Buyer Info

Assets vs. Stock Sales:

Structuring the purchase or sale of an accounting practice, tax firm or any business for that matter, requires both parties to seek the expertise of their attorney and/or accountant. It is estimated that 30% or less of business sales are structured as stock sales, with the vast majority structured alternatively as asset sales. So, what are the primary differences?

Asset Sales: Usually the preferable structure for the buyer, an asset sale allows the purchaser(s) to acquire the assets in a sales transaction, with a “stepped-up” tax basis. This “stepped-up” tax basis, allows for a purchaser to depreciate tangible assets at a higher amount over a shorter period of time (usually 5-7 years) and allows for a smaller allocation of purchase price to intangible assets, such as goodwill, which must typically be amortized over a longer period of time (usually 15 years or more in certain circumstances). In addition, since only the assets are transferred in this sort of structure, there is no assumption of liability to the new owner, which could be in the form of prior mistakes, employee lawsuits and the like.

Regardless of the structure, it is important for both parties to work closely with their tax advisors, attorneys and consultants to understand what the structure means for them.

Since asset sales only include assets (typically equipment, inventory, pre-paid expenses), the transfer of other intangibles, such as copyrights and patents can be more challenging. Since the owner maintains ownership of the entity, transferring individual assets can sometimes be more difficult.

Stock Sales: Usually the more preferable structure for the seller, a stock sale allows the purchaser(s) to acquire assets through change of entity. Since most assets, both tangible (equipment) and intangible (patents) are in the name of the entity, a stock sale can facilitate this transfer in a more efficient manner. The purchaser not only acquires the assets of the entity, but also the liabilities. Therefore, it is important during the due diligence stage to ensure an understanding and verification of any outstanding liabilities which may inadvertently be purchased. The purchaser may elect to have the seller sign an indemnification against all unknown debts or prior wrongful acts, to further protect themselves against unknown or undiscovered risk. The seller on the other hand, can benefit greatly from a stock sale, primarily in the form of tax savings. Asset sales are most frequently taxed at Ordinary Income tax rates; whereas stock sales are treated most frequently at Capital Gains tax rates, which are much more advantageous.

Regardless of the structure, it is important for both parties to work closely with their tax advisors, attorneys and consultants to understand what the structure means for them. This is a non-issue for sole proprietorships, general partnerships and limited liability companies, as the do not have stock to sell; however, Sub Chapter S Corporations as well as C Corporations, will have this decision to weigh. Depending on the size of the company, the larger it gets, the more susceptible to a stock transaction it is. The amount of verifiable assets available in the business will also make a large impact on which treatment is the best for both sides.

Work with your consultant at Tax Firm Sales to guide you through the options of your next accounting practice purchase or tax firm!

Employee & Client Retention:

The purchase of an accounting practice or tax firm must address the sensitive issue of employee and client retention. Accounting and tax are a very personal service; those that retain a firm to complete these services must have a high level of trust and confidence in those performing the services. Therefore, the proper management of employees, particular key staff members, is vital to the overall success of any practice.

In most circumstances, only key employees (and sometimes not even key members) are privy to the sale negotiations of a practice. Most owners prefer to keep the sale of their practice highly confidential because of employee and client retention issues. Therefore, when seeking an accounting practice for sale, buyers must take extreme caution to only communicate directly with the seller or their sale consultant, unless expressly told otherwise. Buyers are urged to not visit the site, unless a pre-scheduled appointment with the owner is arranged; in addition, any phone calls to the firm for the owner should be treated as a personal nature, never disclose your reason for contacting the firm to anyone but the owner answering the telephone.

At some point in the sale negation, the sellers should identify employees they deem as “key.” These key employees may have strong relationships with clientele; management ability; expertise in their area of accounting, tax, audit or other areas or other reasons why the owners would deem them “key.” It is important to understand if these employees know about the exit strategy of the owner(s); if they are willing to stay employed for a new owner; what their responsibilities and rate of compensation is and if they have a non-compete in place, which would transfer appropriately to a new owner. Once the relationships are understood, it will be important to meet the staff at a later point of negotiations. Understanding what the employees do; what their interactions with clientele is and what their known future with the accounting practice is, is a very important element to the continued success of the firm. It is recommended to work at retaining employees (especially at the beginning of a transition) to reduce the impact of change on existing clientele.

