Buying an accounting or CPA practice is an exciting venture for many entrepreneurs and seasoned accountants looking to expand or diversify their portfolios. While the allure of an established clientele, proven systems, and reputable brand may be attractive, it’s essential to approach such an acquisition with caution. One of the most significant aspects to consider during the purchase is the contract. Contracts can be fraught with potential pitfalls, and when it comes to buying a business, these issues can translate to substantial financial and operational repercussions.
In this post, we’ll highlight some potential contract issues that buyers might encounter when purchasing an accounting or CPA practice. Knowledge of these concerns can help prospective buyers be vigilant, ensuring a smoother transaction and a successful transition.
The worth of the practice in question is, of course, a top concern. Disparities between the buyer’s and seller’s perceived values can create disagreements. Factors that influence valuation include:
- Client list quality and longevity.
- Reputation in the market.
- Financial history and forecasted revenue.
- Assets, including technology and infrastructure.
Ensure that the valuation method used is standard for the industry and that both parties agree on the final figure. It might be prudent to involve a third-party appraiser familiar with accounting practices.
Often, sellers might decide to set up shop elsewhere after selling their practice. To protect the buyer, non-compete clauses are essential. These prevent the seller from starting a competing firm within a specific radius and time frame. Ensure this clause is reasonable but protective enough to secure the buyer’s interests.
Client Retention Guarantees
A significant portion of the practice’s value is its client base. There’s always a risk that clients might leave after the transition. Some contracts include clauses where a portion of the sale price is held in escrow and is contingent on client retention. If a specified percentage of clients leave within a certain period, the buyer might be entitled to a refund.
Smooth handovers are crucial for client and employee retention. The contract should specify the seller’s role in assisting with the transition. Will they introduce the buyer to key clients? How long will they stay on to ensure seamless operations? Clarifying these details can prevent misunderstandings later.
Employee and Talent Retention
A practice is only as good as its staff. If key personnel leave following the sale, it can hurt the practice’s operations and reputation. Consider clauses that encourage the retention of essential employees or provide for compensation adjustments if key staff depart shortly after the acquisition.
Buyers need to be cautious about inheriting hidden debts or liabilities. Comprehensive due diligence is essential, but so is including clauses in the contract that protect the buyer from undisclosed financial issues. This can range from unpaid taxes to pending litigation.
Intellectual Property Rights
In today’s digital age, many firms have proprietary software, branding elements, or processes that are integral to their operations. It’s essential to ensure that the contract clearly states the transfer of these intellectual property rights to avoid future disputes.
Sometimes, part of the purchase price is deferred and based on the firm’s future performance. This is known as an ‘earn-out.’ If you’re considering an earn-out, the contract must detail the terms, performance metrics, and the period.
If the purchase is being financed, there may be clauses relating to the terms of this financing. For instance, if the seller is providing financing, the contract should state the interest rates, payment terms, and what happens in case of defaults.
In case things go awry, it’s wise to have an exit strategy. The contract should outline the conditions under which either party can terminate the agreement and the implications thereof.
The adage “the devil is in the details” rings especially true when purchasing an accounting or CPA practice. A well-drafted contract that addresses potential issues is crucial in safeguarding the buyer’s interests. It’s highly recommended that both parties engage an experienced accounting firm business broker, such as Berkshire, with such transactions to guide them through the process. With the right precautions and a thorough understanding of the contract, buyers can embark on this new venture with confidence.