Buying an Accounting Firm: What to Look Out For

Whilst purchasing an accounting firm, or any other professional services business for that matter, does have similar issues to other commercial businesses, there are some very important issues that require particular attention to protect a buyer’s interest and their ability to run the business following settlement.

Due Diligence

Although most buyers will have ascertained prior to signing the contract whether the business is well situated, has enough parking or ease of access for clients and is close to facilities important to the business, the REIQ Business Sale Contract only provides a buyer with 15 business days from the date of contract to verify whether the financial accounts of the business are true and correct.  It does not provide the buyer with time to undertake further due diligence such as investigating the business’s goodwill, the licences and accreditations held or required by the business and its employees, or whether the company’s intellectual property is appropriate to the business, transferable and in good working order.

It is important to note that the goodwill of a professional services business quite often rests with the reputation of the owner or principal licence holder. Investigation should be undertaken as to whether the owner or principal licence holder or key staff have ever been, or are, the subject of a professional or ethical investigation such as for negligence, malpractice or professional misconduct. Any such charges or investigations could have a detrimental impact on the business’s goodwill, both at the time of sale and in the future.

A special condition to allow a buyer enough time and access to information to ascertain the true value and running requirements of a business is therefore imperative.

Licences & Accreditations

Most professional service businesses require some kind of licence or accreditation either for the business or more usually for the principal and its key employees (such as real estate licence, financial advisor licence, accounting degree and medical degrees). It is important that these licences and accreditations are in place at settlement, if not before, so that the buyer can begin trading immediately upon settlement. It is advisable to make the settlement of the contract subject to obtaining all necessary licences and accreditation by way of a special condition in the contract.

Restraint of Trade

The REIQ contract restrains the seller from running a similar business, dealing with past clients, interfering with customers and poaching staff, but only within a prescribed area for a prescribed period. For a business whose clients are not tied to one area, that may not be enough, and the clause says nothing about the seller using or disclosing confidential information about the business after settlement.

It is imperative to protect a buyer’s interest by including a detailed restraint of trade clause in the contract that is specific to the needs of the buyer and the professional service business being purchased.

Software

Software can be key to the operation of a professional service business (such as accountants using tax preparation programs, medical centres, dentists and physiotherapists using client record databases). It is therefore important to ascertain whether:

• the software is still available;
• the software is suitable or adequate for the purpose of the business;
• the software is up-to-date and the provider is updating it at least annually (this is especially important with accounting programs updating tax tables);
• that the software can be transferred or a licence can be purchased without loss of existing client data; and
• that the software will run on the buyer’s current computer equipment (if not purchasing seller’s computer equipment) and will continue to do so if the buyer upgrades its computer hardware in the near future.

These investigations would no doubt be undertaken during the due diligence period. However, it is advisable to make settlement of the contract conditional upon the transfer or purchase of a licence to run the software to ensure that all client information can be accessed from the day of settlement.

Files and Fees

Many professional practice fees are charged up-front at each client attendance (such as doctors, dentists and veterinary practices). However, in some professional service businesses (such as accountants, surveyors and law firms) fees for work done can accumulate over time with an account only being issued when the work is complete. It is therefore important that a basis for billing and collecting fees for work, which falls over the contract period and after settlement, be inserted into the contract.

It is also important to ensure that an agreement is recorded for retaining past and current client records or files, as well as how the business’ clientele will be advised of the change of ownership.

Conclusion

As there are many issues unique to buying a professional service business, a buyer should seek the advice of a specialist business lawyer prior to signing a contract to ensure that the contract includes all special conditions necessary to protect their interests. Without these protections in place, a buyer may find they are unable to run their new business properly, or at all, following settlement.