Buying An Accounting Firm

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.

Why buy an accounting practice?

Whether you are an entrepreneurial Certified Public Accountant (CPA) with your heart set on starting your own accountancy firm (as a ‘startup’) or a CPA wanting to buy an accounting practice, there are plenty of risks involved whichever route you take.

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.

From a more optimistic standpoint, many CPAs see that the advantages of buying an accounting practice outweigh the risks, too. For example, some of the issues as mentioned above, such as retaining clients, accounts, staff and office space, if managed properly and professionally during the business takeover, can be of a huge advantage as you won’t have to set up these things yourself.

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.

Top 10 tips on buying an accounting practice

If you are asking yourself ‘should I buy an accounting practice?’, then you may well want to read our Top 10 tips below that offer some advice on various topics such as how to buy an accounting practice and the transition of the business to the seller.

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.

2. All you need to start: some traditional networking! At first, it can be daunting when trying to find an accounting practice to buy. There are a plethora of good websites out there that list CPAs that are up for sale, but some of these may be difficult to navigate. By attending CPA and accounting networking events, you can directly reach accounting practices that could potentially be looking to sell – or at least let them know you are looking for acquisitions should they ever be looking to sell their business.

3. Put emphasis on profitability, not revenue. This point applies to the firm’s valuation as well as your final decision whether or not to buy. For example, if you buy into a firm based on its sky-high revenue alone and neglect the potential risks and overheads (such as staff and office space), then you might be waiting a long time to see that return on investment. For example, if you buy an accounting business for $50,000 that brings in $50,000 a year, that may sound like you’ve found a winning lottery ticket. However, if only 20% of that revenue is profit (i.e. $10,000 per year), you won’t see a penny back on that initial investment for 5 years!

4. Do your homework on the firm’s client base. This information, which can easily be obtained from the owner or during the course of a due diligence check, is essential to you as the buyer, as the firm’s existing clients and accounts should match up to your own areas of expertise, interests, and ambitions.

5. Get the necessary help: Any large-scale company takeover or merger requires a whole team of lawyers and independent audit agencies to make sure everything goes to plan, is done by the book, and is completed in the best interests of both parties involved. To buy an accounting firm won’t require as much help, but it is worthwhile engaging an independent auditor or broker to oversee things like the company’s valuation, or even a lawyer to handle the accounting practice buy-sell agreement.

6. Start your due diligence early. This step, in fact, simply starts with a conversation with the owner of the accounting practice. He or she, depending on how interested they are to sell up shop, should be able to provide you with all of the most important information you need to know, such as the history of the practice, the financials (although these should be verified), the staff, working conditions etc.

7. Consider to buy a remote accounting practice: With prices for office space on the rise along with more advanced accounting software, apps and cloud storage readily available, many accounting practices have gone remote – or semi-remote, with part of their staff working most days from home. Consider this as one of your options when thinking about how to buy accounting practice as it can often work out to be more affordable and profitable in the long run.

8. Carefully plan how you will finance the transaction. Remember, just like buying a house or car, you have plenty of options at your disposal in terms of how you are going to pay. Normally, the bigger the down payment the better (to avoid interest on business loans). However, many bank financing deals can be obtained to fund your transaction if you have the right credentials, business plan and a suitable cash deposit .

9. Consider buying in. Another popular option for entrepreneurial CPAs, rather than buying an accountancy practice flat-out, is ‘buying in’ as a partner or in a similar position. This opportunity may arise when slightly larger firms need to replace one of their retiring partners or when they are looking to expand. This begs the question - how to buy into an accounting practice? Obviously, various issues need to be considered especially regarding the valuation of your equity that you are buying. However, most of the above tips should still apply - even when buying a minority proportion.

10. Questions, questions, questions. While the major aspects of any CPA firm takeover will look at the client base, staff, turnover and profits and overall financial audit, it’s a good idea to formulate a whole list of questions ready to pose to the owner or partner; these will give you a clearer picture as to the flexibility of the future business operations of the firm, as well as the sustainability of future profitability, and so on. For example, how many hours does the owner/partner/key management work per week – if the owner is overworked doing 10 hours a day, 6 days a week, is this really what you want to be doing? Also, what are the existing terms of the firm’s staff employment agreements (and how will a takeover affect these?); What are past client’s experiences with the firm?; How long will the acquisition take and how involved will the current owner be regarding the facilitation of the transaction?

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.

We hope the above information on buying accountancy firms, as well as our top 10 tips have been of use.

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