It’s not easy to start an accounting practice from scratch.
It requires you to be good at marketing, hiring the right talent, implementing the right technology, and more.
If that sounds overwhelming, you can also consider an alternative path to becoming a firm owner—buying an accounting practice.
In this blog post, I’ll give you the information you need to assess whether buying an accounting practice is the right choice for you.
Let’s get started.
Table of Contents
- Reasons to Buy an Accounting Practice
- Risks to be Aware of When Acquiring an Accounting Practice
- How to Buy an Accounting Practice
- Tips for Buying an Accounting Practice
6 Reasons to Buy an Accounting Practice
Though it may not be the most cost-effective route to firm ownership, acquiring an accounting practice comes with notable advantages.
Here are a few key perks:
1. Existing Client Base
Buying an accounting practice provides an established clientele.
This allows you to skip the phase of building and acquiring clients, which is often the bane of many firm owners who start from scratch.
You can focus on other critical aspects of the business while maintaining a steady stream of revenue.
That being said, you still may have to find new leads, as some clients may not appreciate the change in ownership.
If you’re looking for effective ways to generate leads, check out this blog post.
2. Established Reputation
One of the challenges of building a firm from scratch is the lack of credibility and track record.
However, when you buy a practice, that won’t be much of a factor as you’ll also inherit the firm’s tenure in the market, assuming it’s good.
Take for instance this firm, it has a good number of positive reviews.
A positive reputation like that can really catch the eye of potential clients. It could make it a lot easier to bring in new business and keep them coming back.
3. Seasoned Team Members
As I mentioned in one of my podcast episodes, talent acquisition is not easy.
Many agree that it’s one of the most difficult aspects of running a firm.
According to an AICPA survey a couple of years ago, finding qualified team members is the top concern of firms with at least 2 headcounts.
You can avoid this headache if you opt to buy an accounting practice, as you will be acquiring the employees along with the firm itself.
No need to worry about training and learning curves as the team you’ll inherit is already experienced with the ins and outs of the firm.
4. Diverse Service Offerings
Acquiring a practice may expand your service offerings by integrating niche services that the acquired firm previously provided.
It allows you to offer a more comprehensive suite of services, meeting the different demands of clients and potentially opening up new opportunities.
With a broader target market, landing new clients could be less difficult.
5. Faster ROI
With an existing client base and steady workflow, there’s potential for a quicker return on investment compared to starting a practice from scratch.
Buying a firm can position you to recoup your investment faster and start gaining profits sooner, making firm acquisitions an appealing and financially advantageous approach.
6. Regulatory Compliance
An established practice likely has existing processes for regulatory compliance.
Buying an accounting practice can potentially increase the odds that your business is already up-to-date with industry regulations from the start, reducing the risk of compliance-related issues.
5 Risks to be Aware of When Acquiring an Accounting Practice
It’s not all sunshine and rainbows when it comes to buying a firm.
You also have to know about certain pitfalls that come along with it.
Listed below are the most common risks you have to be prepared for.
1. Bad Clients Acquired
When you buy an accounting practice, you might get clients who are used to doing things the old way. They may not like change and might not agree with the direction you want to go.
Bad clients can cause problems such as:
- Constant scope creep
- Financial strain
- Reputation damage
- Incompatibility with the firm’s values
No matter the specific challenges these clients bring, the end result can include reduced revenue, increased workload, and a disrupted work-life balance for your team and yourself.
2. Underperforming Team Members
Just like the clients, the team you’re inheriting plays a critical role in the success of your firm acquisition.
And underperforming team members could pose a big risk in the short and long run.
If you have to let any of them go – the process of recruiting, hiring, and training new team members comes with expenses that extend beyond salary considerations.
Here are some other issues with problematic team members:
- Productivity and Efficiency Concerns: Problems with efficiency not only affect the service quality but also slow down the whole team.
- Integration Challenges: Resistance to change or a lack of adaptability may impede the smooth integration of the acquired team.
- Client Satisfaction Impact: This can jeopardize client retention and harm your reputation as the new owner.
3. Mismatch in Culture
The risk of a mismatch in culture shouldn’t be taken lightly due to the following reasons:
- Communication Challenges: Misunderstandings can easily affect productivity, efficiency, and overall morale.
- Compliance Issues: A cultural misfit may introduce challenges in ensuring compliance with industry regulations.
- Resistance to Process Updates: Changes in the workflow or new processes could be seen as a negative by some.
4. Clients And/or Team Leaving After Acquisition
One of the primary risks of buying an accounting practice is clients and team members leaving. I could make the argument that it’s the top risk.
Why?
The stability and success of the newly acquired firm heavily rely on maintaining existing clientele and retaining seasoned team members.
