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Buying a Book of Business


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I am considering buying a book of business from a retiring tax preparer.  They are asking for 40% of the gross revenue from their clients for four years.  I think this is a little steep, but never having purchased a book of business before, I'm not sure if it is reasonable.  There will no purchase of assets, just the client list and they will be available to help out with any questions for the first two years.

Any advice would be appreciated.

Thanks.

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As they say the devil is in the details. Are they asking for 40 % of their client base gross revenue at the time of sale to be paid years 1 thru 4,

in effect 160 % of gross revenue. If they are that's unrealistic. It depends on what kind of clients they have. Are their client fees below average,

average or above average for your area. If the book of business is heavily weighted toward Form 1040 clients then they are asking way too much.

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I bought a book recently; the research I did told me that 100% of 1 year's revenue was the max I would be willing to pay.  I ended up paying a lesser percentage, but I had referred many of the clients to the preparer in the first place.

I do have a retention clause so that the amount decreases if retention isn't maintained.  I'm paying over 5 years because of this retention clause (so X% of gross revenue for 1 year based on clients who actually sign up with me and then are retained).  I have to make a good faith effort to keep clients, etc., and I will still owe if I lose a client as a result of a mistake, lack of timeliness, etc.

Hope this is helpful.

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"and they will be available to help out with any questions for the first two years"

I am not sure what help could be provided past encouragement to stay in yr 1, unless you are using them in a quasi or actual employee manner.

Yr 1 retention may be somewhat higher, as many will simply not want to make the effort to go elsewhere.  Year 2 may be more important long for long term retention.  I would consider 50% of year 1 and 50% of year 2 as my likely top amount, and would not want an all yr 1 based figure.  I would want some sort of no interest payment plan over enough years to make the work pay for my time even in yr 1.

Likely, a business transfer/succession attorney's retainer can include helping with negotiation.

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Our firm has purchased practices in the past.  I have no idea about pricing, but I did see that it was very helpful to have the former owner (or spouse in the case of the one who died) around to greet their clients coming to us for the first time.  The clients were relieved to see a familiar face.  The prior owners introduced us and assured the clients that they were in good hands.  While I don't have retention stats, many of those clients have stuck with us for years now. 

Covid-19, of course, has changed everything.  If you will not be seeing clients in person (our firm has already decided not to), how are you going to greet and get to know these new clients?  If they can't meet you, why come to you at all?  I'd knock a few percentage points off just for that.  Also, look at how far away the clients live.  People may have moved some distance away but kept coming back to the old practitioner because they'd been with him for 20 years.  Without him, they'll likely look for someone closer.  We lost a lot of clients for this reason when the senior member in our firm retired and sold it to a junior member even though they already knew most of us and we were in the same place.  Also do what cbslee suggested and look at the types of returns the seller has.  After purchasing one practice we ended up firing many of the clients after a couple of years because they were used to getting away with things we questioned (big charitable contribs "same as last year," huge Sch C or employee business expenses, medical expenses that were paid for by insurance, etc.).  Also see how the seller's pricing lines up with yours.  If he undercharged, you can't raise the price to your standard all at once or the clients will flee.  If he overcharged, his clients may have been complaining and will expect a fairer price from you.  Both scenarios affect what you will be paying the seller.

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It's mainly 1040 clients with a couple 1120's, one 1065, and one 990EZ.  Her fees are comparable to what I charge and most of her clients have been with her for many years.  The payment would be a % of the fees from her customers that stay with me each year.  For example, if revenue from her clients was $30K the first year and $20K the next, the % would be on $30K and $20K.  She is also offering to present this to her clients as a "merger" between our firms for the first year with me taking over next year, thinking that more clients would be likely to stay if she was still involved in the first year, albeit in a very limited manner. 

 

Thanks for the replies.  I will keep you posted.

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I haven't bought or sold clients, but I'm in a few professional groups (and, obviously, professional message boards) and hear percentages more like 30+% of retention for 3 years, or maybe front-loaded at 40% in year 1 and 20% for the next 2/3, or even 20% for 4/5 years. I've also heard smaller percentages plus wages for the seller for 1 or 2 years to work at the new firm, or even rising percentages with wages, such as 20% year 1 30% year 2 40% year 3 to incentivize the seller to help with retention. And, I've heard of down-payments with lower percentages or fewer years. It can be a regional thing, so maybe ask for advice at a NYSSEA zoom meeting/message board or similar local group.

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I sold off about 3/4 of my practice to some friends, for 33% of receipts per year for three years.  We presented it as a merger, and in fact still work together on some clients.  We share the web site and file portal and I still field general questions (cuz people still email me first) but copy them.  For more complex problems I forward to them with a note to the client that I asked X to respond 'cuz I'm out of the office today.  In general it has worked really well for all of us (me, them, and clients).  But 40% for four years is too much.

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