Art of Accounting: Selling a practice and still running it
A lot of accountants sell their practices and hasta la vista baby! They sail into the sunset. However, some want to hang around.
Usually when a practice is sold, the seller sticks around long enough to introduce the buyer to the clients and assures the client they will be available if any problems develop or to field calls when necessary. This is usually for a three-month period and there is no compensation for this. However, it also assumes the seller is not going to do any work or perform any specific services.
If services are going to be performed, there should be compensation for that. Occasionally, problems develop defining exactly what those services are and how they should be compensated. I believe no services should be performed unless there is an agreement from the buyer. That sounds easy, but it isn’t so simple. I know of many instances where the seller continues performing some work and then, after quite a bit of time has accumulated, requests payment. This serves no one’s interest. It thwarts the transfer of “control” to the buyer, reduces the overall client retention and can confuse clients and staff. To avoid this, purchase agreements should be very clear about this. Further, in the absence of clear instructions, and/or as soon as the buyer notices this, the seller should be told to stop the work and to explain why they did the work without informing the buyer, and what other client services the buyer wasn’t informed about.
Suggested compensation
A suggested method of compensation where the seller continues working is for the seller to receive one-third of the amounts collected for their actual services. This would be measured by the time charges of their work, reduced by the percentage reduction of the total time charges actually received. This would cover discounts, writedowns and pre-negotiated fixed fees.
For example, assume the seller’s time charges were $4,000, the total time charges were $10,000, and the actual amounts collected were $7,000. Thus, $7,000 divided by $10,000 equals 70%. Then 70% x $4,000 = $2,800 x 1/3 = $933, which will be paid to the seller for the work they did for that client’s billing. A further illustration is that the billable rate should be reasonable and in line with the buyer’s and other staff rates. Also, assuming a $350.00 billable rate, then $350 x 70% x 1/3 = $82, which would be the rate they would be paid. Everything must be agreed upon beforehand and be transparent so there will be no disagreements. Also, “busy” work, networking and client contact work would not be paid for; payments would only be for chargeable types of services.
Fixed fees
I understand many firms set fixed fees or fees for a package of bundled services, and the price charged would be unrelated to the time charges. That is typical. However, for this type of situation and to create a workable method without confusion or room for disagreement, I feel my suggestion is reasonable and should be adopted. If the buyer and seller cannot agree on an objective determination of compensation for the seller, then the seller should sell and leave.
No time system
If there’s no time charges system in place, the seller and buyer would need to negotiate a price for each instance that the seller performs services. This is more cumbersome and subjects the two parties to possible constant disagreements.
The above is a suggestion for a method. Use it as a start to determine what would work best for you.
Do not hesitate to contact me at emendlowitz@withum.com with your practice management questions or about engagements you might not be able to perform.
Edward Mendlowitz, CPA, is partner at WithumSmith+Brown, PC, CPAs. He is on the Accounting Today Top 100 Influential People list. He is the author of 24 books, including “How to Review Tax Returns,” co-written with Andrew D. Mendlowitz, and “Managing Your Tax Season, Third Edition.” He also writes a twice-a-week blog addressing issues that clients have at www.partners-network.com along with the Pay-Less-Tax Man blog for Bottom Line. He is an adjunct professor in the MBA program at Fairleigh Dickinson University teaching end user applications of financial statements. Art of Accounting is a continuing series where he shares autobiographical experiences with tips that he hopes can be adopted by his colleagues. He welcomes practice management questions and can be reached at (732) 743-4582 or emendlowitz@withum.com.
