Acquiring Free Revenue has its Drawbacks
I’ve now spoken with a few firms who have made acquisitions of fee bases below $1 Mill where several clients have multiple years’ lodgements outstanding. Initially this is perceived as a real win or bargain.
Often the deal goes something like this. The purchaser pays a reasonably competitive market price for the fees based on what would be deemed as revenue for one year’s work and lodgements from the client base. This price may be 85 or perhaps even 90 cents in the dollar of the qualified recurring revenue; although on occasion we have also seen such propositions discounted further in price.
However, for our example, let’s say the recurring fees are deemed to be $500K for which the purchaser has paid 85 cents in the dollar or $425K, most of which has been paid at settlement with limited recourse.
In terms of the extra work required to get these clients up-to-date with their lodgements, no price is paid to the vendor for the fees generated from this additional work. This is the basis upon which the purchaser has initially become excited. Their eyes light up at the thought of performing this additional work with the fees generated from these multiple years’ lodgements being received by them at no cost! Its money for jam they think. However, in reality, how little it is that they know.
A couple of events typically ensue following such transactions.
1. The vendor may have been unwell or perhaps not, but typically they haven’t managed these clients well. They have not communicated well with them, been responsive to their needs and telephone calls, provided good advice or advice at all. So the clients are very frustrated and angry which carries over to the way they deal with the new advisers.
2. The clients may or may not be aware that they are years behind in their returns with the probability of paying significant tax along with penalties. They may even try and convince the new firm that they thought lodgements were up-to-date.
3. Often these clients then become demanding in terms of the time it will take to bring their work up-to-date, placing unrealistic turnaround times on work completion.
4. Because of the mess their affairs are in due to the prior accountant, the clients often then expect a discount on the fees.
5. The firm finds that it doesn’t have the resources to meet the demand of these new clients as well as their current client base. This leads to increased pressure, unhappy clients, stressed staff, a lack of desire to answer the phone and a massive management problem.
6. Plus, because the clients are so frustrated with the prior accountant or firm, as well as now your firm, they either take their work elsewhere prior to engaging your firm or leave straight after you have toiled to complete all the outstanding work. Therefore you have paid for clients who never intended to engage your services in the first instance or you have failed to retain the clients past the first year. The opportunity for client loss is massive let alone damaging your relationship with your original clientele.
7. And, you have limited recourse in terms of the purchase price.
So purchasers come out the other end of the ‘year from hell’, they are often left scratching their heads wondering what they thought was so appealing in the first instance. The revenue they thought they were acquiring for free has probably ended up costing them much more in terms of their staff, the continuity of their original client base, their health and sanity and the overall performance of the practice.
Upon reflection, I would challenge such purchasers as to whether clients who were that far behind in their lodgements, regardless of the cause, were really the type of clients their firm wanted to service, irrespective of what a bargain it may have seemed in the first instance.
Please be wary of such and similar scenarios.