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Discussion:Buying or Selling a Tax Practice

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Umk395 (talk|edits) said:

3 December 2010
I'd like to learn more about the details of buying an accounting/tax practice. Here are a few questions I have:

1. What's the "going" rate for purchasing accounting/tax practices? It obviously depends on a lot of factors. Most accounting/tax practices I've seen lately are selling for 1.25-1.30 times revenues.

2. What's the "typical" way to structure the acquisition price? Obviously, no one will pay 100% cash upfront (unless the price is discounted). I'm seeing that more often than not, the deal is structured with 75% down, then 10%

3. For integration and continuity purposes, most accounting/tax practices announce the deal to their clients as a "merger" instead of "I"m selling my business to Joe Smith". This results in more clients staying on board instead of jumping ship (and adversely affecting the purchase price). Then, the "old" owner stays on board for at a minimum of a year so he can introduce his clients to the "new" owner.

4. Wondering what your thoughts are on selling the accounting/tax practice in May vs in Dec (right before tax season). I would prefer purchasing an accounting/tax practice in Dec. If purchased in May, and most of the revenues were tax-related, then you won't know for 7-10 months down the road whether you made a bad deal by giving the seller 75% of the purchase price upfront. Would rather know the answer to that question within 60 days by buying the business in Dec. So while it seems that most sellers want to punch out right after tax season (May), that's not the ideal time for a buyer to purchase the business if most of the revenues are tax-related.

5. I am seeing that a lot of accounting/tax practices that are for sale are over-staffed. I base my conclusion on knowing how many clients I have and what it takes in term of resources to process those clients. Could be that the other accounting/tax practices process their clients differently than me, etc -- plenty of reasons. This was just a general observation.

6. What are brokers charging for selling accounting/tax practices? I assume 10%-20%

7. When an accounting practice is sold, what percent of clients drop out and go somewhere else. Anyone have any first-hand or indirect knowledge of this?

Other thoughts/experiences?

DZCPA (talk|edits) said:

3 December 2010
I will call you to discuss. I have purchased 7 EA/CPA firms in last 22 years

Umk395 (talk|edits) said:

4 December 2010
Thanks Dave -- let's touch base on Monday. Appreciate your willingness to talk.

Thomascpa (talk|edits) said:

December 7, 2010
I have the exact same questions. My partner and I are looking to buy a practice and don't know where to begin. I have been in touch with some brokers and it seems the only thing they care about is having you initial the agreement and send it back to them so you are under contract with them.

Bbowers (talk|edits) said:

8 December 2010
We purchased another CPA's practice late December last year. It was a last minute deal forced by health issues on his part. Basically we took his account list & agreed to pay him 25% of the fees collected for any of his lcients each year for the next 4 years. Our agreement excluded any fees caused by adding or changing the basic scope of services he had provided. He sent a letter to his client list telling them his office was closing & that we were available to provide services with his recommendation of us. His letter also included a release form the client had to return to have their records transferred to our office or to any other accountant they designated. We followed up with a welcome letter to his entire client list encouraging them to complete the form so we could transfer their records. For being last minute it went pretty well. He had one employee & we agreed to hire that person at least through tax season. We have kept him & he has turned out to be a great employee. We transferred about 70% of his client base.

We decided to use the percentage over 4 years to protect us in case people did not transfer or if they did transfer but left after a year or two. We used a local attorney to draft the agreement & also included a 3 year non- compete for the prior CPA. The timing was pretty rushed but it was the perfect time to cpature tax season business. Hope this helps a little.

JackTraffic (talk|edits) said:

9 December 2010
I think the bizcomps data base includes quite a few comps for accounting firms... and the valuations seem to be right around 100% of sales. But if you look at current listings of firms for sale, (e.g., bizbuysell.com) people usually seem to be asking for more than 100%.. even so it's hard for me (as a Monday morning quarterback) to reconcile the asking prices you see with the only hard data I have via bizcomps).

As to commission: I believe that Mark Hauser of Accounting Practice Sales once quoted a 10% sales commission when I asked him about selling my firm.

Attrition comment #1: FWIW, I have a friend who sold his (CPA) tax compliance and writeup practice when he retired... but then he continued to help out the next couple of tax seasons (just to stay busy, etc.) He says the new CPA didn't lose any clients. I believe him.

