Home » Bookkeeping articles » Contract Issues When Buying An Accounting Or Cpa Practice

Contract Issues When Buying An Accounting Or Cpa Practice

June 11, 2021
Bill Kimball

sale of accounting practice agreement

Selling your accounting practice doesn’t have to coincide with retirement, however, and many of the most successful sales do not. Your complete source for accounting practice sales, mergers, acquisitions, and financing.

Every seller has specific requirements for the sale of an accounting practice to be successful, as do the buyers. Before starting the process of a CPA practice sale, define exactly why you want to sell, what you want to achieve from the sale and how it will support your future, and perhaps most importantly the qualities you seek in a buyer. In addition to SDE considerations, firms with below-market fees will be viewed as less desirable by buyers, which can motivate most buyers to offer less than favorable terms to the seller, thus driving down the final sale price. understanding of all material aspects of the seller’s CPA practice before making an offer. The seller further benefits from the direct correlation that exists between minimizing buyer insecurities and maximizing the selling price. Some buy-sell agreements use formulaic valuation clauses that are simplistic blends of accounting information and valuation multiples.

Ways To Evaluate Accounting Firm Performance

You’re probably worried about what will happen if word gets out. Maybe you could lose key clients or some of the staff you rely on so heavily.

  • This same misconception comes into play when sellers think that the only trick is finding a buyer.
  • Stating the price in a contract is relatively straightforward unless there are retention contingencies.
  • At the time the buy-sell agreement is executed, no owner knows who will be bought out, when, or why.
  • Delegating and stepping back is a major psychological issue for some business owners.

It provides for a value before the triggering event occurs and before any parties are identified as the buyer or seller. The appraiser delivers the valuation report, and the owners have an opportunity to read it, provide comments, and then have the value in hand. If, later in the year, a triggering event occurs, conflicts over value should be reduced, as the parties have already agreed on a value. It is important to keep the valuation provisions of buy-sell agreements up to date, as market conditions and other factors will change from year to year. In many cases, drafters of buy-sell agreements gravitate toward the use of “fair market value” as the underlying premise of value. This allows the value derived for a buy-sell agreement to potentially be used for gift and estate tax planning. Under that scenario, the deceased co-owner’s business interest would be bought out at a price by the surviving owners and would be the value that would govern for estate tax reporting purposes.

Instead of spending time building and sharing your brand, you can walk into a firm that is already known in the community. Work in progress and debtors are difficult areas in smaller accounting firms.

Your Complete Source For Accounting Practice Sales, Mergers, Acquisitions, And Financing

If the buyer’s practice is more attractive to talent, ask them to hire the person and place them in your business. When implemented properly, this strategy can eliminate the risk of a failed sale. You may also want to align the timing with your current office lease.

Net profit margins, before taxes, will range between 20% of gross too as high as 60%. Obviously firms with higher margins tend to sell for higher multiples. Most practices sell between 100 to 150% of gross annual billing with most occurring in the 125% range. A third potential formulaic valuation clause is using a multiple of a profit measure, such as price-to-earnings (i.e., the market value of the interest’s common equity relative to a multiple of earnings). One example of this could be proceeds or expenses from a lawsuit, for which such adjustment could also include adjustment of legal expenses for the year in question.

Deal Structure

Because it has been around for a while, it is likely known in the community and has a reputation. People know what services the firm offers and what makes it different from other accounting firms. A known brand also leads to word-of-mouth marketing from past and current clients, which is a huge advantage.

Clean terms are not only easier to document, terms impact the deal after closing in interesting ways. According toSRS/Acquiom, in general business sales, 2/3 of retention based deals give rise to conflicts with escrowed funds.

There are more sophisticated earnings formula clauses as well, such as multiples of EBITDA. If you have ever bought a practice off the street, you know you can’t keep paying the seller their historical level of full-time compensation and pay for the practie purchase at the same time. Yet many internal purchase arrangements are set up under the same flawed economics. Avoiding the pitfalls above and following these relatively straightforward suggestions will help your firm stand out from the field of other selling firms in the fierce competition for the best buyer. The partners must have open and honest discussions about the future of the firm and agree that it is time to sell. If only a few partners want to sell, maybe a buyout of those who do makes more sense than selling the whole firm. If most of the partners aren’t on board with a sale, it may be a very different transition.

Accounting for these terms in writing at the time of the creation of the buy-sell agreement helps define how the purchase price will be paid. If financing is used, owners should be cautious about stating a fixed rate; for example, the low interest rates of the current business environment may be too low for a future purchase in a higher-rate environment. Some owners may want to use “applicable federal rate ,” which is set by the IRS as an imputed interest rate for, and generally used as a minimum interest rate on, debt. The IRS sets the AFR for short-term, mid-term, and long-term instruments on a monthly basis. In addition, a buy-sell agreement may provide a predetermined valuation clause should a triggering event occur. Financing and payout terms of the purchase can also be included as part of the buy-sell agreement.

sale of accounting practice agreement

Getting on top of your workflows will greatly improve your business’ appeal to potential buyers. They’ll want to see that you’re able to do business quickly and efficiently. Be brave enough to let go of underperformers in your team. You want to improve the revenue earned per full-time employee. Doing so will increase profitability during your final years, and increase the appeal of your firm to buyers. It’s a simple way to get you thinking like a buyer and it will highlight the areas of your business that require attention.

Approximately half of our transactions are sold with 100% cash at closing, while approximately 90% of our transactions have fixed-price structures, leaving only about 10% with any contingencies. We believe a small discount for the seller is well worth having clean terms. Furthermore, we believe fixed pricing helps both parties in the deal because it generally results in better transitions. Terms – Seller/Vendor financing and contingent pricing will impact the price. Cleaner terms are much more desirable for the seller and therefore generally go with a lower price. This can be extremely problematic when it causes the parties to lose sight of what’s really important. A successful purchase agreement is one that is written so that everyone understands the terms of the contract and can move forward with ease and assurance in a timely manner.

sale of accounting practice agreement

In theory, this type of clause should reduce conflicts regarding value between buying and selling owners, but this is not always the case in practice. For CPAs looking to sell their accounting practice, it can be a big plus to be in a small firm. That’s because small firms generally can command higher multiples than big firms, and external sales usually produce higher prices for accounting practices than internal ownership transfers. Both the buyer and the seller should go about the due diligence process in a business-like manner.

Five Benefits Of Buying Accounting Firms

It is recommended that both sellers and buyers engage their own attorneys in regards to non-compete agreements and other legal matters associated with the sale/purchase. Jurisdictions have different views and interpretations on non-competes, how they can be written and how they can be enforced. Sometimes included as a part of the covenant not to compete or as a separate clause is a non-solicitation agreement. While the non-compete clause prevents the seller from performing accounting and tax work in general the non-solicitation agreement specifically identifies that the seller will not do work for the existing clients being transferred. It can also specify that the seller won’t recommend or suggest that the clients go to someone besides the buyer. In some cases the non-solicitation actually takes the place of the non-compete.