Are you thinking about buying an accounting practice? Whether it's a distant dream or a definite plan, understanding the steps you need to take, along with the pros and cons, will help you plan your way to success. But buying an accountancy practice is no simple feat.
Even if you have your funding in place, there are always challenges and potential complications to overcome. What questions should you ask a seller and what key considerations are there to put in a business plan?
Key Takeaways from this Post
There are a number of reasons why it might be beneficial to buy an already-established accounting firm rather than starting a new one. You'll inherit clients, staff, and the business's reputation. This means you'll also get a quicker ROI.
With the pros though, there are always cons. Consider how you might get stuck with poor-performing staff, along with the unknown financial risks involved with buying a business. Ensure you hire a solicitor to minimise your risk and help protect your assets.
This guide details a 7 step buying process. It goes through stages like defining your goals, creating your business plan, and giving the seller a Letter of Intent.
But that's why we're here. This guide to successful acquisition will walk accountants through the process and address how to overcome common obstacles when buying an accounting firm. Read on...
Why Should You Buy an Accounting Practice?
Let's dive into the top 4 big reasons for accountants and sole practitioners to buy an accounting practice rather than starting an accounting firm:
Established Client Base
When you're starting a new service-based business, it can take time to establish a client base. You have to source potential clients, promote your services, and convince potential new clients that your practice is the one for them. Building up your client base can be a long, gruelling task.
When you buy an accountancy practice that's already been through that process, you inherit their clients. This cuts out the immediate rush for client acquisition. You can focus more on gaining even more clients and growing your business rather than just getting it off the ground.
Already Staffed
Just like clients, buying an accounting firm will come with staff. Hiring employees comes with a substantial cost to your finances and your time. You have to place ads, screen candidates, assess their skills, interview people, and then go through the whole onboarding process. Being able to avoid all this is a big thumbs up in favour of buying an accounting firm over starting your own accounting firm.
Built-Up Reputation
Likewise, buying an accounting practice comes with an already-built-up reputation. Providing it has a positive reputation (because you wouldn't buy one with a negative reputation anyway), you can inherit that reputation and enjoy the benefits that it brings. For example, clients willing to pay premium prices for an outstanding service. Or word-of-mouth recommendations from happy clients.
Faster ROI
When you open your own accounting firm, it can take a long time to see a return on your investment. The main reason for this is because of the time it takes to establish a positive reputation and gain a solid client base. When you buy accountancy practices outright, you're buying a business that's already been through these processes and so you're effectively skipping them. This inevitably leads to a faster ROI. And by extension, a stronger profit margin.
Potential Risks of Acquiring an Accountancy Practice
With pros, there's always a bunch of cons to accompany them. These are the potential risks of acquiring an accountancy practice:
- Potential to acquire bad clients: There's always the chance you'll be stuck with bad or awkward clients. They might not take kindly to the change in management and cause problems for you moving forward.
- Poor-performing staff: If you haven't vetted and assessed your staff yourself, you don't know how they perform. You might just get lumbered with poor-performing staff that you'll either need to train, reprimand, or let go.
- Loss of team members or clients: Team members and clients that don't like your new way of doing things might decide to leave the practice. In this case, you'll have to decide whether to let them go or to try your best to accommodate them in order to convince them to stay.
- Unknown financial risk: You have to trust that the seller has been completely honest and transparent about the firm's finances. You'll uncover as much as you can through the due diligence process. But details can slip through the cracks, leaving you at risk.
How to Buy an Accounting Practice
- Define Your Goals
- Start Your Search
- Ask the Right Questions
- Due Diligence
- Create Your Business Plan
- Create a Letter of Intent
- Make the Deal
1. Define Your Goals
Before you even begin looking for accountancy firms for sale, you need to establish your goals. Your goals will help you determine what to look for in an accounting firm. You might find one that's highly profitable but, if it has bad clients, or you have to work extremely long hours to achieve these high profits, you might want to rethink what's important to you.
For most people, a good work-life balance is the ideal goal. But beyond that, you might want to consider:
- How tolerant you're happy to be with clients and staff.
- What your management style will be.
- Where you want your firm to be 1, 3, and 5 years in the future.
- What skills and experience you have for managing an accounting practice and a business in general.
Use these questions as a guide for defining your goals.
2. Start Your Search
Once you have your goals you can begin searching for accounting firms for sale. Looking online will probably yield the best results, particularly if you're willing to relocate. Look at accounting firm directories and social media sites. Ensure you also take advantage of your network of contacts and ask around for any opportunities.
3. Ask the Right Questions
If you've found a accounting practice you're interested in buying, arm yourself with a list of questions to ask the current owner. He or she should be more than willing to answer any questions from potential buyers for the sake of transparency.
These questions will help you uncover details that might not be readily available. Or, critical details that you might not otherwise have known but could potentially influence your decision to buy.
Some questions to consider:
- What is your client retention rate?
- When was the practice founded?
- Are you the initial practice owner? If not, what were the reasons for the former owner selling?
- What are your reasons for selling now?
- How do you maintain your financial records and can I review them?
- What accounting firm marketing strategies have you implemented and what ones do you currently use?
- What is your profit margin?
You want to build up a complete picture of the business. You want to get a timeline of its dealings, profitability, success, and failures. With this picture, you can properly assess whether or not it is a good business venture.
