It takes abundant resources to start an accounting firm, starting with legal and administrative requirements, obtaining necessary licenses, setting up the resources to comply with local regulations, obtaining financial resources, setting up a formal office, hiring and compensating trained and junior accountants, receiving and installing diverse software for various functions, and making investments in marketing and branding. After investing in these resources, there is a prolonged wait to onboard the initial customers and create trust to make subsequent sales.

When considering how elaborate this can be, acquiring an existing accounting practice is a compelling idea. Buying an accounting practice instead of starting one from scratch can be a strategic move to accelerate right into a bustling business. The compliance requirements, licenses, and setting up of a compatible flow of software and efficient teams can take years to build and a lifetime to maintain. What if acquisition is the right move to capitalize on your resources and ideas NOW, as opposed to the slow burnout process of setting up a business?

If you are reading this article, the thought has already occurred to you. Here are some more incentives to drive you further in that direction.

Contents of the article

But before we delve deeper into the subject, it’s essential to address a necessary consideration regarding compliance;

Are Licenses Transferable While Acquiring an Accounting Firm?

Acquiring an existing accounting practice seems like a strategic move to obtain all necessary licenses fast, but is it feasible in the US? The answer is not as simple as a Yes or No; here’s what you need to know;

The CPA License: 

The license is issued to an individual by the state and cannot be traded off. You may, however, employ a CPA in a key managerial role or partner with a licensed CPA to continue providing CPA-related services. If you are not a CPA and do not onboard a professional in a primary role, you are legally not permitted to operate as an accounting firm.

Firm Ownership:

CPA firm registrations and licenses are not transferable. As per US law, you are required to re-register the firm under new ownership.

Direct transfers are not possible; you may provide CPA and accounting services by retaining the existing CPA in a principal role when you acquire an existing accounting practice. Not only will this allow you to conduct business legally, but it may also be a strategic advantage to create confidence with the existing client base and help ease the transition of internal teams to avoid adjustment shocks. Getting back to the incentives to consider an acquisition.

Why Should I Consider Buying an Accounting Practice?   

1. Existing Client Base: 

One of the most significant advantages of acquiring an accounting practice is tapping into an existing client base. A smooth acquisition and maintaining client confidence take time; however, existing teams that have previously conducted business successfully are an essential advantage.

2. Reputation: 

Establishing operations that have earned positive reviews on multiple platforms takes years of consistency and proficiency, but it is a heavy mantle to carry. 

3. Symphony of Resources:  

Creating a symphony within the various software, software experts, accounting professionals, and all other functional teams on board is a complex yet delicate task.  Creating an optimized workflow while balancing these far ends is more difficult compared to acquiring a team that has achieved a symphony and has an existing master sheet for times of crisis.

4. Tested Business Model: 

While ‘accounting practices‘ can be defined easily on paper, in practice, it represents a plethora of services. It caters to diverse industries with the right pricing model and workflows. Finding a successful blend of services and achieving operational efficiency to maintain demand is a herculean task. A tested business model that has achieved a competitive advantage in an area of service is a leg-up over new entrants.

5. Experienced Team: 

Experience is an invaluable, precious resource. A seasoned team could provide a buffer against uncertainties and unprecedented business lows. Retaining good employees with a shift in ownership and changing working styles can be difficult. A slow and empathetic transition with realistic expectations could help maintain employee confidence.

6. Easier Access to Financing Opportunities: 

Lenders and investors are willing to finance an acquisition with a proven track record. SBA 7(a) loans with favorable terms are sometimes available for accounting firm acquisitions.

These seem like significant advantages to acquiring an accounting practice, but such acquisitions come with inherent risks.

What are the Risks Associated with Acquiring an Accounting Practice?

1. Overvaluation of the Firm: 

Goodwill can be inflated. A firm has to be valued for its actual intrinsic value, the value of its assets, and its revenue and earnings potential. A low return on investment can hamper the intention and value of the acquisition.  

2. Obsolete Service Offerings: 

The company might be surviving on a once-celebrated but currently dwindling offering. An offering might be outdated because of AI solutions, Rapid adaptation to newer software, or shifting industry trends. It’s vital to make an in-depth analysis of the service offerings and their growth potential.

3. Client Concentration Risk & Non-Recurring Revenue: 

• Revenue analysis should be conducted with skepticism to save yourself from client concentration risk and Non-Recurring revenue.
• Client concentration risk involves earning more than 80% of your revenue from a few clients. Losing them could uproot the whole firm.
• Non-recurring revenue is a few one-time sales that represent a significant part of revenue. Not being able to retain clients or not having diverse offerings could render a business obsolete.

4. Cultural Misalignments and Adjustment Shocks: 

A change in ownership is bound to cause some misalignments, but if your value system and approach to work are fundamentally different from how the company approaches work, it could lead to high employee attrition and loss of morale.

5. Outdated Technology and Processes: 

Several firms are still operating on legacy systems and paper-based operations. Upgrading to newer tech like QuickBooks Online, Xero, cloud portals, and workflow tools could: Temporarily hamper productivity and significantly increase the cost (software and training costs) post-acquisition.

6. Client Attrition Risk: 

A Change in ownership that leads to rapid and unprecedented change could be perceived as an inconvenience by clients. Assuring the values of the previous ownership is essential to retain the client base.

7. Hidden Financial Risks: 

The post-acquisition period can be expensive if there are pending IRS penalties, Legal disputes, or labor law issues.

8. Reputation-related Issues: 

While the possibility of inheriting a good reputation seems rosy, the chance of acquiring a bad one can be damaging. It’s easier to build a good reputation from scratch than to rebrand an existing bad reputation among potential customers.

What are the Steps Involved in Acquiring an Accounting Practice?  

