Are you are looking to buy a CPA firm? Then this page runs through some of the essential information you need to know beforehand. We take a look at why this can potentially be a great opportunity for you on a business and financial level, as well as how it can actually be achieved securely and successfully by looking at some of the things to consider when buying a CPA practice.
There are obvious advantages to starting your own business yourself in any kind of industry; for example, there is usually less upfront capital required and you might find greater freedom when it comes to making those all-important decisions. However, many individuals and partners decide that buying into a CPA firm is a better choice than starting out from scratch.
Firstly, already-established firms enable you to get started straight away, without having to fuss over what some people might consider the ‘small stuff’ – such as renting office space, having relevant business licenses in place and so on.
Another big advantage (or disadvantage from the startup perspective) is that, in general, income will be rolling in from the get-go – providing that you are not buying a non profitable CPA firm (although this is still an option in some cases). This is a huge issue for startup entrepreneurs all around the world, and not just those in the accounting industry. Capital has to raised and injected into a new business, and there is never any guarantee when – or if – the profits will start to emerge. In fact, some estimates suggest that over 75% of all startups fail.
It is also worth considering that CPA firms generally have a set of successfully-proven systems and procedures in place, and, if you are able to retain the majority of the firm’s staff, maintaining those well-established client relationships should be feasible. Again, this will depend on the level of loyalty of each client, as well as their faith in which they have of the smooth running of the business ownership transfer. And this is the point we come onto next… how such transfer can actually be achieved.
The process of buying a CPA practice is different in many ways from regular business takeovers or large-scale acquisitions or mergers. In fact, it can even be more straightforward than buying out a small business or company. The reason? Many CPA owners, as they reach retirement age, seek a quick and convenient way of ‘cashing out’ on their firm that they have successfully built up over decades.
Needless to say, the selling off of a successful firm can generate a lump sum amount that accountants can put towards their retirement, pass on to their kids (who haven’t decided to pursue a career in accountancy) or invest in something else.
This whole concept creates a healthy buyers’ market, meaning that those looking to into this, especially those thinking about buying a small CPA firm, can easily discover a plethora of profitable firms that are either actively up for sale, or that would be potentially interested in selling up shop.
Extensive research can be done online to discover small firms with older owners that are up for sale (or that might be interested in selling). However, one of the most effective ways of actually getting the ball rolling is to do it the old-fashioned way: pick up the phone and simply ask. Worst case scenario is that you get a firm “not interested”, while on the other hand, you might just land yourself a little gem at half of the cost (and risk) associated with establishing your own practice.
Once a lead has been established with one or more firms, there’s obviously a long list of other conditions and issues that need to ironed out between yourself and the owner of the firm. The big one here obviously is price – i.e. the valuation of the firm, as well as how the payments will be made (all upfront, monthly installments etc.), whether the firm’s staff will be kept on, what the firm’s office leasing conditions are, and so on.
Valuating the firm – and ascertaining whether it is actually going to profitable in the future, all depends on your due diligence.
Unlike the due diligence processes involved in large-scale mergers and acquisitions where every single transaction of the past x-number of years has to be tracked and given a full audit, the due diligence process when buying a CPA firm doesn’t have to be as complicated.
In fact, the first step of you due diligence (if you’ve been following above) has already been ticked off; i.e. you have met the pre-existing owner, created a dialogue and mutually agreed upon the terms. This should have given you a reasonable idea of the firm’s history, whether the owner is trustworthy, who his or her major accounts are, what the firm’s staff’s level of expertise is, and so on.
Naturally, the next step is for you to delve deeper into the firm’s accounting records and simply take a look for yourself.
For example, you will need to:
- Look into their pricing systems (and whether you think what they are charging is right for you as an accountant)
- Find out how their billing practices work
- Look into client files (or samples) to gain an understanding of the quality of work the firm typically produces (if there are errors and missing pieces, this is a big red flag)
- Obtain a copy of the documents showing the firm’s reported revenues, expenses and tax returns over a set number of years
Remember, a due diligence investigation should always be carried out so you can obtain a clear picture as to the true valuation of the firm, as well as spot any red flags (such as inconsistencies in the quality of the services provided or discrepancies in their tax returns).
But a due diligence report can also work in your favor when it comes to buying into a CPA practice; for example, understanding the nature of the firm’s accounts – such as their scope of industry, the client’s age and their turnover – will all give you a huge head-start when your first day in your new office comes around.
Aside from the obvious importance of the due diligence report and its subsequent findings, it is always worth trusting your own instincts at the same time; if something seems fishy, it probably is. And even when you are approaching the stage to where you have enough confidence to go ahead and takeover the practice, don’t be afraid to ask additional questions, either to the owner, other staff or to other CPA industry professionals.
- What are the terms and conditions of the staff employment agreements – and will/should these be re-negotiated at a future date after the acquisition?
- What are my options if I only want to buy CPA accounts – or if other firms want to acquire my accounts in the future?
- What are my options in terms of the firm’s location if I do buy? Can I relocate?
- How many hours does the owner or other partners typically work per week/month? Chances are, if he or she is doing 80-hour-weeks, this might be a contributing factor towards its success!
- What are my financing options and which one suits me best? Just like buying a house, the larger the down payment, the easier the whole acquisition will be. Some surprisingly good bank financing deals can be found to support CPA acquisitions, although normally a minimum of 10% of the firm’s value will need to be put down. And while it is rare to by a CPA firm flat out, it is possible.
- How long will the acquisition transition take and what are the main steps to be taken for the deal to go through? (This point also raises the question as to how much the current owner will be involved in the takeover, for example, how proactive he or she is willing to be during the course of your due diligence process).
- Is there any flexibility in terms of joint ownership rather than buy cpa practice as a whole (if applicable)?
It’s quite clear that there are many pros and cons of buying a cpa firm. However, whether you’re considering scooping up a modestly sized firm that is looking for a quick sell, or thinking about buying a larger cpa firm, there is massive potential out there, providing that you follow your own instincts and judgment, carry out a thorough due diligence and seek advice from reputable online sources or even independent financial advisers.
We also hope that the information on this page has been of use. If you have any questions, comments or thoughts on any of the content displayed throughout, please do not hesitate to get in touch.