BUYING A CPA FIRM? HERE’S WHAT YOU NEED TO KNOW ABOUT NON-COMPETE AGREEMENTS
A version of this article first appeared in The CPA Insider.
A few years ago I read The Snowball: Warren Buffett and the Business of Life by Alice Schroeder. One of the business adventures the Oracle of Omaha encountered in his career happened when he bought a company from an 89-year-old seller without a noncompete agreement. Whatever the reason for this huge oversight—perhaps the seller’s age played into Buffett’s decision-making—it proved to be a costly mistake. A few years later the seller opened a competing business literally next door.
When I learned about this story, I could not believe that such a savvy businessman could spend millions on an acquisition without any sort of noncompete agreement. Apparently though, Buffett learned his lesson. When he negotiated a new deal years later with the same seller, he was sure to include a noncompete agreement.
Importance of CPA Firm Non-Compete Agreements
Warren Buffet’s story demonstrates (1) the importance of noncompete agreements, and (2) that even experienced buyers make mistakes. If you are going to buy a CPA firm, you’ll want to make sure that your noncompete agreement will protect you if the seller decides to get back into public accounting. The noncompete agreement should be negotiated and agreed upon when you and the seller are negotiating all of the sale terms such as price, payment terms, and transition assistance.
When buying a CPA firm, there are four key issues that relate to non-compete agreements you will want to consider.
4 Key Non-Compete Agreement Points to Remember
1. Provision for New CPA Firm Distance
Make sure your non -compete agreement contains a provision for distance. The main purpose of a non-compete agreement is to prevent the seller from serving the clients of the business that is being sold. Most non-compete agreements contain a provision for distance that stipulates, for example, that the seller not serve clients within a certain metropolitan area. This provision is necessary even when a seller agrees not to seek the business of previous clients.
In theory, if a seller opened an office next door to her old practice, but agreed not to serve her past clients, then her new practice should do the buyer no more harm than if another CPA began competing in that same location. In reality, though, her opening a practice right next door would be very confusing to clients. Moreover, it would be very difficult to police and track whether the seller was in fact accepting previous clients. Including a distance component to a non-compete agreement can prevent this kind of situation.
2. Ensure Your Non-Compete is Enforceable
Be sure that your non-compete agreement is enforceable under your local laws.Most jurisdictions will not enforce non-compete agreements that cover too much geography or too long a period of time, so check your state or provincial laws to determine whether your agreement is enforceable. (As a general guideline, most of the agreements my practice sees last about five years and cover roughly the metropolitan area where the accounting practice operates.)
3. Be Aware of the Seller’s Intentions to Sell
Ascertain the seller’s intentions. Pay very close attention to the seller’s plans for after the sale. Don’t simply listen to what the seller is saying. Look at his life circumstances as well. Often, how a seller behaves during the negotiations of the noncompete agreement can give the buyer a glimpse of the seller’s struggles with exiting or his or her commitment to leaving public practice for good.
Here are two scenarios that illustrate this point:
- Example A: The cpa firm seller is 75 years old, and his spouse retired last year. They have just purchased a retirement home in Palm Springs, where their daughter also lives and is expecting their second grandchild in a few months. He and his wife have both had successful careers, and they have lived below their means and have plenty of savings to enjoy a comfortable retirement. He is retiring in order to move and to spend time with his grandchildren.
- Example B: The accounting firm seller is 55 years old, and she is just tired of the demands of practicing. She says she may take a few months off and then look for a job in industry. She likes some aspects of public practice, but gets overwhelmed with the administrative and managerial responsibilities.
The firm owner in Example B may do exactly as she’s indicated. She may go into industry and never pose a competitive threat. Or, after some time off, she may feel refreshed and decide to return to public practice. However, the firm owner in Example A, who’s older and has a firm retirement plan in place, is far less likely to become competition.
4. Clearly Define Non-Compete Agreement Terms
In general make sure the non-compete agreement is specific and clear especially if the seller wants to keep some of the business. We generally recommend that sellers hand over their entire business to buyers, but they often wish to keep a few clients or, in some cases, entire segments of the practice. Sellers who are older, for example, may want to keep working but lack the energy, time or desire to do so full time. Keeping a small handful of clients can be a way for them to stay helpful and useful to others while easing into retirement. Other clients sell segments of their cpa practices to focus on areas that they have more desire to pursue. Wealth management is the most common example. Our experience with these sellers has been very positive when they have a successful history with the segment that they want to pursue.
In both these cases, though, buyers need to make sure sellers are crystal clear and specific about which clients they are keeping and why. Your non-compete agreement should include a complete list of all of the clients being kept by the seller and should include a description of the services that the seller will be allowed to provide after closing. You should also keep in mind that non-compete agreements executed as part of the sale of a firm can have tax consequences.
Non-compete agreements are a critical component of every business deal, whether it’s buying or selling a practice or negotiating an agreement with a partner, shareholder, or key employee. It’s one area even an icon such as Warren Buffett can’t afford to overlook.
Ready to Take The Next Step…
When you’re ready to purchase a new firm or sell your current CPA firm, Poe Group Advisors can help. Our accounting practice intermediary firm is known for our seamless process as well as our efficient and diligent approach to facilitating the buying and selling of CPA firms. We strive to ensure that both parties involved are able to plan and implement a strategic, successful transition of clients and staff. Let our team of skilled and invested professionals help you with the next step in your endeavor.