Acquiring an Accounting Company is a multi-phase process that requires a plan of action, due diligence, negotiations, and integrations. Here’s a brief look at the steps to acquire an accounting practice

1. Assess and Define Your Acquisition Strategy

• Why are you considering an acquisition? Are you adding to the services you have or entering a new industry? Are you rescuing a company with a retiring owner?
• Pen down details like the location (consider where you can practically work from), the revenue range that fits your goals and budget, the number of staff you can compensate, your expectation of client mix, and service specialties.
• Determine your budget: Reassess your financial resources and calculate your budget, including additional costs like legal fees, integration, training your new staff, and unforeseen circumstances post-acquisition.
• Choose how you intend to make the purchase (although this may change upon negotiation)

2. Source Potential Firms

• There are online marketplaces like Accounting Practice Sales and BizBuySell where you can find a business or, at the least, get a ballpark figure of the asking rate.
• You could ask your network of CPAs or get in touch with brokers to see if an accounting business is up for sale.
• M&A advisors or brokers are specialists who can discreetly match buyers and sellers. They may also assist you further with references for services to follow in the acquisition process.

3. Perform Preliminary Evaluation

If you have zeroed in on a few businesses or one business and communicated your intention, these are some documents you have to request:

• Last 3–5 years of financial statements
• Complete report: Client retention and Client concentration data
• Details of Staff roles, performance, and salaries, including benefits
• Technology stack (software): The versions, the backup strategy, and whether they outsource tech support or have an in-house specialist.

4. Due Diligence (Deep Dive)

Preparing a Due Diligence report is one of the most vital steps during an acquisition. It is conducted to value a business’s true worth against the owner’s representation of the company. It also helps to remove post-acquisition financial shocks (concealed facts).

It’s a deep dive into the business; hiring a CPA or an external expert to conduct due diligence removes bias in valuation. Profitjets is your go-to professional for a thorough financial analysis! Delegating to us rids you of the risk of overlooking every minute detail about the financials.

In practice, due diligence is a detailed review and reporting of legal and financial standing, along with operational analysis.

• Tax compliance: Request to see the last few years’ audits and reports to check for pending tax dues and penalties.
• Employment contracts and HR issues: Read through the contracts in detail, including the details of benefits and expected leaves, and get details of previously issued ESOPs.
• Non-compete agreements: Understand the non-compete agreements entered into by the company to check if conducting your routine business puts you at legal risk.
• Lease obligations: Understand the existing lease obligations to estimate costs post-acquisition.
• Review projects that were abandoned before finishing and comprehend how this may affect the business post-acquisition.
• Client contracts: detailed client analysis, including ongoing client contracts and the typical nature of client acquisition, standard terms, etc.
• Get detailed insight into technology licenses, license expiries, processes, experts to handle crises, data security norms, workflows, and plans for further addition.

 5. Assess the Valuation & Deal Structuring

Popular valuation methods: The most crucial pricing decision is whether to use a revenue multiple model or an earnings multiple model, followed by the terms of payment.

• An agreed-upon multiple of gross annual revenue (typically 1.0x–1.5x) or
• Earning multiples, i.e., EBIDTA (can go up to 3 times or more, depending on the terms)

Once you have arrived at the right price, negotiate the terms of payment.

• Down Payment: of 20–50%, and the remaining installments to follow
• Seller financing: A seller offers to finance the purchase or, in this case, treats it as a loan that the buyer pays off over the years to come with an agreed-upon interest (common in smaller firms).
• Earn-out agreements: An agreement where a portion of the price is paid based on future performance

6. The Letter of Intent (LOI)

The Letter of Intent has to be something both companies agree on and align with regarding the intention and specifics of the acquisition. Although the LOI is not legally binding, it locks the negotiation focus.

This outlines the basic terms:

• Purchase Price
• Deal structure
• Confidentiality Clause
• Transition timeline &
• Exclusivity period

7. Finalizing and Signing the Purchase Agreement

The purchase agreement is legally binding, and this is where an attorney plays a key role. The purchase agreement typically includes

• The list of Assets with valuation
• Warranties and Representations
• Payment schedule
• An understanding of the Transition period
• Client retention provisions
• Signing non-solicitation/non-compete clauses
• Signing Confidentiality and Non-Disclosure Agreement
• Signing off the final papers and starting payment
• Undertaking all legal filings necessary for the acquisition to be recognized by the government as a new ownership

8. Closing the Deal, the Actual Transition & Integration

Once the papers are signed off, you begin your days as a new owner with an onus of responsibility to transition and integrate seamlessly while retaining the clientele and maintaining profitability.

• Client communication plan: co-branding or rebranding announcements, retention outreach with continuity assurance.
• Staff Transition: Orientation, roles, expectations of change and continuity, training, and retention incentives.
• Systems migration: Align software, data, and workflows.
• Branding: Carry out the branding strategy as planned; either retain the old name or rebrand under your firm based on which firm has valuable goodwill with better retention and sales conversion value.

Monitor Post-Acquisition Performance

In the case of earn-out agreements, performance monitoring is necessary for both parties.

The new ownership has to be vigilant, hands-on, and sensitive to all the key performance indicators, such as client retention rate, revenue growth, employee turnover, attrition, and other integration milestones that you have set.

Conclusion

The article skims through the advantages of acquiring an accounting practice and the inherent risks to be aware of. A great way to measure the risks you are about to take comes with a detailed analysis of revenue, the tech in use, and a deep understanding of the values of the firm to avoid misaligned values. A due diligence report is inevitable in this scenario. Profitjets is a reliable company that provides outsourced accounting and bookkeeping services, taxation services, and CFO services.  15+ years of experience and 600+ happy customers stand as testament to our proficiency. Get in touch with us for assistance in the due diligence process if you are considering buying an accounting practice.

FAQs on Accounting Practices