Ten Questions You Must Ask Before You Sign
1. DID THE BUYER SEEK OUTSIDE FINANCING?
There is widespread misconception that the seller should be the default source of financing the sale of a practice. Fortunately, there are options to finance a sale. It’s always beneficial to have potential buyers explore bank financing as a first option. Lenders love financing a business with consistent and predictable cash flow; tax and accounting practices represent exactly that.
2. IS THE DOWN PAYMENT ADEQUATE?
A down payment should accomplish two important goals – shifting some risk to the buyer and ensuring the buyer’s commitment to the purchase. The buyer should be prepared to come up with a sufficient down payment. The down payment amount varies, but lenders will generally consider 15-25% as adequate.
3. WHAT HAPPENS IF THERE IS LARGE ATTRITION IN THE CLIENT BASE?
Most buyers would prefer to buy a practice based on how much they collect during the first few years. However, this shifts all the risk to the seller. While the seller owes the buyer his good faith and support during the transition, the bulk of control in client retention is truly in the hands of the buyer. Both parties should understand the risk and seek the best means to mitigate or share in that risk.
4. WHAT IS MY COMMITMENT TO HELP THE BUYER SUCCEED?
Many buyers and sellers have a false idea that the seller needs to help in the transition by being around for months, or even years. In practice, a smooth transition is often accomplished in as little as 4-6 weeks. The seller plays a role in facilitating this. Having the seller linger too long, will delay the buyer’s ability to start building those important client relationships that are necessary for a successful transition.
5. DID I INVESTIGATE THE BUYER? IS THEIR LICENSE CURRENT?
Some things such as credit history, experience in running and growing a practice, financial statements, and a résumé, should be examined by the seller. Too often we assume the buyer is the only one that should conduct due diligence. However, the seller is advised to do their own due diligence, especially when carrying a note or guaranteeing any of the future income.
6. AM I GETTING FAIR MARKET VALUE?
Fair market value for these types of transactions is sometimes difficult to determine. It’s more difficult if you are only speaking with one or two buyers. Having a large pool of buyers is the most accurate means to gauge if you are getting the best price and terms that the market can offer.
7. DO WE HAVE A PLAN IN PLACE FOR A SMOOTH TRANSITION?
The most successful transitions occur when the buyer and seller work together and keep focus on what’s best for the clients. The seller’s duties and pay, if any, should be clearly established from the beginning. The buyer should be the lead but the seller’s assistance and suggestions will be invaluable.
8. SHOULD MY ATTORNEY REVIEW THE AGREEMENT?
It may be wise to consider a third set of eyes. Although speaking with legal counsel is never discouraged; high quality attorneys with common sense can be very difficult to find.
9. IF THINGS GO WRONG, DOES MY AGREEMENT PROTECT ME?
Good agreements set you up for a successful outcome and also plan for unfavorable scenarios. Working with your broker and a reasonable attorney is the best option to reach workable solutions to common problems.
10. DO I REALLY WANT TO SELL?
This may seem like an odd question at this stage of the process. However, it may be a vital one. We’ve seen many cases where owners thought they were ready to sell and were not. Do you have something else you want to do with your life? Are you financially able to leave your practice? When you wake up the day after the sale, will you feel you made the right decision?