Art of Accounting: Problems after selling your practice

Selling a practice is a life-changing event for most people. It means letting go and deciding to retire. It also means monetizing the practice that provided your living and added savings for your long-term financial security. A previous column provided some remedies if a buyer reneges on the transaction. This prompted some reader questions, leading to this follow-up with added information. 

1. Protecting yourself from the buyer not being able to maintain the practice;
2. Protecting yourself if the buyer dies or becomes disabled or incapacitated;
3. Protecting yourself if the buyer just walks away from the practice;
4. Protecting yourself if the buyer files for personal bankruptcy;
5. Protecting yourself if the buyer stops making payments; and
6. Protecting yourself if the buyer drops a large number of clients just before the seller’s guarantee period lapses.

These are all real problems and can occur. I do not have the answers to all of these but will raise some things to consider. A lot of these issues need the advice of an attorney who would look to protect the seller against any of these things should they occur.
These questions remind me of the Laventhol & Horwath bankruptcy in 1990. At that time L&H was the seventh largest accounting firm in America, with international revenues of $664 million. By way of comparison, the largest firm then was Ernst & Young with $4.46 billion in revenues. Arthur Andersen had revenues of $3.38 billion (they filed for bankruptcy in 2002).

About two years prior to the L&H bankruptcy, a friend “merged” his practice into L&H and got “paid” with partnership points. His intention was to work a few more years and then retire and receive a “pension” payout. In 1990 when L&H filed for bankruptcy, his equity and the value he created his entire professional life were wiped out, and he also had some personal liability since L&H was a general partnership. He was further offered the “opportunity” to buy back his practice from the bankruptcy trustee at a much higher price. With regard to Arthur Andersen, the equity and capital accounts were similarly wiped out.

The point of this is that sellers cannot protect themselves from a buyer’s bankruptcy or if the buyer just stops making payments or simply walks away from the practice or is unable to maintain the practice. Perhaps if the practice being sold were placed in an entity and a lien was filed on that entity, the seller could take back the practice if payments were not made. Go to an attorney for any further advice. 

One way to protect yourself is to make sure the buyer has a practice continuation agreement with another practice to take it over if there is a death or sudden incapacity (including a major or even a minor mental health issue) of the buyer. If a partnership is buying the practice, then review the buy-sell agreement to ascertain continuation is assured and that the purchase contract would be honored if a partner withdraws, dies or becomes incapacitated.

To protect from the death of the buyer, a suggestion is to buy a limited term life insurance policy on the buyer where the full unpaid balance of the notes would be paid upon the death of the buyer (and the balance of the coverage would go to the buyer’s heirs). An attorney could draft a suitable designation of beneficiary for that policy.

I’ve seen buyers who are more interested in selling annuities and managing assets and who drop “unsuitable” clients just before the guarantee period ends.

You can avoid many of these problems by receiving all cash. The buyer could borrow the money from a bank, and I believe Small Business Administration guarantees are applicable for such acquisitions. Alternatively get a very large down payment of at least 50%.

The seller should do careful due diligence on the buyer and include a credit check, lien search and whether complaints have been lodged against them. Check out their level of experience and capabilities to service clients similar to yours. Also look at the present composition of their practice and whether non-accounting services’ revenues are significant and might be of greater interest to the buyer. The seller could also have a trial period where they work together with the buyer on the clients. This gives each party a “look-see” at the clients, and the buyer’s ability and level of comfort with the client services and soft skills. How compensation is paid for the joint work is another issue that would need to be worked out. 

Nothing is perfect. But proper preparation can reduce the potential for problems and disappointments.

Do not hesitate to contact me at emendlowitz@withum.com with your practice management questions or about engagements you might not be able to perform.