Understanding the makeup of the clientele is another extremely vital topic while evaluating a tax or accounting practice. Revenue for most firms is made of up a combination of accounting and tax services. Specialty firms may have a mix of other services, including: auditing, payroll, consulting, etc…When a percentage in one area is high, it leaves room for growth in the other areas of business. Depending on the type of buyer and their experience in the financial industry, current percentages of business in certain areas provides a tremendous opportunity to capitalize on the high and low areas of service offerings.

In addition to understanding the service offering percentages, analyzing the clientele by revenue is also necessary. The goal of any accounting or tax practice ownership transition should be to maximize client retention. Owner involvement is a key element in maximizing client retention; as stated above, clients utilize their choice of tax or accounting practice because of the trust they have in those performing the services; therefore, a recommendation of a new buyer from a former owner is invaluable. It is important to work with the seller on a strong transition plan and expect to meet with key clientele together. Sending out letters to the clients from both the seller or buyer to introduce yourself can be there may be state guidelines that must be followed and are required in a transition of ownership to properly notify clientele of the change. Change can be difficult for clients and employees; therefore, minimizing change and being sensitive to this topic can make a world of difference in the success of any ownership transition.

Transition…What to Expect:

Transition plans can vary dramatically from one purchase to another; there is no perfect model to follow for an accounting practice transition. Most sellers prefer some level of commitment from the seller to continue to be a visible contributor to the practice. Sellers expect to support a new buyer in a transition and some are more open than others to what level of support they will provide. Typically, included in the sale price is a pre-negotiated number of hours that the seller will provide (at no charge) to a new buyer to assist in general transition (including training on the business, payroll, billing, understanding clientele, general business issues of importance). Beyond general training, if a buyer wishes to retain the services of the seller as a professional employee or consultant, the buyer and seller must come to an agreement on compensation after the included transition support.

At Tax Firm Sales, we believe in transparent business sale transitions with clientele. Clients do not want to walk into their accounting practice to find an unannounced new owner. A change in owner of an accounting practice should be properly and professionally communicated to those that make it successful.

There are many issues to be considered in a transition plan, the three key areas include: employee management; client management and duties of the new owner. Getting to know the employees and what they do – areas of weakness and strength – their interaction with clients and their work capacity will assist in ongoing management. Employees are not always open to change, mainly geared by insecurity in their positions and income; therefore, being supportive to the employees, spending time with them and showing their value is important to do. If the seller is in a position to seek retirement, more involvement with the new owner will be necessary. The new owner will most likely take over the accounts that the retiring owner was managing. Leveraging the knowledge of the seller on their accounts specifically is important. Once the buyer is well versed on the work flow of the practice, identifying duties of staff, seller and new owner will become easier.

At Tax Firm Sales, we believe in transparent business sale transitions with clientele. Clients do not want to walk into their accounting practice to find an unannounced new owner. A change in owner of an accounting practice should be properly and professionally communicated to those that make it successful. Buyer and Seller should work hand in hand in communicating this change to the clientele. There are many reasons for an owner to sell (retirement, health, other business interests…just to name a few); communicating the reason for the sale as well as the support to the new owner is a recommended step for the seller to take. Clientele is important to a seller; we have never met a seller who did not want to see continued success of their firm long after their departure. Selecting the right buyer is difficult and buyers should feel privileged at their selection; sellers should be happy to provide their recommendation to their loyal client base. Large clients should be personally introduced to a new owner, by way of the seller. Take time to consider the clients. A successful transition will show in the retention numbers.

Value Consideration:

The first two questions a typical buyer will ask is how much does the practice cost and what is the cash flow to the seller? Two excellent questions, and both are important in identifying the value of an accounting practice or tax firm. There are many standards that are universally acceptable in valuing a business; there are different models that are applied in different industries. The most common valuing method for accounting practices is based on gross revenues; however, this is certainly not an absolute. Tax Firm Sales uses a unique approach in valuing accounting and tax practices, utilizing a combination of gross revenues, seller’s discretionary earnings, and management of the firm, assets, growth opportunity and revenue consistency. All sale prices are considered by our on-staff Certified Public Accountant and can be explained throughout the sale process.