4. Due Diligence
A thorough due diligence means going through everything with a fine tooth comb, from financial statements to client contracts.
Let's break this down properly to establish what areas you should assess with due diligence:
Finances
This step allows you to assess the firm's financial health by analysing financial statements, like profit and loss statements and cash flow statements. Also look into any debts the accounting firm has and any liabilities it's responsible for paying. For example, taxes or legal bills.
Legal
This part involves checking the firm's contracts, legal obligations and disputes, and licences. Anything that it is legally-bound to. Review whether the business maintains compliance within all the correct areas of the practice. This is one area where working with a solicitor is useful. They can offer legal advice and ensure the firm's done everything by the book.
Technology
Review the technology that the accounting firm uses. This could be hardware or software. Analyse the processes and what aspects are automated with technology. Plus, assess the potential for incorporating further technology if you want to. For example, integrating your eCommerce accounting software with a bookkeeping automation software like Link My Books.
Consider how easy the technology would be to use. And, how difficult it could be to migrate if you chose to use a different solution. For instance, switching to a better accounting software.
Clients
Now's the time to assess the firm's clients, their contracts, and retention rates. You should analyse the profitability of the clients, in addition to the services they receive. Part of client due diligence is to assess the risk and potential of losing each client. And, whether there are additional services you could potentially upsell to them.
Operations
Operations due diligence involves looking at how the firm operates on a day-to-day basis. It also involves looking at its reputation within the industry and whether you feel confident in enhancing this. Look closely at the firm's workflows, managerial processes, disciplinary procedures, and staffing structure. You want to come away with a solid understanding of how the business functions, inside and out.
Staff
Finally, you have your staffing due diligence. This is like vetting and assessing the members of staff that will be working for you if you choose to close the deal. Look into each member's skills and qualifications. Look at any disciplinary action they've faced at the firm and be sure to review staff contracts. Once you've gone through all that, you can think about whether it would be necessary, or even desirable, to provide staff with training.
5. Create an Accounting Firm Business Plan
Once you've done the due diligence, you can go ahead and draft your accounting firm business plan. It will contain information about the business, its history, its services, and the industry it serves. A business plan clearly defines what your plans are for the business and how you intend to achieve your objectives.
This is a good structure to follow for your plan:
- Executive summary: An overview of the business, along with a breakdown of your services, and your vision and mission.
- Company description: Further details about the company, including past details, like revenue and investments, and current (or future) roles and responsibilities within the firm.
- SWOT analysis: Bullet point your firm's strengths, weaknesses, opportunities, and threats. This shows you have looked at the firm's potential from all angles.
- Market analysis: Looks at your target market and market trends. includes who your firm will target and why them specifically.
- Marketing and sales strategy: Outlines how you plan to promote the firm and its services. And, how you'll clinch deals to gain long-term clients.
- Finances: Goes into great detail about the company's finances, with projections for the following five years. Also details costs associated with running the firm.
A business plan not only keeps you on track to meet your goals but it's also essential for securing funding for business ventures. It shows potential investors that you understand the business and its industry. You'll prove you know its potential for growth, and will detail your marketing and sales strategies for achieving that growth.
6. Create a Letter of Intent
A Letter of Intent is a letter to the seller outlining your proposition for buying the company. The seller can choose to accept your proposal, negotiate its details, or suggest alterations.
Be aware that a LoI is not a legally binding document. It does, however, make sure that both parties are on the same page. It clarifies what you want and expect from the sale, including:
- Proposed purchase price based on your own valuation
- Structure for paying, whether that be in instalments or the whole price outright
- Confidentiality policies
- Timeline for sale
- Due diligence expectations
7. Make the Deal
If all parties are happy with the arrangements you can go ahead and make the deal. Ensure that the due diligence hasn't raised any alarm bells and that all your questions have been answered thoroughly.
Closing the deal can be a rather lengthy process and involves:
- Completing any outstanding paperwork
- Signing contracts
- Buyers paying for the business
- Transferring assets and liabilities
- Informing clients and the team of the transfer of ownership
- Legal filings
Do You Need to Hire a Solicitor?
The long and short of it is, yes you do. It's an extra cost but one that is essential. Buying an accounting firm is a complex process that requires legal expertise. Going it alone could be a detrimental mistake. A solicitor will help ensure that everything about the firm and the sale is legal and above board. They can also answer any questions you might have about the legality of the business.
Solicitors will draft legal documents and look over contracts for you. If they spot any compliance or regulatory problems, they will discuss these with you and talk you through your options.
Choosing not to engage with a solicitor puts you, your business, and your assets at risk. They'll work with you to protect your interests and ensure you get the right advice.
Are Your Ready to Buy and Accounting Practice?
Buying an accounting practice is a huge deal for most people. The whole process is lengthy and risky, as well as challenging and exciting. You need to be able to look at the potential pros and cons. Work to identify any potential risks that you might face and mitigate them before they become an issue.
The 7 step accounting sales process in this guide will help show you the way. Practices should be thoroughly assessed across all areas of the company so that the potential buyer fully understands what they're getting for their money.
If you're searching for the right automation technology to accompany your new firm, Link My Books might be for you. It's a bookkeeping automation software that saves accountants 6 hours per month on every eCommerce client they have.
You can get a free trial of Link My Books today, no credit card needed.
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