Who Should Bear the Risk of Client Retention?

The key to a successful operation of an accounting or tax practice is client retention. That is true after the purchase of a practice but, in fact, that is true for any practice. All firm owners must be able to retain clients in order to survive and thrive. In the day-to-day operation of a practice there is no guarantee that clients will keep returning for services. No person owns the clients and therefore no one can force them to stay. In theory, an owner could lose every single client tomorrow! Yet owners typically do not worry too much about it because they realize that clients can be retained successfully for years and decades. Studies show and experience confirms that clients stay when owners treat them right, solve their problems and meet their needs. That is true for new owners or long-time owners.

Why then is client retention the number one concern of all buyers and most sellers? There is the wide-spread perception that the bond existing between clients and the professional will be broken in a sale and will be difficult for a new owner to re-establish. The fear is that just the change of ownership itself will cause clients to leave the firm for a competitor or start doing the work themselves. Everyone has a horror story about someone who bought a practice and lost two-thirds of the clients. However, under circumstances involving a reasonable amount of care and common sense, client retention for a new owner often can be close to what would have been experienced by the previous owner!
Why is this? The answer can be found in looking at the deal from the client’s perspective. Many clients will not be happy about the change. That is because there probably has been some kind of understood relationship built up although in many cases that relationship with the professional is more perceived than real. But probably more important is the fact that people just do not like change. However, that dislike of change can work for the new owner.

Sure, the client loved working with her former accountant or CPA and is stunned that she must continue without her trusted advisor and friend. But once she gets over her initial shock, what are her options? She still needs accounting and tax services and she still needs an accountant. Those who have planned ahead may have an alternative in their back pocket. For most people, though, the only real option is to go to the Yellow Pages and start from scratch.

The best option for the client is almost always to give the new owner a try. After all, the new owner already has her files and can be found in many cases at the same phone number and the same address as the old owner. Often the same employees are there and hopefully the prices are about the same. The client usually assumes that the professional she has trusted for years has checked out the new owner. When it comes down to it, convenience is routinely a top priority for the client. Searching for a new accountant and conducting multiple interviews can be a very exhausting and time-consuming venture. If the buyer makes it a priority to reach out to her as soon as possible then staying with the new owner is the easiest choice for the client to make.

How can buyers make sure that the clients will stay with them? The answer really is simple. An accountant retains new clients in the same way he or she retains any client. Again, if a buyer treats (new or old) clients fairly and meets their needs then there is reason to believe most clients can be retained. Some clients will be lost because some are lost every year. Everyone realizes that. And some clients may be lost just because the change gives them a chance to go to that neighbor or cousin or to find someone closer. But the number of people who change firms just because of a change in ownership does not have to be that high. How many people would give the new dentist a try if they received a postcard in the mail from their old dentist saying the practice had been sold? Most people say they would give the new dentist a try. That is really all that can be asked.

That helps to answer the question: Who should bear the risk of client retention? In reality, the buyer has almost all of the control over client retention! It is the buyer who makes the decisions regarding quality of services and pricing decisions that affect clients. The seller can assist the buyer with key introductions, endorsement letters, occasional problem solving and words of encouragement. However, the seller’s ultimate contribution to the deal is to bring the goodwill of the clients to the closing table, to provide a list of persons with the need for accounting services and to use his or her influence to encourage clients to give the new owner a try. The seller simply owes the buyer loyalty and good faith support. The seller helps with client retention but the bulk of the responsibility, by far, is with the buyer. If the new owner does not treat the clients well and provide fair solutions for them they will leave no matter what the seller says or does. It really is only the buyer who can make the clients happy two or five years down the road.
The buyer does, though, need to be protected from unscrupulous practice owners by non-compete agreements, due diligence investigations and legal protections. But, when two honest parties are involved, the sale can be completed on the day of closing; it does not have to drag out for an extended amount of time.

It is generally preferable to close sales on the day of closing. Then practice owners either receive all cash at closing or a substantial down payment and a note receivable at a fair rate of interest rather than a payout contingent on client retention. Buyers can look forward to owning the business full and complete from day one and to making all of their own decisions regarding client retention. They will fully bear the risk and the reward of the decisions they make, not the old owners. That, of course, is the way most business transactions work in this world. Given good faith on the part of the seller and the hard work of the buyer the transfer of an accounting or tax practice can often be a win-win situation.