Buying an accounting practice

Purchasing an accounting practice may be on the cards for professionals and entrepreneurs with the drive and desire to become business owners and run established firms.

Rather than starting from scratch, acquiring an existing business can be strategic for individuals or organisations seeking to expand or assert their presence in the Australian financial services market.

However, the process of buying an accounting firm requires careful consideration and thorough planning. You’ll not only need field experience and a good head for business but strong purchasing power and financial planning skills as well.

So, if building an accounting practice from the ground up is not on the cards, let’s run through the essential methodologies to value and purchase a pre-existing accounting practice.

How to value an accounting practice or CPA firm?

Straight off the bat, you should consult a qualified valuation expert to determine the value of any accounting practice you’re considering buying.

Several factors come into play when determining the value of an accounting practice. These include:

• Its financial performance
• client base
• reputation
• growth potential
• market conditions
• tangible and intangible assets.

There are various valuation methods for prospective buyers to understand. So, let’s run through a few of the more common approaches. Rather than using each method in isolation, considering them as a whole gives a more complete picture of the firm’s value.

It’s also important to note that valuing an accounting business is not an exact science. Its final value will depend on a combination of factors specific to the firm.

1.      The earnings-based approach

This approach assesses the intended accounting firm’s earning capacity and profitability. You’ll typically calculate the firm’s earnings, such as its average annual net income. With the earnings-based approach, you also need to consider factors such as the firm’s size and historical performance. Look at the scope of their business clients and their retention rate.

2.      The market-based approach

This valuation method involves comparing your intended accounting business with similar firms that have recently been sold. As with most purchases, such as buying a vehicle, comparing your potential investment with counterparts in the market are essential in ascertaining its proper value.

By analysing comparable purchases, while considering accounting industry trends and current conditions, you can estimate a fair market value.

3.      The asset-based approach

Using this method, you can determine the value of an accounting practice by assessing the fair market value of its tangible and intangible assets.

Tangible assets are essentially physical assets such as office furniture, equipment, and inventory.

Intangible assets, on the other hand, include client relationships, brand value, and intellectual property. It can be difficult to tabulate the value of intangible assets, but you can often estimate it by looking at factors like client retention, market view, and longevity.

Key considerations for purchasing an accounting practice or CPA firm

After you’ve covered the valuation of your potential investment, there are still a myriad of variables to consider before you decide to make the purchase.

1.      Define your objectives

Before embarking on the journey of buying an accounting firm, it is crucial to define your objectives.

You’ll need to determine the type and size of accounting firm you wish to purchase, such as a boutique bookkeeping practice, a small local practice, or a larger firm. Consider factors like location, client base, services offered, reputation, and growth potential. You also need to consider your skillset, whether you’ll partner with someone to buy it, and the availability of financing.

2.      Conduct thorough market research

Once you have a clear understanding of your objectives, you’ll then need to conduct comprehensive market research to identify accounting firms available for sale. In doing so, keep an eye out for red flags.

Explore industry databases, professional networks, and online platforms specialising in mergers and acquisitions. You’ll likely need to engage with industry experts, brokers, and consultants who can provide insight and guidance.

3.      Evaluate their financials

Another crucial step is, of course, the financials. When you identify a potential accounting firm for acquisition, it’s crucial to conduct a comprehensive financial analysis and do your due diligence.

Assess the firm’s financial statements, tax returns, and client contracts to understand its profitability, cash flow, and possible liabilities.

Engage a professional accountant (this may be you!) or a financial advisor to ensure you’ve undertaken a meticulous evaluation of the firm in question’s financial health and stability.

Purchasing and owning a CPA firm or accounting practice

Now we get down to the pointy end. Once you’ve valued the practice, evaluated the market, and defined your objectives and limitations, it’s time to buy.

1.      Negotiate and structure the purchase deal

It’s time to negotiate the deal. This will be no simple feat and may take many rounds of negotiation. At this point, you should engage a legal professional who specialises in mergers and acquisitions. They will assist you to structure the transaction and draft a comprehensive agreement.

They will also run you through the relevant legal requirements, contracts, tax implications, and regulatory considerations.

Factors that you’ll consider at this stage will include:

• the purchase price
• payment terms
• non-compete agreements
• potential liabilities
• inclusions and exclusions of the deal.

2.      Manage the transition process

After finalising your acquisition, it’s time to manage the transition process.

First, you should communicate with the existing firm’s employees and clients to ensure a smooth transition of ownership. Retain key personnel if necessary and address any operational or cultural challenges that may arise during the transition.

This is a precarious undertaking, and you should pay particular care that you maintain open lines of communication and foster a positive work environment. Factors like culture, client satisfaction, and smooth business continuation will be crucial to the success of your new venture.

3.      Embrace technology and innovative workflows

In the modern era, it’s essential to leverage new and emerging technology to stay competitive. Make sure you invest in powerful practice management software, client management systems, and cybersecurity solutions. Do your best to embrace automation and data analytics to improve your efficiency and decision-making.

Lastly, make sure you invest in yourself. By continuously engaging in professional development and staying abreast of emerging technologies, you can position yourself and your newly acquired accounting firm for long-term success.