I recently had an interesting exchange with a prospective buyer considering acquisition of a tax and accounting practice for sale that ProHorizons represents. In the conversation, the buyer shared that they see the purchase as just a locked book of business. Simply a transfer of the existing clients and nothing more. I shared a different perspective that perhaps the buyer should look at it as more than that and, then, he would likely realize a more successful outcome to the transaction.
Buying a “Locked Book of Business” – Pessimism
If you believe you are buying just the existing clients and no other aspect of a tax and accounting practice, this is what I would call a “Locked “book of business” purchase. In this scenario, the existing book of clients is transferred to you and that is all, no other aspect of what was likely a thriving business with all the ebbs and flows a tax and accounting practice experiences. In my opinion, this is a pessimistic approach to buying a practice simply because every practice experiences some natural client loss every year. Clients sell their businesses, go out of business, move out of the area, pass away. No amount of transitional assistance from the seller is going to change this and, as a result, the revenue retained from the transaction will decline year to year to year. Beyond that I believe this approach has an underlying negative psychology about or perspective of the transaction. I believe the parties know this will be the outcome and so psychologically are often unmotivated to strive to alter it… because, as I pointed out, you cannot avoid it. So, you combine an anticipated decline in revenue with a lack of motivation and it is no surprise we hear about transactions with massive client loss in the market. This is typically not the sole cause of large client loss, but it undeniably contributes.
Buying the “Going Concern” of a Practice – Optimism
So, let’s shift our perspective and look at buying a tax and accounting practice in a different light. I mentioned before, every practice experiences some natural client loss every year for a variety of understandable reasons that are out of the practice owner’s hands. Well, then how do strong thriving practices grow year over year then? Through the going concern of their practice, which includes: their website, online and offline advertising, new client capture and on-boarding processes, referral networks, email systems and email marketing, social networking, the proliferation of the phone number into the market for decades, the established workflow and system processes, staff and their efficiency with the established processes, and the seller’s name and reputation. All of these are tied to the recognition, the reputation, and the ongoing growth the selling practice developed and experienced. To buy a practice and include these, particularly the referral sources and referrals directly from the seller who has likely been turning away business for years in anticipation of stepping aside, is to most likely insure a very successful transaction. More importantly, this involves an optimistic outlook that is highly motivated. If the seller and buyer can offset potential revenue decline with new clients via referrals and other transferred initiatives of the seller’s practice, then both parties will be striving to achieve something more than what was initially available. For the seller, this may even mean increasing the sale price, which can be highly motivating. For the buyer, this could mean turning an acquisition of a book of business into a new ongoing pipeline of potential clients for years to come, also highly motivating.
Go Into a Practice Acquisition with a High Level of Optimism
The reality is that some clients are going to be lost in the years following an acquisition. We have a choice in how we wish to perceive this and how we wish to address it. In my experience, the pessimism of a buying a tax and accounting practice as a “closed book of business” loses and the optimism of buying the “going concern” wins. We have seen phenomenal results from transactions over the past 27 years of brokering accounting practice sales:
- Practice sale prices increased based on the buyer’s success in the first year. An example: a Palm Desert “going concern” sale with expected revenue transfer of $837,000 ended up being $925,000 after one year because the seller was motivated.
- Buyers establishing themselves and growing well beyond the acquired amount of revenue in the years to follow. Same example: the buyer of the Palm Desert tax and accounting practice had no presence in the market prior to the acquisition but is a much larger practice today than $925,000 because they purchased the “going concern” of the practice and the benefit of all of the seller’s methods of generating new business including a volume of referrals to this day from the seller and the seller’s referral sources.
It is true that in many cases we see the new client revenue generated in the buyer’s first year after closing the sale simply offsets the client loss or sometimes the client loss slightly outpaces the new clients who come in via the transaction. Not every outcome is phenomenal, but even in those cases when compared to what the results would have been if the book of business was locked, the results are significantly better because the role the “going concern” played and how it made the parties were more optimistic and more motivated.