The Importance of Deal Structure in the Sale of Accounting Practices
I get frequent calls from buyers that ask if we sell accounting practices with payments based on client retention.
The short answer is that most of our transactions do not have client retention clauses. A lot of buyers think that puts them at risk. In fact, I would contend that in the majority of accounting practices, it actually makes the deal smoother and more likely to succeed.
If you look at a couple of key differences in the dynamics of buyer and seller behavior in a cash sale vs. an earn-out sale, you will understand why this is. When you have a retention based buy-out, a very interesting thing happens. The seller wants to stay around for a long time to make sure the buyer “does the right thing” by his clients and staff. This may seem to be a plus to the buyer. He sees the seller involvement as helpful to the hand-off of client and staff relationships. In a cash sale, the seller is much more willing to leave the practice after closing. After all, his or her payout has been completed. Success is up to the buyer at that point…which is exactly where the responsibility needs to be.
No two owners will operate in exactly the same way. A long transition usually ends up with a struggle for control between the buyer and seller. This has quite an impact. Clients and staff usually pick up on this. Also, a client relationship cannot be handed off like a baton. The seller has a relationship with the client and the buyer has to develop his or her own relationship with each client.
The buyer is much more likely to succeed if the seller is out of the picture. He or she is allowed to run the practice as he or she sees fit and to develop those client relationships without any outside interference. That is the essence of why cash deals succeed. Why accounting practices were traditionally sold otherwise…continues to be a mystery to me.