FAQ

Throughout the course of a business negotiation, you will want to ensure you have researched the taxes that the accounting practice you are looking to acquire is responsible for.  Examine the records for items such as payroll tax, sales tax and if they are a C Corporation, income tax, to validate that all proper taxing authorities have received both the required reports/forms as well as appropriate payment.  Especially when approaching a stock sale of an accounting practice, a wise purchaser will be sure to verify all taxes have been appropriately accounted for, as risk for non-payment could shift to the new owner.

The transfer of a company’s accounts receivable will vary across industries. Specifically, for accounting practices, the accounts receivable typically stay with the prior owner to a specified date and then transfer to the new owner. Since most work is billed at either an hourly rate or a flat rate, cut-off and transfer of fees is usually quite seamless in an accounting practice. Especially true with tax firms, whereas taxes are billed at either flat form fees, done with the preparation of the return, or hourly fees, also done with the preparation of the return. This fee structure is ideal for a cutoff of time or form based billing; however, many accounting practices have, what is commonly referred to as work in process (WIP) work, which are services that are ready to be completed, but not yet started. This WIP work is most frequently included in the purchase price and fully transferrable to a new owner. In addition, most accounting practices bill either monthly for services (such as payroll or monthly accounting) and require fee at time of pickup for one time services (such as tax preparation). Therefore, having a large accounts receivable, over a 30 day period, is not an industry norm for accounting and tax practices; this is most definitely a cash flow advantage of ownership.

The letter of intent (LOI) is a sometimes overlooked, but valuable negotiation tool. Although technically non-binding for either party, the letter of intent should be utilized as a roadmap for how a prospective sale would transpire. Buyers are encouraged to work with the seller’s consultant to outline as many details as possible within the letter of intent.

Typically (or recommended) a more efficient and time saving way to negotiate the pertinent details of a sale transaction, the letter of intent should include ‘deal-breaker’ items, such as sale price, sale structure (asset vs. stock), timeframe of purchase, transition support, financing contingencies, guarantees, non-competes, accounts receivable and includable assets (both tangible and intangible). Other items included in a letter of intent include place of settlement, due diligence requirements and state of governance.

Once the letter of intent is executed, both parties can use this as integral part of purchase agreement development. The attorney of both parties will depend on those items agreed upon in the letter of intent to ensure their clients’ are both adequately protected in the finalized wording of the purchase agreement. The less that each party must consult their attorney on negotiation points, the less back and forth it will take between attorneys in the development of the finalized purchase agreement.

Whether it is a stock sale or an asset sale, indemnification of buyer and seller is a good practice to follow. Working with your attorney to create a standard indemnification can assist in protecting both the buyer and seller from acts performed by either party that could create some sort of monetary claim by the injured party. Therefore, having indemnification is beneficial for both parties to protect their separate assets both before and after the sale.

Your staff can be an essential strength to the successful transition of your accounting practice or tax firm.  The consultants with tax firm sales are always cautious with the employees of businesses for sale.  The owner will know best what the staff should know or needs to know; therefore, our consultants will identify themselves as callers of ‘personal nature,’ as buyers are instructed as well.

Employees fundamentally resist change (in most instances); usually not as a lack of ability or strength, but a feeling of insecurity. Sellers must keep in mind the value-add a strong staff can contribute to the overall sale price of their business. Buyers seek business with a strong staff in place, a staff that can undergo a transition and continue to be a strong asset to a new owner. It is important to prepare your staff in an internal and external manner. Internally, staff members should be encouraged to develop their skills and can benefit from continued mentoring, both before and after a sale transition is announced. If you are having staffing issues, correcting them prior to a sale transition is preferable. Externally, preparing staff profiles including staff members’ job duties, strengths, weaknesses, client contacts, non-compete covenants and future plans is helpful for buyers to evaluate. The more a buyer can get to know your staff, through the use of profiles and eventual face-to-face meetings, the better.

Buyers want to understand where there is further opportunity to expand on an already successful business. Evaluating the competitive factors and having suggestions ready for a new buyer can be immensely helpful in transition discussions. Sellers know their business better than anyone else; therefore, you as the seller can be a great guide for a new buyer. What have you tried before, what worked and what didn’t? Why did it work or why didn’t it? With a new owner comes new opportunities to be explored, help your buyer identify those opportunities that you may not have capitalized on.

Depending on the structure of the sale and the alternate financing or cash available, a seller may be asked to finance a portion of the sale of their accounting practice or tax firm. This is not uncommon in the accounting industry or any industry, for that matter. Buyers sometimes like the added commitment by the seller to stand by their business and finance a portion. Many conventional lenders and certainly the Small Business Administration (SBA) require some form of owner financing, usually not exceeding 10-25%. At Tax Firm Sales our goal is to minimize owner financing through the use of cash buyers or convention lending (lower owner finance percentages). Some owners prefer to finance a portion of their sale to increase their interest income and reduce tax rates on installment sales; others don’t want to owner finance at all. No matter what the preference, your consultant with Tax Firm Sale will work with you to identify your ideal situation and work with buyers that fit that description. The ultimate goal is to maximize price and cash in pocket.

Collateral is another form of protection lending institutions will look for in writing a loan.  It is not uncommon for banks to seek personal guarantees from buyers or assignment of collateral against the loan.  Although not always a requirement, it is one that banks prefer if possible.  The higher down payment and credit score held by the purchaser(s), the less likely for personal guarantees and collateral.

Sellers most often desire a 100% buyout of their accounting practice or tax firm; however, depending on the purchaser, some sellers will consider carrying a portion of their practice sale.  One of the reasons Tax Firm Sales qualifies their purchaser prospects is to assist in the evaluation of those purchasers that sellers will consider carrying.  Interest rates and term lengths will vary based on the goals of the seller and the ability of the buyer.  Sellers may or may not require collateral protection and percentages of owner carry will vary vastly based on seller, business circumstance and qualification of buyer.