Selling accountancy practice after death

[Caroline81]

Hi. I wonder if anyone could help me. My Dad died unexpectedly in November. He had been a self employed for 20 years and was working under a franchise. When he died, the franchise contacted us to let us know my dad's clients would be distributed among some of their other accountants. We were told because it would not be a "smooth hand over" they would only be able to sell the clients for 0.5% of their GRF. This is all very new to me but we were expecting, rightly or wrongly, that if my dad made £40,000 in a year, his business would sell for approximately £20,000 and this is the amount we would get for the clients over the course of a few years.
I have just been contacted by the franchise who are offering us £2500 as well as, from the sounds of it, needing to pay £4,000 for catch-up work. I don't completely understand the email they sent so i'll paste some of it below and delete some of their names.

"I wanted to confirm the final consideration amounts for the clients (taking into account WIP, the % of GRF and the clients who have signed up. This was clearly not a standard practice sale for all the sad reasons. Due to the circumstances of the handover, there was obviously a lot of catch up work which had to be done, and clearly affected the “WIP” calculation much more than we all would have liked."

The total consideration is as follows:


From N - £2,066.50

From L – Her Catch Up work was such that she should be paid: £4,046.17. I also understand that she has a separate fee for direct work for the estate at £2,050, which is outside these arrangements.

From G - £373.00

From J - £308.75

From D - £71.50

As per the arrangement, this results in a net payment to L, as a result of the level of this catch up work "

If anyone would be able to help me make some kind of sense of this and if this is a fair deal, i'd really appreciate it. Unfortunately my dad's accountancy brains were not handed down to me so I've been finding all of this very confusing.

 

[Financial-Modeller]

Perhaps your / your late father's solicitor might be best placed to help.

 

[Paul Kelly ICHYB]

Seeing a solicitor is possible the best action and a lot will be down to the franchise agreement.

My gut feel is that you will not get best value by letting the franchisor divide things up. Why not show your books to a few local accountants and see if they are interested.

 

[UK Contractor Accountant]

Sounds a load of rubbish to me - you owe L for catchup work?

Who is running the Practice following your father's death as normally there is a continuity agreement in place for someone to step in and run the Practice on behalf of the Estate until sold.

As above check the Franchise Agreement to see if you can sell the client base elsewhere.

Bock of fees normally sell around the 1.00 x GRF mark.

 

[Caroline81]

Sounds a load of rubbish to me - you owe L for catchup work?

Who is running the Practice following your father's death as normally there is a continuity agreement in place for someone to step in and run the Practice on behalf of the Estate until sold.

As above check the Franchise Agreement to see if you can sell the client base elsewhere.

Bock of fees normally sell around the 1.00 x GRF mark.

Thank you. This is the main thing I am confused about too. I don't understand why we owe someone money to catch up on work?? I've just forwarded it to my solicitor so hopefully she will be able to advise.

Sorry, just to add. The clients were all allocated new accountants by the franchisor within a few days of my dad's death so we never really had the option to sell privately. They classed them as their clients, my dad had tried to leave a few years ago and go it alone and was told he'd need to buy the clients off them.

 

[UK Contractor Accountant]

Well this is on TaxAssist Accountants Website - they are Franchisers

Does this contract permit me to sell my business?
Yes, the client base is a considerable asset built up and owned by you. The value of your business is calculated as a multiple of your gross recurring fees. Current industry averages are between 0.8 and 1 multiplied by the gross recurring fees. The TaxAssist Accountants brand attracts a premium and we are achieving multiples up to 1.4 times annual billing. There are various deferred fees to consider which are laid out in our Franchise Agreement, which you would factor into your selling price.

