Purchasing a Tax Practice

[HV Ken]

We were approached over the weekend about purchasing someone else's practice (book of business) - adding it to out existing practice. This is not an introduction into the industry - my wife is an EA and I am (what was previously known as) a RTRP.

Any suggestions on what to consider? Immediate thoughts I had:

What is the typical purchase offer (e.g., two years income)?

What is the typical payment plan (e.g. 50% each year)?

What should the "previous" owner's involvement be (active to aid in the transation, out of the picture, etc.)?

I understand typical will vary - just looking for some guidance on considerations.

Would appreciate any insights and thoughts on this. Thanks!

[Guest Taxed]

HV Ken, are you guys consulting an attorney to draw up the agreements? There should be a no-compete clause and whatever formula you use to arrive at the price do not make 100% payment upfront. Use an escrow account if the seller insists (most likely will). When I purchased a book of business, I had the owner help me get introductions ONLY. I did NOT want him around in my shop running the show or doing returns.

Because of a confidentiality argrrment I can not tell you what I paid or who I paid, but it was a combination of cash flow over 5 years and a percentage for goodwill. There was a upfront downpayment and the rest of the payment was spread over 3 years, no interest.

Depending on the book of business, you will have to look at the billing sfor the last 5 years and the attrition rate to figure out what should be a reasonable starting point. In this line of business unless you have clients who have been with you for 5+ years, i would attribute a 50% attrition rate.

[ILLMAS]

Advice - Don't pay for clients that don't come back, some of them don't like change, some feel offended or betrayed that some unknown person is doing their taxes or handling their records and tend to go somewhere else. Those are the clients you don't want to pay for.

[HV Ken]

HV Ken, are you guys consulting an attorney to draw up the agreements?

Indeed, if this moves beyond the conversation phase, I will be consulting an attorney. Thanks for the tips!

[rfassett]

I have only purchased one tax practice over the years and that was from an estate. The practice was five doors down from mine and the practitioner, who was a friendly acquaintance, died of a massive coronary late in the summer. I contacted the estate about three weeks after his passing to inquire what they planned to do with the practice because the clock was ticking and with each passing day the practice was probably losing value. Obviously the situation and the timing were not good. We determined the prior year billings in a convaluted manner and I was to pay 100% of that with 25% down and 25% in each of the next three years. The estate wrote me (well I wrote and the estate reps signed) a letter of referral to the client base. The situation being what it was, the estate and I agreed to adjust the purchase price based on the amount of clients retained for one year. The contract was written such that if the collections were higher than we anticipated, I would pay more, if lower, I would pay less. As it turned out, we were able to retain only 75% of the purported billings mostly due to the lateness of contacting the clients (by the time we were able to get the letter out (because of the estate reps dragging their feet (understandably)), it was into December). Anyway, always negotiate an upside limit and a downside limit. I think retention would have been better if the gentleman could have been around, but that wasn't going to happen. I wrote my own contract and did not consult an attorney. But I am comfortable with contract law and if you are not, you really do need an attorney.

[michaelmars]

for individuals i have usually paid 100% of the sellers last billing and for businesses 125-150%. I give as small a down payment as possible and then go for a 4 or 5 year payout crediting the down payment however you agree. You get to keep 1005 of any fee increases and if you lose the client you stop paying for them. Especially with businesses, you need to see if any are near retirement age etc. My biggest purchase said that if i lost the client after 2 years then it was assumed to be my fault and i still had to pay something on them but individuals if they left i stopped paying. I want the seller to guarentee me a certain number of hours for consulting because some business owners want to see seller involvement for a smooth transition. i would go for something like [depending on practice size etc] 3 hours a week for this tax season included in sales price [for meetings and phone consults] and a consulting fee of $xx for X amount of hours for the next 3 months.