A prime challenge in M&A: Retaining the clients

Register now

Acquiring another practice can seem like a sure and quick (if expensive) way to grow a book of business. Practitioners warn, however, that such a move can come with problems. For one: How many of those new clients will stick around?

“If you pay too much up front and don’t retain the clients, you’ve wasted money,” said Scott Kadrlik, a CPA at Meuwissen, Flygare, Kadrlik and Associates in Eden Prairie, Minn.

Clients and individual tax pros also cement bonds over many filing seasons. “If the acquiring firm doesn’t consider these personal ties and provide a comparable culture for client interaction, there’s a real danger that the clients won’t be happy and will go elsewhere,” said New York-based Enrolled Agent Phyllis Jo Kubey.

“You have to really look at the client base. Also, what are the plans of the owner? Do they want to retire or just not want to run a business any longer?” said Jeffrey Schneider, an EA in Port St. Lucie, Fla. “Having the owner in place, especially if there are no other long-time staff that’s staying on or if it’s close to tax season, is invaluable.”

Slow diminishing?

The demographics of the acquired firm’s clients are of first concern. “If you buy a practice from older, retiring practitioners, their clients are probably similar in age,” Kadrlik said. “There may be some estate tax work, but the client work may slowly diminish as their income declines and their need for your services decline.”

“The biggest danger or risk is the quality of the clients being acquired, which also includes the service that they’re accustomed to receiving,” said Ed Guttenplan, managing partner at Wilkin & Guttenplan in East Brunswick, N.J. His firm asks such questions as:

  • What are the standards of client data and related compliance that were required by the seller?
  • What degree of documentation was necessary in connection with the work provided?
  • What kind of vetting is performed in regards to the integrity of the prospective clients, as part of the client acceptance process?
  • Was the adequacy of internal controls at the client considered?
  • Are there fee disputes, large overdue balances or unusual billing arrangements?

“If all of the above answers are acceptable,” Guttenplan adds, “we examine one final question of great significance: how easily the client relationship will be transitioned to the new firm. This can be dealt with by paying for clients based upon retention, but even under a purchase arrangement with those terms, the purchasing firm doesn’t want to pay for clients that will leave shortly after the retention period.”

Price points

Jeff Gentner, an EA in Amherst, N.Y., has purchased several small tax prep practices – and each time negotiated a share-responsibility purchase agreement.

“The seller agreed to write a letter to their clients, explaining the situation and highly recommending me as their new tax professional,” he says. “This letter included my experience and credentials. I have always felt that getting them to come to me the first time was the responsibility of the seller. Keeping them beyond that first meeting was my responsibility.”

“In all practices, the purchase priced agreed upon was based on the first year’s gross income,” he adds. “This way the seller had an incentive to get the clients to me. This method has proved very successful; each time 5 percent to 85 percent of the clients accepted the change. If you use any other method, you’re simply purchasing a list of potential clients.” All purchase agreements should include a covenant not to compete, he added.

“Did the current owner undercharge based on your rates? If so, you may not keep as many clients as you think when they find out your rates,” added Laurie Ziegler at Sass Accounting, in Saukville, Wis. “And what’s the age of the clients? If there are many seniors, this will play a large role in the retention rate.”

“Do you have the staff to service the new client base? Most firms have enough work [and] are buying other firms for the employees and then culling out the clients from the old firm by raising rates,” Kadrlik said.

Many factors can affect retention and other important aspects of a deal – some of which a preparer can help, and some a preparer can’t. “With all the talk of tax reform and knowing that tax reform is most likely imminent, I’m reluctant to enter into any agreement,” Gentner added.

For reprint and licensing requests for this article, click here.
M&A Practice management Tax preparers Tax preparation Tax season