Accountancy practice sale mistake leads to £200,000 loss for owner

Poor broker advice and lack of legal input costs a vendor 200,000 as demonstrated in this case study:

Some of the Morgan Cox Accountancy team met with our legal colleagues last week to catch up with some of our accountancy clients sales progress and also to share important feedback between the various components of the sales process.

Unfortunately what was shared with us was deeply upsetting so we thought that we would share it with you in order to help learn the lessons and prevent another case like this from happening in the accountancy sales market.

In 2009 an accountancy practice vendor engaged the services of a UK accountancy practice broker (not us) to sell her practice. One of the reasons why the vendor engaged this broker was because they told her that they were experienced in the legal aspects of the sale process and could deal with all legal aspects including the sale and purchase agreement. She was told that this alone could save her up to £6000 in legal fees which she found attractive. She subsequently engaged the service of this broker.

A purchaser was found and the vendor followed the brokers advice and let them deal with the legal aspects fo the sale. A sale and purchase agreement was provided which she duly signed. The agreed purchase price was £400,000 speak over a thirty six month period with 4 equal instalments of £100,000. After 24 months however the third payment was not made. It was disclosed at this point that the purchasing company no longer existed and that the assets had been sold/transferred to a new company (owned by the same directors as the purchasing company). The sale and purchasing agreement was only made with the original company and no warranties to prevent the transfer or sale of the assets had been agreed. This subsequently left the vendor £200,000 out of pocket. The vendor engaged the services of one of our legal providers in an attempt to recoup the outstanding debt which after a period of 12 months proved unsuccessful and resulted in legal costs of £20,000. 

There were two elements that could have prevented this situation from arising, both of which should have been in the original sale and purchase agreement. Firstly there should have been a clause in the contract preventing the sale or transfer of any of the sold assets during the buyout period. Secondly the vendor could have been saved by the presence of a clause where the responsibility for settling the money owned was joint and several between the acquiring company and its directors. This would have enabled the legal team to take action on a personal basis against the directors and their individual assets. This last clause alone would have posed as a deterrent to such practices occurring. It would have served as an avenue to also recoup the money owed.

You may ask why the vendor did not take action against the broker who essentially created this situation by giving advice that could be seen as misleading at best. This avenue was not possible because of the contract of engagement which had been drawn up by a lawyer and which the vendor had signed. In it was a clause whereby the vendor gave up all possible and future claims against the broker.

There are several lessons to be learnt from this case report.

• Always seek expert advice.
• Don't try and save costs by cutting corners.
• Read the small print on any contract.
• Do engage the services of a specialist lawyer. They are not cheap, however the above situation could have been prevented had they been engaged.
• It it sounds too good to be true, it normally is.
• Get it right the first time as once you have signed any legal contract you are bound by the terms contained within the contract.

Selling your accountancy practice is an important step. You would have spent a lifetime building your practice up and your financial security and retirement could depend on the proceeds of it's sale of the assets and goodwill. Morgan Cox Accountancy are a specialist accountancy broker operating in the UK. We partner with specialist lawyers who only deal with the sale and purchase of accountancy practices. We have negotiated reduced capped rates for legal services and can introduce you to a short list of these specialists to act on your behalf. We will never attempt to act on your behalf in areas where you are better represented by a specialist as the consequences such as the above case report are all too frequent.

To discuss our services please contact us to day or view our current accountancy practices for sale in the UK.