 

[MyAccountantOnline]

Hi. I wonder if anyone could help me. My Dad died unexpectedly in November. He had been a self employed for 20 years and was working under a franchise. When he died, the franchise contacted us to let us know my dad's clients would be distributed among some of their other accountants. We were told because it would not be a "smooth hand over" they would only be able to sell the clients for 0.5% of their GRF. This is all very new to me but we were expecting, rightly or wrongly, that if my dad made £40,000 in a year, his business would sell for approximately £20,000 and this is the amount we would get for the clients over the course of a few years.
I have just been contacted by the franchise who are offering us £2500 as well as, from the sounds of it, needing to pay £4,000 for catch-up work. I don't completely understand the email they sent so i'll paste some of it below and delete some of their names.

"I wanted to confirm the final consideration amounts for the clients (taking into account WIP, the % of GRF and the clients who have signed up. This was clearly not a standard practice sale for all the sad reasons. Due to the circumstances of the handover, there was obviously a lot of catch up work which had to be done, and clearly affected the “WIP” calculation much more than we all would have liked."

The total consideration is as follows:


From N - £2,066.50

From L – Her Catch Up work was such that she should be paid: £4,046.17. I also understand that she has a separate fee for direct work for the estate at £2,050, which is outside these arrangements.

From G - £373.00

From J - £308.75

From D - £71.50

As per the arrangement, this results in a net payment to L, as a result of the level of this catch up work "

If anyone would be able to help me make some kind of sense of this and if this is a fair deal, i'd really appreciate it. Unfortunately my dad's accountancy brains were not handed down to me so I've been finding all of this very confusing.

First of all sincere condolences.

I have sold a few accountancy practices so am familiar with disposing of a practice, but I'm no expert.

Generally most accountancy practices sell for about 1x Gross Recurring Fees (GRF) so if your Father had sold his practice and his fee income (not profit) was £40,000 he would have generally expected it to sell for about £40,000.

The sale price would then generally be paid in installments over 24 to 36 months subject to clawback. This means that if clients decided to go to another accountant the sale price would be reduced by an agreed amount over an agreed period to reflect the loss of the income for the buyer of the practice.

Unless a huge number of clients left or your Father received a large amount of fee income for work not done or partly done (that's the WIP - Work In Progress) getting £2,500 for a practice with fee income of £40,000 is VERY low indeed.

 

[MyAccountantOnline]

T...I don't understand why we owe someone money to catch up on work?? .....

Did you Father perhaps receive payment in advance for any fees?

 

[Jaydee]

Caroline, while the typical practice sale price maybe 1 x GRF, the franchisor was saying that you would have to take 0.5 x GRF to make the deal attractive to purchasers as there could be no handover and so the cases would be more problematical for the new accountants. There is some merit in that argument, but whether the discount is fair at 50% is impossible to say - but as it is by now a "done deal" you are where you are with that one.

The figures quoted as recoverable now are tiny, however - do you have a feel for what level of fee income (not profit) your dad was generating?

With regards to the reduction for WIP, and the amounts owed to L, this would suggest that your dad billed in advance and so he had received the income for work that the new accountants had to carry out - and so they are contra'ing their unbillable work with the 0.5 x GRF that they owe you. You maybe should ask for a breakdown of WIP by client and the charge-out rates that they are using, as without this transparency it is impossible for you to know whether the WIP adjustment is correct.

 

[Caroline81]

Did you Father perhaps receive payment in advance for any fees?

Hi. Thank you for your reply. My dad received direct debit payments over the course of the year for end of year tax returns, which of course he didn't get around to completing/submitting for everyone. He also received DD's for payroll and VAT returns.
I know of 3-4 clients who decided to leave, perhaps there were more, but there were originally approximately 60 clients to start with. One of the accountants bought 2 clients yet is only paying £71.50 for them both which even I know is a ridiculously low amount.

 

[Caroline81]

Caroline, while the typical practice sale price maybe 1 x GRF, the franchisor was saying that you would have to take 0.5 x GRF to make the deal attractive to purchasers as there could be no handover and so the cases would be more problematical for the new accountants. There is some merit in that argument, but whether the discount is fair at 50% is impossible to say - but as it is by now a "done deal" you are where you are with that one.

