Having Your Cake & Eating it Too: Why Keeping Clients May be Bad
Practice owners wanting to sell sometimes express a desire to keep some clients in order to continue an income stream. Be aware that decision can have undesired consequences on the sale.
First of all, almost all buyers will be suspicious that the owner is cherry-picking the clients. That is a very real concern because, in our experience, we have never seen an owner keep the deadbeats and low-paying clients!
Secondly, continuing to do work for some clients means the owner is still in business and will be viewed by many buyers as a potential competitor. Remember that one of the biggest concerns of buyers is retaining clients and an owner still in business makes that harder to do. At the very least, some of the purchased clients will wonder why the owner is doing work for some people but not for them which can cause problems for the buyers.
Thirdly, keeping clients is sometimes an indicator that the owner is not really a seller. In other words, the owner may think he or she wants to sell but emotionally has not let go. That can come up later in the sales process or even in the transition.
Fourthly, the retaining of a portion of the practice will most likely reduce the value of the practice. Imagine a firm that grosses $200,000 and nets $80,000. The owner wants to keep a few family members and that old buddy from high school. The work from these clients totals $20,000. The gross income of the practice has now been reduced by 10% but the cash flow is down by 25%! In the end, cash flow is the key to value.
Finally, keeping clients can lower a seller's chance of getting the best terms. Banks often will not lend if the owner is not selling the entire practice. And, as noted above, cash flow is harmed and bankers love cash flow.
Can a practice sell if the owner wants to keep doing some of the work? It is possible but generally is not a good idea. If an owner does want to keep clients then this needs to be disclosed up front and the relevant amounts clearly noted on any financial statements. More often than one might imagine, an owner will pop up after an offer has been made or even accepted and say, "Oh, by the way, I am keeping these clients." That can be a real shock to the process.
Is it ever acceptable to keep clients? In some cases, the answer is yes. For example, the owner may be doing services for some clients that the buyer is not qualified to do. Or perhaps, the owner has some clients from a home state that are not likely to transfer to a new local buyer. Another instance might involve family members who have been receiving steep discounts for services.
Overall, however, owners should carefully consider the decision to keep any clients. It almost always will decrease value and likely will affect how easily or quickly the practice sells.