Attrition comment #2: I am convinced that in my practice (which is very personal-service-y), selling my practice would result in pretty brutal attrition. Yeap, people might stay around the first year just for convenience sake... but in year two or three, either the new CPA would need to deliver an equivalent product or clients would leave. Obviously, this is intuition on my part...

CrowJD (talk|edits) said:

9 December 2010
Go visit a lot of older accountants and pour some anti-freeze in the water cooler of the older gentleman you want to buy out. You'll weaken him down at least $50,000. Don't get too carried away. You want to weaken his resolve and give him dizzy spells, not kill him.

QUOTE: "I am seeing that a lot of accounting/tax practices that are for sale are over-staffed"

Outsource to India or Timbucktu.

AcctPracticeEx (talk|edits) said:

12 June 2012
Umk395

I'm not sure if you are still looking for answers given that it is over 1.5 years sice your original post, but here are my thoughts:

1. What's the "going" rate for purchasing accounting/tax practices? It obviously depends on a lot of factors. Most accounting/tax practices I've seen lately are selling for 1.25-1.30 times revenues.

This varies and depends on a number of factors including profitability.

2. What's the "typical" way to structure the acquisition price? Obviously, no one will pay 100% cash upfront (unless the price is discounted). I'm seeing that more often than not, the deal is structured with 75% down, then 10%

Again depends on the loaction of the practice and the number of interested buyers. Some new financing options have come into the market which make the 'all cash at close' a real possibility. Yes I'd probably agree that to get the maximum price a seller has to carry some risk in the transaction. You are correct in identifying that the 'terms' of a deal are almost as important as the price. I'd always suggest sellers find out what the financing market is for buyers by speaking to the relevant finance specialiststhemselves. Its a small market and you will quickly identify what options are open to buyers and what in turn you can expect to negotiate.

3. For integration and continuity purposes, most accounting/tax practices announce the deal to their clients as a "merger" instead of "I"m selling my business to Joe Smith". This results in more clients staying on board instead of jumping ship (and adversely affecting the purchase price). Then, the "old" owner stays on board for at a minimum of a year so he can introduce his clients to the "new" owner.

Transition arrangements as you would expect vary. Some buyers want the old owners out asap, whilst others want the comfort of having them around. Transition is an important area, particularly where the seller is carrying risk in the transaction. The key role of the seller in transition should be in introducing existing clients to the new owner and ensure a smooth transition, but I wouldn't expect this to take a year.

4. Wondering what your thoughts are on selling the accounting/tax practice in May vs in Dec (right before tax season). I would prefer purchasing an accounting/tax practice in Dec. If purchased in May, and most of the revenues were tax-related, then you won't know for 7-10 months down the road whether you made a bad deal by giving the seller 75% of the purchase price upfront. Would rather know the answer to that question within 60 days by buying the business in Dec. So while it seems that most sellers want to punch out right after tax season (May), that's not the ideal time for a buyer to purchase the business if most of the revenues are tax-related.

I agree with May. However can you be that precise when trying to time a transacyion of this nature? Selling a business can be an emotional experience and a lot can go wrong that can delay a sale. 5. I am seeing that a lot of accounting/tax practices that are for sale are over-staffed. I base my conclusion on knowing how many clients I have and what it takes in term of resources to process those clients. Could be that the other accounting/tax practices process their clients differently than me, etc -- plenty of reasons. This was just a general observation.

Every business is different, but yes I suppose practices which are over staffed present an up side opportunity to the buyer in terms of efficiency improvements.

6. What are brokers charging for selling accounting/tax practices? I assume 10%-20%

Yes, that sounds about right. Though on average closer to 10%-15%. Geographically isolated practices of firms that require more marketing (read "effort") will more thank likely charge a higher commission rate.

7. When an accounting practice is sold, what percent of clients drop out and go somewhere else. Anyone have any first-hand or indirect knowledge of this?

Again this varies from practice to practice and from deal to deal. Much will depend on the quality of the customers. Buyers must analyse the customer base to determine how likely they are to churn. Look at length of time with the business and geographical proximity to the practice. If I was pushed for a number from a budgeting perspective I'd always be cautious and go with say 80%, but I'm sure in reality year 1 figures are better than this.

Other thoughts/experiences?

Yes, confidentiality is key to a sale. Also be aware that buyers (and their lenders) will most likely insist on some form of non-compete and will also focus on other fee earners and whether non-compete agreements are in place.

I hope that this helps.

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