Seller’s Discretionary Earnings (SDE) is figured by adding identified costs specific to the owner or one-time costs that are not normal in the operation of the business back to bottom line Net Income. View the example on the right.

Reaching seller’s discretionary earnings should also be a transparent process. Anything that is added back to Net Income will be accompanied by notes explaining the reason for the add-back. This will be a necessary process while evaluating financial statements and tax returns. Keep in mind that add-backs to financial statements as well as tax returns may contain different sets of add-backs; however, they should ultimately provide the same bottom line figure (SDE).

In addition to seller’s discretionary earnings, other items requiring analysis include: gross revenues and sources of revenues; classification of management as either absentee or owner managed; the assets included with the sale and growth opportunity.

Gross Revenues and sources should be examined for consistency and percentages. Understanding how the revenue flows and from what sources will identify strengths and weaknesses in the accounting practices as well as opportunities for growth. Understanding how the business is managed will contribute to the sale price, whether it is absentee or owner managed and the opportunities or weaknesses this creates. Lastly, assets in their owner nature are valuable. Therefore, depending on the assets recently purchased or in operation, will either add to a practice value or decrease it.

The combinations of the above topics are the most important elements in asking price and should be properly analyzed by the prospective buyer for validity. There is not an easy way to put a price tag on an accounting practice or tax firm. You can utilize a consultant with Tax Firm Sales to aide in the process of understanding value and where to find additional value post-purchase.

Due Diligence:

Due diligence can be a daunting task. Typically initiated after a signed purchase agreement; this is the opportunity for the buyer to ask any questions about the accounting practice or tax firm and get substantiation to the answers to those questions. Items to review during the due diligence process include (but is not limited to) the list on the right:

Due diligence should be treated like your own mini audit. Expect the owner and possibly key employees to be present during due diligence. Remain respectful of the owner’s business; do not ask accusatory questions, simply understand the business and get answers to your most burning and pertinent questions. Due diligence can be as surface or in depth as you wish it to be. Many buyers complete the due diligence process in as short as one day and on their own; others take longer and continue to have questions post due-diligence after consulting with their legal or finance consultants. Sellers are extremely helpful during due-diligence; their knowledge of the business should be leveraged to the fullest extent by the prospective buyer.

Utilize your consultant with Tax Firm Sales for additional questions after due-diligence or for assistance in preparing for the process. Many surface questions can be answered through conversations with the seller; due diligence should be for verification of previous statements made.

Once you are at a comfort level with verification of the business functions and financials, the next step will be to move forward with the business closing and final steps at becoming an owner of the accounting practice or tax firm at hand. Knowledge is key…never stop asking questions until you are fully satisfied with the knowledge obtained.

Closing Process

If you have entered the closing process, let us first say Congratulations on this very big step!

There is still a lot to do to facilitate the closing of your accounting practice or tax firm sales. You can guarantee your Tax Firm Sales Consultant will be there every step of the way. Processes to consider while going through the closing process include (not exhaustive list):

• Identify your escrow company (may be independent or attorney)
• Ensure the following agreements are in place with signatures from both parties:
  • Leases (if applicable)
  • Employment contracts (if applicable)
  • Franchise agreements (if applicable)
  • Purchase agreements
  • Bill of sale
  • Seller financing documents (if applicable)
• Creation of amortization schedules and outside or seller financing documents
• Corporate transfer documentation
• Formation of new entity (if applicable)
• Transfer of employee documents and records
• Cutoff of Accounts Receivable / Payable
• Cutoff and transfer of Work in Process (WIP)
• Transfer of marketing information
• Transfer of vendor contacts
• Transfer of client contracts and contact information
• Transfer of utility bills
• Transfer of property keys
• Transfer of supplies and/or reimbursements for pre-paid expenses (pro-rations)

The closing process is detailed, but is the last step and should be celebrated; a deal is never a deal until it’s closed…lean on your consultant with Tax Firm Sales to facilitate the closing process.