How To Buy A Cpa Firm
The first question that may come to mind is, how much do the owners of accounting firms make? The answer to this question depends on many factors, including quantity of clients, hourly rates, and specific industries served. That said, purchasing an established firm or an existing book of business offers numerous advantages to starting from scratch.
how to buy a cpa firm
Stepping into an up-and-running accounting firm complete with an established client base, accounts, employees, licenses, etc. can be less risky since many significant hurdles to starting your own firm are already in place. And, yes, you can start making money from day one. However, success hinges on your ability to ensure a smooth business transition, seamlessly retain clients, and execute a strategic plan that takes the business forward.
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There are many reasons to consider purchasing an existing CPA firm. First and foremost, purchasing an accounting firm that is already set up and running can be logistically easier than building from the ground up. When you buy an existing firm with established operations it can help to minimize the risk associated with starting a new business. An existing CPA firm should already have a strong client roster, as well as existing processes in place. And of course, an existing firm will already have knowledgeable staff members ready so there will be little to no training required to keep things operating smoothly after the handoff
Before you even begin searching for CPA firms for sale, be intentional about what you want. The more clarity you have going in, the more likely you are to make a good purchase decision. This post provides information you need to be aware of beforehand.
When you are buying an accounting practice there are several factors to consider and the process should not be taken lightly. Before you finalize the purchase of any accounting business, it is crucial to understand every aspect of the firm.
The due diligence process of buying a CPA firm helps you gain a full understanding of the firm and ensure that it is the right firm to meet your personal and professional goals. Performing due diligence helps assess the risk of buying the firm and showcases the value and opportunity.
Before you buy a firm, be sure to fully understand the structure of the firm and how it operates. This includes knowing how the firm is legally established as a business and how the ownership is divided.
Find out how the firm is structured, including the reporting structure and general workflow. This phase of due diligence is also a good opportunity to find out the involvement level of the current owner.
Financial statements show what assets the firm currently has and has had in the past, but they are also powerful in making projections for the future. When gathering these forms during the due diligence process, look at how numbers and revenue have changed over time. That information can be expanded to the future as you consider growth potential.
One of the most valuable parts of a CPA firm sale is the client list. Your due diligence should include understanding the full client list and how loyal they are to the firm. The client list can be very telling about how the firm is run and how the money comes in.
The most resilient firms have a diverse client list and bring in money from multiple top clients instead of having one client represent the majority of revenue. Go in-depth on the client list to understand their size, potential, and needs.
Looking through the client list will also inform you of the type of client and if they come from the same industry or are more diverse. You can also get an understanding of how long they have been connected to the firm and how much time is usually spent on their projects.
Aside from the financial information, due diligence should also uncover the legal details of the firm. Find out about any past legal issues the firm may have experienced, including lawsuits from clients and employees.
Some firms send invoices right after the service is performed, some bill monthly, and others offer client retention with a monthly fee. Different firms have different payment processes and understandings that affect when and how the money comes in.
Before the sale is final, you should understand how the firm keeps client information and documents. If you find missing or disorganized paperwork or documents that look like they have been changed over time, that can be a red flag about the organization and integrity of the firm.
As part of your due diligence efforts, take a full inventory of the physical assets of the office and its equipment and supplies. New firm owners can come in and completely overhaul the interior of the firm, but that requires time and money.
4. Duration of the Payout Period Most deals use a range of three to 10 years for the payments, and most do not include added interest. Smaller firms usually are paid in four to six years, and acquisitions of larger firms traditionally have longer payout periods.
Volume also plays a role. Larger firms traditionally receive smaller multiples and longer payout periods. This is predominantly because, in densely populated areas, there may be many firms that can absorb a $500,000 firm into their firm with little to no overhead increases, but no one can absorb a $10 million firm, for example, without substantial increases in overhead. Also, smaller firms tend to yield a higher percentage of profit to the bottom line than larger firms.
The most popular multiple is still 1 times billings, but less than half of agreements now use that multiple. Very few use more than 1 times, and more than half use less than 1 times. In some cases, the multiple is applied to the book of business the partner managed rather than overall firm billings. Larger firms tend to use a multiple of compensation as opposed to equity. Most of these firms use a formula that looks at the average compensation of a partner over a period of time, multiplied by between two to three times, in most cases, and paid over eight to 10 years (plus capital).
The Private Companies Practice Section (PCPS) is a voluntary firm membership section for CPAs that provides member firms with targeted practice management tools and resources, including the Succession Planning Resource Center, as well as a strong, collective voice within the CPA profession. Visit the PCPS Firm Practice Center at aicpa.org/PCPS and the Succession Planning Resource Center at tinyurl.com/oak3l4e.
Taking over or acquiring an already established firm is commonplace in the accounting sector, and there are numerous advantages of doing so, as we shall shortly explain. You can also check out our top 10 tips that offer useful advice on buying an accounting practice.
Put simply, the main reason as to why people tend to go for the second option, i.e., buying an up-and-running firm with accounts, employees, licenses and office leases already in place, is that there are not as many risks. Additionally, those risks that you are likely to face, such as losing accounts or staff, are much easier to take control of compared to risks associated with startups, which can often fail in the first 12 months due to reasons beyond your own control.
This all boils down to one important point: a newly-acquired firm can start bringing in income from day-1; depending on the size of your initial capital injection (i.e. how much you paid for the firm), as well as how well you manage and retain old clients, you may be able to see a return on investment in a relatively short space of time.
1. Scout around for small, profitable firms with older owners. The reason? Many CPAs reaching retirement age are likely to be considering the sale of their business in the next few years and building relationships with them early on can be beneficial to all parties.
Whether you are juggling the possibility of starting up your own accounting practice, buying a firm outright or purchasing part of the equity and becoming a partner in an existing firm, the potential for entrepreneurial CPAs at the moment really is huge.
Usually, the sale of a firm will require a certain client retention period after closing the deal. A good scenario is when the sale is on an earn-out payment strategy. If the seller accepts a 25% payout over the next four years from its revenue, they will receive the remaining balance from fee collections of retained clients within this period of time. This duration is the retention period. Although some keep this as short as two years, some structure depends on fee collections and client retention for the period.
Duration of the payout period is how long it will take the seller to receive all the sale money from the buyer. The period can be 10 years or more (larger firms typically have an extended payout period). Smaller firms have a shorter payout period, ranging from 3 to 7 years. This matters because buyers evaluate a purchase's profitability based on its future cash flows. A more extended payout period leads to smaller payments and higher cash flows.
On the other hand, many buyers are ready and willing to buy a small CPA firm as long as they perceive it is large enough to support their future business. Smaller firms, especially those owned and operated by the owner, are easier to manage. These become more attractive to buyers hoping to use financing for the acquisition process. 041b061a72