One issue for people on the cusp of retirement is,
What will happen if death comes along whilst I am at my desk?
I can understand such people wanting to continue to work, it adds to the retirement savings and keeps the brain functioning.
Some accountants have a written Disaster Plan with arrangements in place for someone (a colleague?) to come in and run the practice until a fast smooth sale can be made. You don’t have to be on the cusp of retirement to need a Disaster Plan, what would happen if you were seriously hurt in an accident, or suffered a sudden significant illness?
For those with no Disaster Plan, a practice can still be sold, provided someone moves quickly. Clearly the better the practice is set up, the easier it is to sell.
Items that help a sale include:
- Documented systems
- Client lists
- Lodgement records
- Up to date WIP and Debtors
- Permanent files
- Signed employment contracts with restrictive covenants
- Signed engagement letters with clients
- Adequate back-ups (especially important in the case of a fire)
If we assume the practitioner will not be around to introduce clients to a purchaser, then continuity of staff may become critical. Are staff likely to leave and take clients? Will they willingly sign a new employment agreement, which include a restrictive covenant? Agreements in place from the start; create a great buffer, safeguards the practice and helps ease the transition. If staff want to take fees, have a clause in the Employment Agreement stating the price.
A purchaser will usually collect any Debtors and pass to the vendor. WIP will be billed where possible, and the amount received remitted to the vendor, depending on the arrangement, either before or after tax. It is important to determine what will happen to provisions for staff leave, including Long Service Leave. This includes the vendor’s accrued leave.
Other assets may include equipment and furniture, generally this has a low value, unless some is quite new.
There is a floor price for Goodwill; currently it is around 25 cents in the $1 of renewable gross fees. Most purchasers in the case of a Distressed Sale, are willing to make some initial payment, then the balance over say 2 – 3 years, based on the fees realised by the purchaser. So a high Goodwill price may eventually be paid, but over a number of years and only on those fees / clients transferred and maintained for at least 2 – 3 years.
Yes, Distressed Sales do occur, it just takes a while to collect all the money and top dollar may not be realised.
One must keep in mind that with a new or interim practitioner, change is a given; he or she may not look after your clients (hold their hands, take midnight phone calls) in the same manner as you would care for. If there is no handover, any level of client could leave. Generally in any such circumstance the new principal would focus on the top clients – they do make the most money. This can greatly reduce the overall sale figure; preparation is key.
The final figure can significantly change if it is a sale to someone unknown. Have someone qualify the buyers to ascertain a cultural fit, negotiate the deal and the contract ensuring you have the right terms of the agreement. It’s Imperative to make sure your advisor is working for you and not the buyer.
Available, Affable and Able; and in that order – ask everyone for advice as your trusted colleague might be out.
Phone: 1300 523 352
Email: magnus@jadejapartners.com
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