Block of fees finance for accountants: funding a client book purchase

Most blocks come from one of four situations, and each carries a different risk for the buyer and the lender:

• A sole practitioner retiring without a successor. Clients are often long-standing and loyal to one person, so the quality of the introduction decides retention.
• A firm leaving a service line. A practice moving towards advisory work may sell its small self-assessment or payroll clients. The fees are real but low per client, and the work is volume-heavy.
• A firm pruning its client base. The clients being sold may be the ones the seller found least profitable or slowest to pay. Ask why each group is being sold.
• A distressed or unwell seller. Sales can be quick and cheap, but records may be patchy and the handover rushed.

What you acquire is goodwill in client relationships. There is no work in progress, no debtor book and usually no staff, and every client decides for themselves whether to move. Each one signs your engagement letter, and you carry out fresh customer due diligence under the money laundering rules and request professional clearance from the outgoing accountant, as the ICAEW helpsheet for incoming accountants explains. A lender is therefore funding an asset that can walk away, which is why it concentrates on your ability to keep and service the clients.

If you are buying the seller's staff, premises and company as well, the deal is a practice purchase: see our page on finance to buy an accountancy practice.

The headline figure in a sale memorandum is gross recurring fees, and the price is usually expressed as a multiple of them. Lenders start there but do not lend on it. They work towards the cash the block will add after you have paid to service it:

1. Fees you expect to keep. Recurring compliance and monthly bookkeeping or payroll fees count in full. One-off projects, probate work and tax investigation fees are usually discounted or ignored.
2. Less the cost of doing the work. Extra staff hours, software licences per client, a higher professional indemnity premium and any extra office space.
3. Tested for attrition. The repayments must still be affordable if a share of clients leaves in the first year.

Bolt-on fees can be more profitable than your existing book, because your rent and systems are already paid for. Lenders give credit for that only if you can show where the capacity comes from, for example a manager with spare hours or a planned hire already costed. Most buyers borrow for the completion payment and pay any deferred instalments from the fees collected. Borrowing the whole price up front removes the retention protection that a deferred, fee-adjusted payment gives you. Our existing guide to financing a block of fees works through a clawback calculation step by step.

When the block changes hands matters as much as the price, because repayments usually start soon after drawdown while fees from the new clients follow the compliance calendar.

• Autumn completion. You inherit the January self-assessment workload almost immediately. Your team does the work in December and January, and the fees arrive in February or March, often after two or three loan repayments.
• Spring completion. The handover happens in quieter months, clients get to know you before their deadlines, and the first fees from March year-end companies arrive over the summer.
• Billing method. A block on monthly direct debit plans produces cash from the first month. A block billed annually on completion of the work may produce little cash for months.

Some lenders can offer a short capital repayment holiday at the start, or a drawdown date set to match completion. A revolving credit facility alongside the loan can cover the gap until the first fees are paid, and our page on fee and WIP funding explains how lenders treat unbilled time.

Hypothetical, rounded figures with interest excluded, to show the arithmetic. Not a quote or an offer of finance.

• A block bills £150,000 a year. The price is £150,000: £75,000 on completion and £75,000 over two years, adjusted for fees retained.
• Servicing the clients needs a senior accountant and extra software, costing £70,000 a year. At full retention the block adds £80,000 a year before interest and tax.
• The buyer pays £15,000 from reserves and borrows £60,000 over five years, so capital repayments are about £12,000 a year. Deferred instalments are £37,500 a year for two years.
• Year one commitments are therefore about £49,500 plus interest, against £80,000 of added profit.
• If only 80% of fees stay, income falls to £120,000 but the new salary does not fall with it. Added profit drops to about £50,000, while the retention adjustment trims the deferred payments. The margin becomes thin, which is exactly the case a lender will test.

The lesson is that the cost of servicing the block, not the price, is often what decides affordability.

The personal guarantee on a fee block loan can outlast the clients it paid for. Read our guide to personal guarantees before signing. Be wary of taking on clients you would not normally accept: poor payers, clients with high money laundering risk or clients expecting far more work than the fee covers. Cherry-picking the block, rather than taking every client, may lower the price and the risk.

Not borrowing is sometimes the better choice. A seller willing to be paid entirely from fees collected, a merger, or organic growth through referrals may suit a practice that is already stretched. Borrowing of £25,000 or less by sole traders and small partnerships can be regulated consumer credit, which brings additional protections.