|
Lawyer for Accountants, Accountancy
Corporations and Accounting Practices
Article #8 – Buying and selling an
accounting practice
This is Article #8 in my 9-part series on
the basic corporate, business and contract law issues for
accountancy corporations and accounting practices in
California. The articles in this series are:
This article gives a quick overview of
buying and selling an accounting practice. I discuss the
deal from due diligence, through deal terms, to the
definitive deal documents.
Finding the Deal
The first step is to find a deal.
Talk to people in the industry. Find out if an
accountant is
looking to sell and retire, or if an up-and-coming associate
is looking to buy. If you have a longer timeline, consider
hiring an associate and grooming him or her to take over
(from the buyer’s side, consider being that associate). If
that doesn’t work, hire a broker who specializes in
accounting practices. Lastly, remember that the
Accountancy Act restricts who can buy and own the
practice.
Due Diligence
Both the buyer and the seller should go
about the due diligence process in a business-like manner.
Most buyers of an accounting practice have experience in the
profession and understand what to look for, so I won’t
belabor the issue. At a minimum, (1) check the seller’s
accounting license for a history of complaints, (2) review
the practice’s financial statements and tax returns for the
past three years, (3) analyze whether the seller’s
relationship with referral sources and clients can
realistically be transferred to you (conversely, beware if
the relationship is so intensely personal that it can’t be
separated from the seller), (4) beware of prior employee /
contractor misclassification in the practice, and (5) check
for liens, unpaid back taxes (including sales taxes), unpaid
workers compensation, unpaid trust fund taxes, unpaid
vacation liability, unpaid bills, and current and potential
lawsuits.
Deal Terms
The first deal document is a letter of
intent, also called a term sheet. The parties use a letter
of intent to confirm basic deal terms. The letter of intent
should not be binding on the parties, except for such
matters as due diligence procedures and perhaps a lock-up or
exclusive period within which the seller may not field other
offers.
Purchase price is the primary deal term.
Payment terms are almost as
important as the total purchase price. For accounting
practices (a service business), usually you use some combination of cash,
promissory note, and earn-out (which is money that is paid
over time based on the practice’s post-closing
performance). Sellers love cash and buyers love earn-outs.
Also consider who collects the accounts receivable that were
booked before the closing date.
Another deal term is legal structure –
will it be a stock or asset sale? As a rule of thumb,
buyers want to buy assets and sellers want to sell stock.
From a legal perspective (and putting aside the tax
differences between a stock sale and an asset sale, which is
your job to figure out), in a stock sale the buyer takes the
entire accountancy corporation, leaving all contracts,
assets and liabilities in place for the buyer. In an asset
sale, the buyer takes the assets of the practice but not the
liabilities (except those that the buyer agrees to assume);
the seller keeps the un-assumed liabilities.
Deal Documents
Once the parties agree to the basic deal
terms, they move on to the deal documents including the
purchase agreement. In the purchase agreement, the seller
makes representations about the practice. This allows the
buyer to recover back some of the purchase price if any of
the representations is materially misleading, for example,
the seller did not disclose certain liabilities.
Representations are not a substitute for due diligence, but
they do provide additional security to the buyer.
The last important piece is the
non-competition agreement. In most cases, the buyer should
receive a non-competition agreement from the seller.
Otherwise the buyer is at risk that, after collecting the
purchase price, the seller will set up a competing practice
across the street. For more information on non-competition
clauses, see Article #6 in this series,
May an
accountant compete against his or her former practice?
This whirlwind tour is over.
Remember that buying or selling an accounting practice is a complex
process. Legal, tax, accounting, valuation and psychology
issues are all involved. Before you do anything, get
competent legal counsel to help you.
Call me to schedule a
legal consultation: 510-796-9144 | 