The figures quoted as recoverable now are tiny, however - do you have a feel for what level of fee income (not profit) your dad was generating?

With regards to the reduction for WIP, and the amounts owed to L, this would suggest that your dad billed in advance and so he had received the income for work that the new accountants had to carry out - and so they are contra'ing their unbillable work with the 0.5 x GRF that they owe you. You maybe should ask for a breakdown of WIP by client and the charge-out rates that they are using, as without this transparency it is impossible for you to know whether the WIP adjustment is correct.

Thank you. That's a big help, i'll do that.

 

[Clinton]

Current industry averages are between 0.8 and 1 multiplied by the gross recurring fees. The TaxAssist Accountants brand attracts a premium and we are achieving multiples up to 1.4 times annual billing.

LOL

@Caroline81 , believe it or not there are over 20 brokers in the UK who specialise in the sale of accountancy practices. They sell no other businesses, just accountancy practices.

If your father were alive and approached them, most wouldn't take on this sale because it's too small. There is also the complication of the franchise. Personally, if I were buying a practice I'd run a mile from a franchise and go for an independent business instead. Buying a franchise is so much more hassle and comes with so many more restrictions.

So it does appear your choices are limited.

I second @Jaydee 's suggestion to get a breakdown. And get someone who understands this stuff to check that for you to see if it's all kosher.

 

[UK Contractor Accountant]

LOL

second that!

 

[STDFR33]

LOL

@Caroline81 , believe it or not there are over 20 brokers in the UK who specialise in the sale of accountancy practices. They sell no other businesses, just accountancy practices.

If your father were alive and approached them, most wouldn't take on this sale because it's too small. There is also the complication of the franchise. Personally, if I were buying a practice I'd run a mile from a franchise and go for an independent business instead. Buying a franchise is so much more hassle and comes with so many more restrictions.

So it does appear your choices are limited.

I second @Jaydee 's suggestion to get a breakdown. And get someone who understands this stuff to check that for you to see if it's all kosher.

Most small practices don’t need a broker. They’ll approach an accountant they know to buy the fees, perhaps their continuity partner.

@UK Contractor Accountant has given the rough valuation of fees which is fairly standard on what to expect.

 

[MyAccountantOnline]

Hi. Thank you for your reply. My dad received direct debit payments over the course of the year for end of year tax returns, which of course he didn't get around to completing/submitting for everyone. He also received DD's for payroll and VAT returns.
I know of 3-4 clients who decided to leave, perhaps there were more, but there were originally approximately 60 clients to start with. One of the accountants bought 2 clients yet is only paying £71.50 for them both which even I know is a ridiculously low amount.

That does make sense.

I definitely agree with Jaydee's suggestion of asking for a full breakdown of the WIP etc.

 

[Clinton]

Most small practices don’t need a broker. They’ll approach an accountant they know to buy the fees, perhaps their continuity partner.

Unfortunately, yes, they go do it themselves! Clueless n00bs.

Accountants are the worst when it comes to thinking they know what they're doing.

 

[STDFR33]

Unfortunately, yes, they go do it themselves! Clueless n00bs.

Accountants are the worst when it comes to thinking they know what they're doing.

You clearly don’t know the industry very well and have a high self importance.

 

[MyAccountantOnline]

....

Accountants are the worst when it comes to thinking they know what they're doing.

Yet their are still over 20 brokers for accountancy practices

Some of us do value other professionals. I personally have used a broker each time I have sold fees.

That doesn't help the OP in the slightest though and I think the majority of us are in agreement that she needs a breakdown of the WIP etc.

 

[Clinton]

@STDFR33 my job is not selling accountancy practices (nor any other businesses for that matter). And I don't claim to be an expert in that.

But I know the brokers who specialise in this sector and I've heard many horror stories of accountants who assumed that just because they have experience practising accountancy they know a lot about finding buyers, building competitive tension, negotiating the deal etc.