Here is a good example of this risk, shared by one of my members inside Future Firm Accelerate:
If you lose too many clients and staff accountants, there are almost no merits to the acquisition.
In essence, you could find yourself back at square one or having an empty office space, negating the very purpose of acquiring an established practice.
5. Hidden Financial Risks
As part of the due diligence process, you’ll review the firm’s Profit & Loss statement along with other areas.
But don’t forget – there are things that may not be visible in a P&L, yet still represent financial risk.
One such example would be whether incorrect tax filings or tax planning was done by the seller, which may potentially expose you.
How to Buy an Accounting Practice
Acquiring an accounting firm requires careful planning and execution to ensure a smooth and successful transition.
Here’s a step-by-step guide on how to proceed:
1. Assess Goals
Sometimes I see people want to buy accounting practices to kick-start their revenues, but they lose sight of their long-term goals and end up acquiring a subpar firm.
Yes, they get the revenues, but they also are stuck working lots of hours dealing with bad clients, bad prices, bad teams, etc.
That’s why before starting the whole process of acquiring a CPA firm, I highly recommend conducting an in-depth self-assessment.
Define your:
- Work-life balance goals
- Management style
- Risk tolerance
- Long-term vision
- Skills and experience
Without really getting a handle on what suits you, there’s a risk you might find yourself knee-deep in the daily grind of running a business that isn’t making your life any easier.
2. Start the Search for a Firm
There are a bunch of ways you can begin your search.
Check out different places like industry databases and social media platforms. You may also consider connecting with business brokers.
Searching online is also a good place to start.
While searching online is easier, don’t forget to tap into your network.
Ask people you know in the industry if they’ve heard of any accounting firms for sale.
Sometimes, word of mouth can lead you to better firms that aren’t listed on online platforms.
3. Assess or Assign a Valuation Multiple
After an initial discussion with the firm and getting some basic information regarding their business, it’s time to assign a valuation.
The valuation multiple is usually linked to a specific financial metric such as revenue, earnings, or client base.
Here’s a breakdown of how assigning a valuation multiple could work:
Revenue Multiple
Valuation multiples are typically calculated using this approach. It involves multiplying the firm’s annual revenue by a predetermined factor.
For example, if the agreed-upon multiple is 1.5 and the accounting practice generates $400,000 in annual revenue, the valuation would be $600,000.
Earnings Multiple
Another approach is to use an earnings multiple, often based on the practice’s Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA).
To give you an idea of how it works, if the agreed-upon multiple is 3, and the accounting practice has an Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) of $300,000, the valuation would be $900,000.
Find out more about valuation methods by checking out this blog post.
4. Produce an LOI (Letter of Intent)
Once you’ve identified a promising accounting firm and conducted initial discussions with the seller, the next step is to produce an LOI.
This document outlines the key terms and conditions of the acquisition.
The LOI typically includes details such as:
- Proposed purchase price
- Payment structure (lump sum, installments, or contingent on performance)
- Confidentiality agreement
- Timeline
- Due diligence expectations
- Exclusivity period
Let’s be clear: An LOI is a non-binding document.
However, I recommend not skipping this step because it helps ensure that both parties are aligned on the major aspects of the deal.
5. Due Diligence
This is a critical step, as it refers to the thorough investigation and analysis that you conduct before finalizing the acquisition.
Typically, the duration of due diligence can take several weeks (minimum) to complete.
Here are some key areas you’ll have to do a deep dive:
Financials
- Income Statements and Profitability: Analyze financial statements to assess historical and current profitability.
- Cash Flow Analysis: Examine the cash flow to understand the liquidity and financial health.
- Tax Returns: Review recent tax returns to ensure compliance and understand the firm’s tax position.
Client Base
- Client Contracts: Check existing client contracts to understand the terms, duration, and any potential risks.
- Client Retention: Assess the client retention rate and satisfaction levels to get an idea of the relationship between the clients and the firm.
Operational Processes
- Workflow and Efficiency: Evaluate internal processes and workflows to identify areas for improvement.
- Technology Infrastructure: Learn which technology systems and infrastructure the firm uses.
Team and Personnel
- Qualifications: Find out the qualifications and expertise of the current team members.
- Employment Contracts: Understand the employment contracts and agreements to assess if they align with your preferences once you take over.
In addition to these, areas such as industry and market analysis, insurance and risk management, and legal and regulatory compliance should also be part of your due diligence.
6. Close The Deal
Finally, after you’re done with due diligence, it’s time to close the deal, provided you’re good with what you have learned so far.
