For my latest blog, I’m grateful to my colleague, Spencer Laymond for reference to his Report for Accountants “7 pitfalls to avoid when buying Gross Recurring Fees”. This is just an extract from the much longer and more detailed Report which is available direct from Spencer on 0208 363 4444 or by email firstname.lastname@example.org
Buying a block of gross recurring accountancy fees can be an exciting and stressful time. Exciting – because with the right deal, the additional fees can be an effective mechanism to your grow your business. But stressful – because even with the right deal, if the structure is wrong, or if certain pre-purchase checks are not made, the acquisition can have disastrous consequences. Even with that fantastic potential (“red ribbon”) acquisition, one has to be very careful. According to Dr William G. Hill the “red ribbon rule” says that if a deal sounds too good to be true, then it is too good to be true! Particular care must be taken to avoid the potential pitfalls.
What are these pitfalls?
There are many potential pitfalls that could arise and for convenience we have placed them into the following 7 categories:
Pitfall 1 – The seller does not own the goodwill. The issue is that goodwill and turnover are not interdependent. Looking at the measure of what a business takes from an analysis of the profit and loss account, whilst a relevant indicator, it is only an indicator. Importantly, turnover is not conclusive evidence that the goodwill generating the turnover is actually owned by a person selling.
Pitfall 2 – Past performance does not equal future performance. Rather than considering any specific reasons why future performance may not equal past performance, we look at the two main ways to protect against this pitfall. First through pre-purchase due diligence, and second with a price adjuster clause in the purchase agreement.
Pitfall 3 – Relying on seller warranties rather than a price adjuster clause. Suing for breach of warranty should be considered a remedy of the last resort. It involves a legal process which may have inherent uncertainties in terms of costs, outcome and time involved. Accordingly we recommend, when buying a business priced on the actual performance (an earn out), both a price adjuster clause and suite of warranties should be incorporated.
Pitfall 4 – Acts of God. What are we trying to get at here? Well, in general terms, any major event that, irrespective of probability, if it arose would create a material issue for the buyer.
Pitfall 5 – Misunderstanding the implication of the Transfer of Undertakings (Protection of Employees) Regulations 2006. Where an accountant is buying a block of gross recurring fees, the risks of TUPE cannot be ignored. We highlight that the transfer of staff is automatic and it is statutory i.e. the buyer and seller cannot as between themselves merely agree which members of staff transfer.
Pitfall 6 – Buying the shares in a limited liability company. The main issue, and the reason for this pitfall, is that when acquiring shares in a company, a buyer will acquire the company with all of its historic, current, prospective and contingent liabilities.
Pitfall 7 – Not accounting for integration of systems, cultures and office space. The extent of the issue is likely to be determined in part through the due diligence process, but in part, for a number of reasons, there may be a number of factors where it is impossible to fully account for. The answer may fall into the overall price / price mechanism you are prepared to agree on.
Concluding thoughts and next steps
We can offer a number of services to assist with the process of spotting or dealing with a red ribbon acquisition, that is too good to be true – from legal due diligence to drafting and negotiating the purchase agreement – it’s then down to you to implement the plan to win over client relationships.”
Spencer Laymond 0208 363 4444
Partner, Curwens LLP