Although buying an accounting practice is a quick and effective way to propel your practice forward, a bad deal can hinder your growth plans and leave you in a spot of trouble. Here are 5 traps to look out for when buying an accounting practice.
1. Not keeping the deal confidential
Sellers can be very sensitive about confidentiality, especially if a potential buyer is taking on a large number of fees. If you compromise this confidentiality, the seller may terminate the deal altogether.
A big problem when buying an accounting practice over the Summer months is holidays; absences can lead to confidentiality being breached as an email meant for one staff member could potentially be seen by another covering for them in their absence.
2. Inheriting difficult or incompetent staff
Sellers generally don't know how competent their staff are, and the buyer isn’t allowed to communicate with staff during the deal period. When you buy an accounting practice, you run the risk of inheriting underperforming or difficult staff members.
Problems can arise both pre and post-sale when staff ability is reviewed. For example, the cost of staff equalling the turnover and the continuity of service agreement that prevents you from letting go of incompetent staff. You also have to consider that unsettled staff may leave and could take clients with them.
3. A low quality, low fee client base
Many service businesses were started by accountants who undercut the fees charged by their local competitors to attract clients; this means that a buyer could be purchasing a large client base, but these are clients who are undercharged for the service offered. This below market rate makes it hard to make a profit.
As well as suffering financially, as the buyer you could also suffer from very low-level work, having to work excessive hours, and having to increase fees. This may affect the retention of their entire client base. (Find out how to win bigger and better clients).
4. Clients not transferring to you
Although there is a high degree of trust involved in all acquisitions, there is a higher degree of both trust and risk when buying an accounting practice as you are acquiring relationships.
There is no contractual ‘ownership’ of a client, they can walk at any time. So when a buyer buys a practice, they risk losing clients. This is especially possible if the seller built long-term relationships with clients and was “the business” or if the seller intends to continue locally as a practising accountant.
5. A clash of cultures that affects growth
As well as acquiring relationships with new clients, as a buyer, you will also be acquiring a whole new team of staff (who are used to working in a certain way). You'll need to build relationships with them quickly!
Sometimes new staff members have very different values or don’t support your growth plan. They may continue to work in the "old way". You'll have to work hard to avoid this "clash of cultures". If you have a poor relationship with your team, this ultimately can affect productivity, growth, and profitability. (Find out how to get your staff to support your growth plans)
Do your due diligence!
You can significantly reduce this risk involved in buying an accounting practice by doing a thorough analysis of the practice being sold during the deal stage.
Here are a few ways that you can avoid these traps above:
- Communicate using private emails, spouse’s emails, or any other suitable method to keep everything confidential.
- Look at the hours done by the staff and the turnover.
- If possible, interview key members of staff to ensure that they are competent and capable of doing the job.
- Look at the number of clients, the rate they are charged, the number of free cases or pro-bono work etc.
- Investigate client files alongside time records to ensure that they are being serviced profitably.
- Negotiate a ‘clawback’ clause to protect you from clients not transferring to you as well as a reasonable handover period. You could even negotiate with the seller to work with you as a consultant during the transition period.
- Educate and train all new staff members on the way you work and the growth plan for your practice, but be flexible and open to new ideas.
By working with a broker that specialises in accountancy, you can avoid these traps when buying an accounting practice and negotiate the best deal for you and your practice.