This step involves a couple of phases, including:
- Finalizing paperwork
- Payment
- Transfer of assets and liabilities
- Employee transition
- Notify clients
- Closing meeting
- Legal filings
Successful closing requires careful coordination, attention to detail, and effective communication between the buyer, seller, lawyers, and any other professionals involved in the acquisition.
Tips for Buying an Accounting Practice
Now that you’re familiar with the steps involved in acquiring an accounting firm, here are some good practices to consider.
Find an Interesting Firm With An Interesting Valuation
As I’ve shared before, my firm, Xen Accounting, was bought in 2018, which helped me learn a lot about firm valuation.
Now, you may ask how do you value a firm and which factors impact its value? I suggest checking out my blog post to get a more detailed look.
Finding an interesting accounting firm with an attractive valuation requires persistence, proactive networking, and a clear understanding of your acquisition goals.
To help you with that, you may also consider:
Leveraging Firm Brokers
In the previous section, I shared a couple of ways to find out which firms are for sale. However, I intentionally left one another: consulting with firm brokers. They could make the whole process a lot easier.
If you want to know a site I used, I have a good experience with Poe Group Advisors.
In addition to their expertise, listings, and due diligence support, brokers can assist you in negotiating the terms of the purchase, including price, financing, and other aspects.
Assess Existing Clients
I touched a bit about doing due diligence on the firm’s client base in the last section. Now let’s discuss some ways on how you can get more insights on the clients you’ll inherit.
1) Client List Analysis
Obtain a detailed client list from the current firm owner. Then, categorize clients based on key factors such as revenue contribution, industry, and longevity of the relationship.
Identify any high-value or long-term clients that significantly contribute to the firm’s revenue.
2) Revenue Concentration
Evaluate the concentration of revenue among clients. Determine if there is a healthy distribution or if the firm relies heavily on a small number of clients. A diverse client base is usually more stable.
3) Client Profitability
Determine the profitability of each client by assessing the revenue generated against the resources and time spent serving them.
Note the clients that provide the most value and contribute to the firm’s overall profitability.
4) Contracts and Agreements
Review existing client contracts and agreements. Pay attention to terms, renewal dates, and any clauses that may impact the continuity of client relationships.
For an easier review of client contracts and agreements, I suggest importing the documents to PandaDoc.
Also, be aware of clients with long-term contracts and any potential risks associated with client agreements.
5) Retention Rates
Request information on client retention rates. High client retention indicates satisfaction and loyalty.
Review any historical data on lost clients and understand the reasons why they left.
6) Client Relationships
Lastly, learn as much as you can about the relationship between the clients and the existing owner.
Don’t settle for just knowing how much revenue they are providing.
Keep in mind that there are plenty of bad clients that will drag you down (even though they pay the right price).
Assess The Quality of the Team
Evaluating the existing team is key in making sure client relationships stay strong and daily operations run smoothly. Listed below are a few methods on how you can do so:
1) Employment Contract
In addition to the salary and scope of work, the job description outlined in the employment contract serves as a reference point for evaluating a team member’s performance.
2) Review Resumes and Experience
Request access to or copies of each team member’s resume to assess their skills, backgrounds, and certifications to ensure a well-rounded and adaptable workforce.
Conducting interviews with existing team members and reviewing their metrics can be helpful, but unless the sales process is completed, you’ll most likely not get the chance to engage with anyone.
Assess Growth Potential
Examining the growth potential of an accounting practice is not something I would recommend skipping.
It’s important because it helps you see how the firm can grow its client base, adapt to industry changes, and make the most of new opportunities.
To have an idea about a firm’s growth potential, here are some recommendations:
1) Client Feedback and Surveys
Request a copy of client satisfaction surveys to gauge their needs, identify areas for improvement, and uncover potential upselling or cross-selling opportunities.
2) Marketing Strategy
A firm earning good revenue despite poor marketing presents an opportunity.
Improving marketing strategies can significantly boost revenue by attracting a larger audience and landing more clients in the process.
3) Technology Assessment
Evaluate the firm’s technology infrastructure. Upgrading to up-to-date tools and software can enhance efficiency and attract tech-savvy clients.
4) Service Portfolio Expansion
Check if the current service packages can be expanded. Adding complementary services or specialized offerings can attract new clients.
5) Pricing Strategy
The firm you want to buy may be undervaluing the services it provides and may be using a pricing model that you don’t want to continue with.
This has to be considered as changing things up here may present some difficulties for you.
Over To You
Buying an accounting practice can be a big risk, but when done correctly – it can also be a huge opportunity.
From figuring out your personal goals to tackling the ins and outs of the acquisition process, I hope I was able to provide some guidance.
Are you already eyeing a specific accounting practice?
Which of the risks do you worry about the most?
Feel free to share your thoughts by commenting below!
