with the extended clients, and I lose a good chunk of the extended clients or don't have a good feeling about the clients who stay I want to be able to walk away without having a large capital investment on the line. But on the other hand I also want to be fair to his heirs.

Thanks again for the feedback.
 

#6
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The price seems quite reasonable. I've purchased 2 separate (smaller) business' in the last 10 years and in both cases I paid 50% of actual receipts for each of 2 years. The seller in both cases agreed to be quite 'visible' for the first year (through letters, phone calls and even at the appt for a couple of squeamish 1st year high dollar returns), and available the 2nd. If I couldn't keep them after 2 years, well that was my problem. lol

The first purchase was due to retirement of the seller, the 2nd one due to the death of the preparer (spouse of the seller). It all worked out fine for me. If you can do 20% for 3 years that is a much better deal than the ones I did!
Jim
Pettit Financial Services
 

#7
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Thanks, Jim. I appreciate the response.
 

#8
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I've purchased 2 separate (smaller) business' in the last 10 years and in both cases I paid 50% of actual receipts for each of 2 years.

I'm a little bit out of the loop on all of this, but in Jim's case, lets say annual Year1 billings were $100k...ditto for Year2. 50% of Year1 of $100k = $50k. And 50% of Year2 of $100k = $50k. So, $50k + $50k = $100k, which is 1x Annual Billings...this is a historical rule of thumb in the profession. Of course, some of the deals are, and should be, predicted on annual collections.

I have also seen the 25% deals as well, over a 2-year period, which is 1/2 of what Jim paid.

Time might be of the essence here owing to the situation; I agree with comments about attrition.

They seemed to feel that may be too much, so I was hoping to get some feedback as to whether or not it is equitable.

You mean the selling family thought it was too much?

If so, then maybe go 25% over 2-years.
 

#9
eze  
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That seems like a good deal to me, but I'm California.....where everything is overpriced.

20% 20% 20%; or 25% 25%....those are fantastic terms by CA standards.

I've been looking for a small shop to buy, 125% of gross receipts is common, no thank you.
 


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