Funding a practice purchase

The problem, stated plainly

A practice purchase asks a lender to advance money against goodwill. There is no plant, usually no property, and very little on the balance sheet that could be sold if things went wrong. The asset is a set of relationships that renew, and its value depends on people continuing to behave the way they have behaved.

Lenders who have never funded one look at that and see an unsecured loan with a nice story attached. Lenders who have funded them before see one of the most predictable income streams in the SME market, provided the fee quality holds up. Same practice, two different answers, and the difference is not the practice. The parent sector page covers what makes the fee block worth buying. This page is about the money.

What the funding usually consists of

Practice purchases at this size are rarely funded from one source. A typical structure draws on several of these:

• Senior term debt from a bank or a specialist lender, over a term normally matched to the retention period rather than stretched well beyond it. See senior term debt.
• Deferred consideration owed to the seller and paid over two or three years, which is finance whether or not anybody calls it that. See vendor finance.
• The buyer's own contribution, from savings, an existing practice, or the release of value elsewhere. See equity contribution.
• A working capital facility, sized for the gap between paying staff and collecting fees, and kept separate from the money that buys the block.
• Asset finance for the tangible parts, which in a practice is mostly information technology and occasionally a fit-out.

Where an existing practice is doing the buying, part of the answer is often refinancing what is already there, so that the combined debt sits on one term and one covenant set rather than two. See refinance and stacking facilities.

How the deferred money is treated

The single most useful thing to understand before agreeing a structure is that the seller's deferred consideration and the lender's debt are competing for the same cash, and the lender knows it.

Expect the question of ranking to be asked early. A lender advancing at completion will usually want the seller's remaining payments to sit behind its own, formalised in a deed of priority, so that a bad year does not see the seller paid while the facility falls into arrears. Sellers are often willing, because a deal that funds is better than one that does not, but it is a conversation that goes much better before heads of terms than after.

The corollary is that the more of the price is deferred, the less has to be borrowed on day one, and the better the whole structure tends to look. Deferral is not a concession extracted from a reluctant seller. In a practice purchase it is the mechanism that aligns the seller with the fees surviving, and a seller who refuses all of it is telling the lender something. See deferred consideration and earn-outs.

The term has to match the risk period

A common error is to seek the longest term available, on the reasoning that lower monthly payments are safer. In a practice purchase that can work against the buyer.

The attrition risk is concentrated in the first two or three years, which is exactly when the debt is largest and the clawback is still live. A term that runs well past the point where the fee base has settled means paying interest for years on a risk that resolved early. A term that ends before the retention is proven means the reverse. Matching the two, and being able to explain why they match, is a sign to a funder that the buyer has thought about the shape of the risk rather than only about the monthly figure.

Sizing it against the right profit figure

Everything turns on this, and it is where practice deals most often come apart in credit rather than in negotiation.

The price is conventionally discussed as a multiple of recurring fees. The debt is serviced out of what is left after the work has actually been done. A lender rebuilds that figure itself: it strips the seller's drawings out, puts back a market salary for whoever does that work after completion, adds back anything genuinely one-off, and services the debt from the remainder.

Two practices billing identical amounts can therefore support very different borrowing, depending on how efficiently the fees are delivered and how much of the delivery walks out with the seller. Do that arithmetic before the price is agreed. If it is done for the first time inside a credit paper, the answer arrives at the worst possible moment. See valuation basics and what a lender does with your management accounts.

The first year in cash, not in profit

A practice bought in the wrong part of the compliance cycle is profitable on paper and short of cash in month three. Salaries, software and premises are paid monthly from day one. Fees arrive on the practice's normal billing pattern, which for a compliance-heavy block can be heavily weighted to one part of the year.

Model it monthly before you borrow, including the initial payment, the work in progress and debtors purchased at completion, the professional fees of the transaction itself, and the cost of any temporary duplication while the seller is still around. That last one gets left out routinely: a handover period usually means paying for two people to do one job for a while, which is money well spent and still money.

Then size the working capital facility for the trough rather than the average. See working capital and the first hundred days.

Security, and what a buyer should expect to be asked for

With little to take a charge over, security in a practice purchase tends to come down to a debenture over the acquiring company, an assignment of the benefit of the purchase agreement including the clawback, and a personal guarantee from the buyer. Property is sometimes involved where a buyer chooses to offer it, which is a decision to take slowly and with independent legal input.

A guarantee is normal in owner-managed acquisition lending and is not by itself a reason to walk away, but it should be understood in detail rather than signed at the end of a long day. Read personal guarantees explained first, and note that some government-backed facilities carry their own restrictions on what can be taken as security. See government-backed funding.

Who is buying matters as much as what

Three buyer profiles come up repeatedly, and they are funded differently.

An existing practice buying a block. The strongest position, because there is a trading record to lend against and the work can usually be absorbed without hiring. The constraint is existing debt and existing covenants, not appetite. See bolt-on acquisitions.

A qualified accountant buying their first practice. Fundable and common. The assessment turns on the buyer's own record, the size of their contribution, and the depth of the seller's handover. See MBO, MBI and BIMBO explained.

A buyer who is not qualified. Harder, and the difficulty is professional as much as financial: who signs the work, what the relevant professional body requires, and what the buyer can hold themselves out as offering. A credible answer to that, usually involving a qualified principal who is staying, has to exist before the funding question is worth asking.

Sequence it properly

The order that works is: rebuild the profit figure, model the first year in cash, then find out what is fundable, then agree the price. The order that causes trouble is agreeing the price and then discovering what is fundable.

Getting an early read costs nothing and changes the negotiation, because a buyer who knows what a lender will support has a reason for the number they are offering rather than a hope.

That early read is what we do. Reads Commercial Finance is not a lender and not a broker, and we do not advise on the deal. What we have is the part that is hard to buy: we know this market, Simon Read has spent years inside accountancy practice sales through Accountants For Sale, and we know specific people who have funded practice purchases before and would do it again. Tell us the fee profile and the shape of the deal, and we come back to you with who can fund it and what they will want to see.

We introduce buyers who are acquiring through a limited company or a NewCo. If you are buying personally, as a sole trader or as a partnership, we will point you to an authorised firm directly instead.