Are you thinking about buying an existing tax practice from a retiring professional?
Having bought four practices, opened two others from scratch, and sold one (the first five bundled into one transaction), I offer the following.
1. Have a written agreement to memorialize the transaction.
2. Have an attorney represent you in the transaction - to either draft the agreement or review the agreement drafted by the seller's attorney. This helps keep your emotions in check and provides a voice of reason.
3. Make sure you have both a non-compete agreement and an anti-solicitation agreement in the contract. (Non-compete means he won't setup shop within x miles of you. Anti-solicitation means he won't contact the former clients or prepare their tax returns, under any possible situation). I recently heard of a situation where the seller sent Christmas cards to his “friends” for the five year duration of the non-compete agreement. The results in year six were disastrous to the buyer. NOTE This is the sale of a business, so the famous "2 year and 25 miles" and "right to work state: rules won't apply. Yes a 5 year, 50 mile non-compete will hold up.
4. The payment price needs to be on retention. It’s also not reasonable to expect 100% retention. You should expect first year retention to be similar to the seller's historic retention.
5. If you are not using the same software as the seller, you need to close on the sale early enough so you can convert the returns to your software and then review all of the returns. (Verify if your software company can convert the seller’s returns to your software. This could change your purchase price). If you have time, you should consider re-keying every return this off-season into your software. In addition to catching errors from the prior year, you will become familiar with the client’s situations, understand the entries into your software, and best of all, and have a clean and complete "roll-over" into the 2011 software.
6. If the seller had employees, what is their status? Did they have employment contracts?
Are the contracts assignable? Can the employee compete with you? Do the employees have the client list and software database? What recourse will you have if they do
compete? Should you have some holdback?
7. What about the seller’s spouse? Does s/he prepare tax returns? Did client have contact with him/her? Should the spouse be a party to the non-compete provisions? I know of a situation where a widow sold the spouse’s tax practice to a national chain for cash, and then competed with them the next season.
8. What about the former business location? Does the lease provide that after the lease term the landlord can’t locate another tax preparer in the location the following tax season?
9. You want the telephone number and domain name he currently uses for the business, even if you seek to forward the phone number to yours, and forward the domain name to yours. It’s valuable to you if clients are used to using it. If the seller uses a generic email address such as "email@example.com,” you really want that email address (he can get a new personal email address, and you can forward all personal email to him. You really need to make sure all former clients reach YOU and not the seller next season).
10. Your agreement should provide that he DELETE and DESTROY all business records not provided to you, especially his software database. As such, you should require he turn over the computer he currently uses. It makes your life easier, and he won't need to go to the trouble of deleting the data on his hard drive. Maybe you will even buy or give him a brand new computer.
11. You need all copies of the tax files. You want all copies of the tax software for all years, including the original CDs. He should assign his license to you for these tax related programs. At closing he should sign a letter addressed to the software company indicating you are the contact person for his accounts. You will mail the letter.
12. You can perform a FOIA request to learn all EFINs assigned to this person. You should prepare a letter addressed to the IRS requesting the IRS cancel/close all EFINS in his name (you need to list them). You can forward that letter to the IRS after the closing.
13. If the seller is “retiring” then be sure to check the IRS online database to watch for new EFIN assignments of interest.
14. You should try to close early enough in the off-season to offer free "meet and greet" meetings to any client who wants to meet with you. Of course, the preceding is NOT legal advice and is based on my nearly 24 years of experience.
One last thing: Don’t be cheap, hire a lawyer!