I have yet to meet a seller who doesn’t wish to receive 100% of their selling price in cash at closing. I have yet to meet a buyer who wouldn’t prefer to have the price determined and paid based on a percentage of their annual collections from the acquired practice over five years. We are all to varying degrees averse to taking on risk. The challenge is that all cash for a fixed price versus no money down for a price to be determined are obviously opposing extremes. These extremes have also been reinforced by some brokers in the market (see our blog How to Structure a Sale and Reasonable Terms Have Become More Clouded).
The real issue is one of perception and intent. Although each of these extremes gives the perception of zero risk to either the seller or buyer, in reality that is not the case. This is because each party doesn’t just have financial risk, they also have legal risk. The reality is that if the acquisition is not successful, the aggrieved party, whether that is a buyer who agreed to a fixed price, has paid all cash, and is experiencing less than expected revenue, or a seller who agreed to an adjustable price, or payment based on collections, and is seeing the revenue and price decline, is likely to have grounds for legal action.
In addition, the requirement of these terms in a transaction naturally leads to a question of the other party’s intent. Why is the seller requiring all-cash and not willing to take on financial risk? Do they lack confidence in the business they are selling? Do they know something the buyer doesn’t? Do they lack confidence in the buyer? Why is the buyer averse to setting price and paying a significant amount of money down? Do they lack confidence in their ability to run the business and adequately service the clients? Are they planning to make changes that will reduce overall revenue?
Ultimately, a practice sale is most successful when the buyer and seller establish some trust and goodwill within the transaction. Shared risk goes a long was to creating this sense of trust and goodwill between the parties. In addition, there is nothing that really motivates either party like a moderate and manageable amount of risk. For the buyer this risk is often in only having a portion of the total price adjustable over a short period of measurement instead of the entire price adjustable over a long period, and having a portion of the debt obligation to a bank instead off all of it to the seller. For the seller this risk is in having a portion of the total price be adjustable instead of it being fixed and carrying a portion of the loan. With some risk on both parties, both the buyer and seller are more motivated to work thoroughly to transition the business and the clients and insure the transaction is a success.
As a final thought, every transaction is unique and the balance of risk between the parties varies from one to the next. So, keep in mind that risk is a big component of price. If you are particularly risk averse and must limit your risk, that may be acceptable to the other party as long as the price is in alignment: the higher the seller risk, the higher the price… the higher the buyer risk, the lower the price.
ProHorizons is a West Coast brokerage and consulting company focused on tax and accounting practice sales and acquisition services.
If you are planning to sell your practice and would like more information about our service, please visit our Sell Your Practice page and/or Request a Sales Information Page. If you are looking to acquire a practice, please visit our Buy an Accounting Practice page, see if there is a practice of interest in our Current Listings in the Pacific Region, and/or Register with us as a Buyer.