Not just accountants. This happens with corporate finance firms as well! And they know how to negotiate deals! (Yes, there are a lot of deals happening in that space. Spectrum Corporate Finance, a company I know and to whom I've sent business to in the past, were bought by FRP Advisory this week.)

It's a doctors make the worst patients kind of thing.

 

[Jaydee]

Unfortunately, yes, they go do it themselves! Clueless n00bs.

Accountants are the worst when it comes to thinking they know what they're doing.

The irony of the first line of your signature!

 

[Clinton]

Yes, but you need to read the link to get the context

 

[Jaydee]

Caroline, if it would be of use to discuss your case on the phone (I am an accountant in practice, who has bought and merged practices in the recent past) then feel free to PM me and I will let you have our number - there will be no charge for my time.

 

[KAC]

Caroline, if it would be of use to discuss your case on the phone (I am an accountant in practice, who has bought and merged practices in the recent past) then feel free to PM me and I will let you have our number - there will be no charge for my time.

Very sensible from @Jaydee who is a longstanding respected member on here.
I agree with others that the big problem at the moment is that we do not know the full terms and conditions in the franchise agreement and that, in any case, it appears to have been a done deal. Hope you manage to get it sorted out

 

[UK Contractor Accountant]

building competitive tension

like the sound of that! - offer & counter offers, hold your nerve, who blinks first, a bit of leverage here and there to tip it over the line, tense round the table Boardroom meetings where nobody knows who to stare out, the long silence technique. a bit of reverse psychology thrown in for good measure.

I'm off to book myself on a Competitive Tension Course

 

[Wild Goose]

The total consideration is as follows:

From N - £2,066.50

From L – Her Catch Up work was such that she should be paid: £4,046.17. I also understand that she has a separate fee for direct work for the estate at £2,050, which is outside these arrangements.

From G - £373.00

From J - £308.75

From D - £71.50

As per the arrangement, this results in a net payment to L, as a result of the level of this catch up work "

If anyone would be able to help me make some kind of sense of this and if this is a fair deal, i'd really appreciate it. Unfortunately my dad's accountancy brains were not handed down to me so I've been finding all of this very confusing.

Hello Caroline,

I'm so sorry for your loss. My father died recently, and life was a constant round of vultures taking chunks from his estate. hospice, funeral, headstone, legals, over-priced reception - some people simply cash-in while you're off balance!

Allow me to clarify, if I may, the figures from the franchiser in your opening post.

£2,066.50 from N
£373.00 from G
£308.75 from J
£71.50 from D
Those 4 amounts total £2,819.75 and are owed to your late father's estate.

Amounts owed by your late father's estate to L are as follows:

"Her Catch Up work was such that she should be paid: £4,046.17"
That's the net amount your side owes L AFTER netting off L's fees for "catch up work". In other words, suppose L was due to pay £2,000,00 consideration for the clients she has received (and £2,000 is just a guess - it could be any amount) then L would have performed £6,046.17 of "catch up work"; from which the £2,000.00 consideration L (hypothetically) owed your side would have been deducted; to leave a net amount of £4,046.17 owed by your side to L.
Needless to say, you need to ask for a detailed breakdown of the catch up work performed by L.

Separately, and in addition to all of the above, L is going to present you with a separate fee invoice for "direct work for the estate" amounting to £2,050.00.
You should again ask for a detailed breakdown of that work; and, more importantly, for details of just who on your side authorised such work.

In summary, and for the avoidance of doubt, the franchiser's current position is that your side owes L a net amount of £4,046.17 and £2,050.00 = £6,096.17. And that the other 4 (N, G, J, & D) owe a total of £2,819.75 to your side. What's the betting the franchiser will retain and net off the £2,819.75 and bill you for the difference of £3,276.42?

I'm sorry if that's not the news you would want to hear; but at least you now know what you're up against. There may even be further charges to come yet. My advice is to ask for the breakdowns and the authority for the work allegedly performed; and dig out a copy of the franchise agreement in readiness for the other side's replies.

Good luck!