Lucinda and Jeremy Kitchin have some advice for those looking to buy an accountancy practice or a block of fees.
If you spend any time looking at listings of accountancy practices for sale, you’ll notice that there is a significant difference between opportunities to acquire the largest and smallest gross fees, but almost all of them fall into the category of ‘small firms’.
This is because of the very flat size-profile of accounting firms in the UK. Around 65%–70% of all UK practices are either sole practitioners or have two partners/directors. In this context ‘small’ equates to turnovers of less than £700,000. At the other end of the scale, the top 100 firms by size in 2020 start with turnovers of £4.2m rising exponentially, with the largest of the Big-4 having gross fees of circa £4.2 billion.
Owing to the flat profile of accounting firms, the vast majority of purchasers are themselves the owners of small firms seeking to acquire either small firms or blocks of fees, although is changing as the market itself changes with a growing focus on consolidation.
The bad news is that most practices for sale attract a fair amount of interest. At A.P.M.A. we oversaw the sale of a £40,000 block of small fees in the London area almost 10 years ago which attracted no less than 106 would-be buyers! More recently, a block of fees of £60,000 in the East Midlands drew the interest of 41 purchasers. And in the past 12 months a block of medical fees of £110,000 gave rise to 54 applications. As you would expect therefore, blocks of fees without any overheads attached to them represent an excellent potential investment to firms looking to increase profitability by maximising use of their existing resources without necessarily adding to their costs.
The good news about this sector is that historically purchasers have been reluctant to pay more than the ‘going rate’ (typically a multiple of 1.0 – 1.2 times the annual recurring turnover). Consequently, the chances of a purchaser being gazumped by another buyer are remote (although it does happen). However, this also means that a seller can usually be selective when deciding to whom they will sell, giving consideration to factors such as geography, turnover, professional qualifications, charge out rates, etc., but almost without exception prior relevant experience is a must.
Here we highlight 16 key issues to consider when buying into an accountancy practice:
- It may be difficult to obtain external funding because there are usually very few ‘hard assets’ such as machinery and equipment that third-party lenders normally like to see (A.P.M.A. can put you in touch with specialist lenders, if required).
- Do you have and do you need a practising certificate?
- You should be comfortable offering a personal service to clients where little is tangible and where everything is dependent on the level of service provided.
- Good interpersonal skills are required so as to be able to grow the fee base and to achieve a position where staff can be taken on and retained. Where chargeout rates are too low, there may be insufficient profit to enable investment in junior fee-earning staff. This then results in the principal doing the low-level work at a low charge rate as well as the higher-level work. To earn a ‘living wage’ the principal then has to work excessive hours with no hope of a solution. This can lead to a pressurised and isolated work-life experience.
- You must ensure the client relationship will continue after you buy. The seller of the practice may himself be ‘the business’. If the current owner has built long-term relationships with the clients and they see him/her as the face of the business, will the business transfer across successfully and how will you ensure this? Experience has taught us that if the sale is handled properly, the stronger the clients’ relationship is with the seller, the more likely those clients are to transfer across.
- In buying fees some protection will be needed in case the purchased clients don’t transfer across to you where it is no fault of your own. This is done via a suitable ‘claw back’ clause in the Sale and Purchase Agreement. Remember that the purchaser will always be at risk if the seller intends to continue locally as a practising accountant.
- What are you really buying? Remember that there is no contractual ‘ownership’ of a client – (s)he can ‘walk’ at any time. Thus the principle asset for purchase tends to be the goodwill.
- Will the seller give you a reasonable handover period so as to give you the best chance of retaining the transferring clients? Will you simply expect some handholding (and to what degree) or will the seller work for you for a time on a consultancy basis?
- Does the seller usually visit the clients at their place of work or do they bring their books into the practice, and how does that fit in with how you usually operate?
- Is the seller proposing you buy the individual fee income attributable to each client or are they selling the aggregate sum of those fees? If you are unsure of the relevance of these two methods visit A.P.M.A.’s website (www.apma.co.uk).
- Is the practice limited to operating from its current offices or are the fees portable to another area? If they can be moved, how far could they be moved without risk of losing any clients, and how would this affect retention of any staff?
- How easily can any senior employees quit and become your competitor? Are there suitable restrictive covenants in their employment contracts?
- During the due diligence phase be certain to investigate the client files alongside the time records to ensure they are being serviced profitably. Check that money laundering and other regulations such as GDPR are in force and up-to-date and that the other necessary due diligence has been carried out on the clients to be transferred. If this needs bringing up to date you will need to factor this in as an additional cost/task.
- Decide whether to employ a solicitor or whether to buy a standard Sale and Purchase Agreement template.
- What can you do to build the business up further? Could you offer additional services to the existing client base? Could you service those clients more profitably? And could you incentivise them to refer their own associates to you?
- If each partner/director (or sole-practitioner) has a client base valued at £200k or more and if his/her share of the gross payroll cost of staff is no more than one third of turnover, the practice should be able to make 50% net profit. Working capital is usually no more than three to four months of turnover.
An accountancy practice can usually make higher than average profit margins compared to other businesses and can provide an excellent platform from which to grow. As it grows, the value increases and a good income stream can be provided to the owner(s).
• Lucinda and Jeremy Kitchin, Jeremy Kitchin, A.P.M.A. Call 01623 883300, lines open until 8pm, seven days a week. See www.apma.co.uk