All posts from June 2010

Why Use a Letter of Intent in an Accounting Practice Sale?

by Ken Berry, CBI

I have presented several webcasts in the past month and in all of them there have been questions about the use and value of a Letter of Intent (LOI) — in our process this is typically a non-binding agreement that signifies agreement in principle on the core deal points and agreement to negotiate in earnest on all remaining items.  Some brokers advise to skip the LOI and go straight to the purchase agreement and an LOI is not typically used in the market at large. So, why do we advocate the use of an LOI when purchasing a business?

In our experience, an LOI is a critical component in structuring a win-win transaction.  We use them on virtually every deal. Here are the main benefits we see:

• More efficient use of time

• Proceeding with a clear understanding and agreement in principle

• Trigger point for taking the next steps

More efficient use of time:   Some people feel an LOI puts the cart before the horse. We find exactly the opposite to be true.  If you were to go to an unknown area, would you want a map of the area? Well that is exactly what the LOI is: a map of the major deal points. In today’s busy world it is important to be sure two parties are going down the same road and in the same direction before spending too much time working out all the details of a transaction.

Proceeding with a clear understanding and agreement in principle:  The key elements of the LOI should be negotiated beforehand and can be used as a guideline to prepare the purchase agreement. It should state that, if all information during due diligence confirms what was represented, that the buyer intends to complete the purchase under certain conditions. The key elements should include:

  • All parties to the transaction
  • Type of deal structure
  • Price
  • Payment structure
  • Non-compete
  • Transition plan
  • Closing date
  • Contingencies (i.e. due diligence, financing, etc.)
  • And identify other items to be negotiated.

Trigger point for taking next steps: In addition to setting the key elements of the deal, the LOI is also a trigger point for critical milestones during process. Those trigger points are:

  • For the seller to remove the practice from the market and focus on the single buyer.
  • For the buyer and seller to begin conducting their due diligence.  With agreement in principle on the main terms the seller will have more comfort in opening the books and sharing client information and the buyer will have more comfort in providing financial information.
  • For the buyer to pursue financing.  The financing process takes times and banks require either an LOI or purchase agreement as part of the loan package.  So an accepted LOI is a critical component to securing financing.

We have a saying in our firm that smooth transactions make successful transitions. Basically, if two parties cannot agree on the elements of the LOI, they will probably have a hard time negotiating while dealing with the minutiae of the purchase agreement. Normally, once the key points of the deal are negotiated up front, the rest of the transaction tends to work much more smoothly.

Comments (1) • Posted June 21st, 2010 at 4:23am

Making Partner Retreats Effective

by Ken Berry, CBI

In a recent article on WebCPA, Make This Year’s Partner Retreat More Productive, Steve Erickson highlights the value of partner retreats. 

“Firms must be able to make strategic decisions and then execute quickly and efficiently,” Erickson writes. “Unfortunately . . . many partners spend a significant amount of their time at retreats talking about the past and issues that cannot be changed.”

Erickson goes on to describe the unproductive use of time many partners experience on retreat and how many partners find it difficult to engage in authentic dialogue on the topics that matter most.   

This may be because partners lack training in group process.  They rise based on their technical ability or their business development skills rather than their ability to manage human capital. 

We also find many firms are partnerships in name only.  They consist of four or five independent silos.  Each partner works alone supported by common staff members.  Partners share an office, a coffee pot and a Christmas party.  But, sometimes that is about all.

Attempts to create economies of scale, synergy between specialties and shared goals – all of which increase profitability – have been frustrated by an inability to engage with one another in authentic dialogue. 

So they meet for a partner’s retreat.  They adopt many elements of a plan recommended by Erickson:

  • Focus on the future
  • Prepare in advance
  • Have an agenda
  • Adopt and enforce ground rules
  • Remember their conversations define their relationship.

The first three of the five recommendations are easy enough.  It is the last two that frustrate real progress. 

They may adopt ground rules but enforcement is problematic.  And although they try to remember that their conversations defined their relationships, when they get into the meat of a critical issue, relational habits kick in. 

Despite everyone’s best intentions, a cycle of domination and avoidance results that undermines their agenda. Dialogue breaks down.   

It starts simply enough.  An item has been placed on the agenda.  It could be anything -- partner’s compensation, marketing strategy, staff roles. At some point in the discussion, someone becomes anxious. 

It may be that the issue is particularly sensitive.  It may simply be that someone feels frustrated at the pace of the discussion.  Whatever the reason, a partner begins to push.  In reaction to the push, one of two things can happen depending upon the relational styles in the room.  

1)      Someone pushes back.  The energy of the dialog escalates.  It reaches a point of risk.  Both partners withdraw rather than jeopardize the relationship.  2)      No one pushes back.  The energy of the dialogue fades.  The result is the same in both cases.  Real issues are not addressed. 

Partners will experience this cycle only a few times before determining that there is no value in a partner’s retreat.  But the deeper truth is this:  truth is, there is no value in a partner’s retreat that lacks process discipline. 

Just as a CPA would never dream of attempting a complex audit without having first planned an appropriate strategy or process for the audit, neither should partners gather for an important meeting without first defining their process. 

If the partners lack the skills, the experience, or the training to do it right, it is time to look for a process facilitator.  A business sometimes needs to hire an accountant to keep its books straight.  An accounting firm sometimes needs to hire a facilitator to keep their partnership straight.    

What is your experience with partner retreats?

Leave us a comment, or contact Kevin.




Comments (0) • Posted June 1st, 2010 at 5:35am