What to look for when buying or selling an accounting practice
Most accounting practice owners are very attached to their clients, some of whom have been with them for decades (Ariel Skelley / Getty Images)
For accountants with small or medium-sized practices, retirement often means putting their firm up for sale. But, while many CPAs could be interested in taking over, there are some unique aspects to buying and selling small and medium-sized practices that both parties need to keep in mind. Here are some of them.
MAKING SENSE OF MULTIPLES
The sale price of a practice is always based on its revenue, says Sonia Albert, a broker with Accounting Practice Sales. “The price will differ according to whether the revenue comes from tax preparation, bookkeeping, general services or specialized services,” she says.
CPA Joe Truscott knows the process well: he sold his Hamilton practice after a very long period in business. “The more stable your revenue, the higher the multiple—about 1.1, 1.2, even 1.3 or greater,” he says. “On the other hand, if your practice is simply preparing tax returns, the value will be lower, as buyers are interested in clients with good average billings, especially when the services provided offer added value.”
Albert agrees. "In the U.S., certain multiples have already been very high (from 1.5 times to 1.75 the revenue), but the market is less aggressive in Canada and the habit of working with brokers, which can provide more potential buyers, is more recent.”
But every case is unique, she says. “We have already sold a firm that offered specialized services at a price that was twice its turnover, while some are more difficult to sell. It will always depend on the nature of the practice, local conditions, location, cashflow, employees, etc. For example, if several individuals want to leave at the same time, it will have an impact on the sale.”
In any case, Albert is not worried about the number of boomers who might put their practices up for sale in the coming years. “I get a lot of inquiries from young, growing practices that are willing—year after year—to grow by buying a traditional practice and converting it. People want to offer more services, in more places, but not starting from scratch.”
CONSIDERING OTHER REVENUE-RELATED FACTORS
When evaluating revenue, it’s important to consider whether most of that revenue is recurring and whether the fees are justified.
As Albert points out, you should also assess the firm’s level of client concentration: If a few clients account for a large percentage of revenue, their departure could hurt the business. This can happen when there is a change in ownership, but also when a client company is growing quickly and the firm can’t keep up.
Profitability must also be considered, the broker says. “A small, well-managed practice can be more profitable than a medium-sized practice. If revenues are the same, you can start by comparing the number of employees. Also, some practices outsource tax preparation, for example, which gives them more time to focus on higher value-added services.”
That said, there needs to be a healthy balance between services that are outsourced and those that are provided in-house, says CPA Ismail Akhter, director, tax and audit in member development and support at CPA Canada. That is because, at the end of the day, outsourcing comes with its own set of risks—quality control, data confidentiality, branding and legal liability. Therefore, whether you are purchasing or selling the business, it is important to keep these points in mind.
Other criteria to consider: What new clients can the firm attract? Is the property part of the sale? Has a lease been signed recently?
INCLUDING INTANGIBLE ASSETS
There are also variables that are more difficult to quantify. For example, has the practice moved from paper to cloud-based services? If not, is the software used compatible with the buyer’s?
“Even though the pandemic has accelerated investments in technology, you still see a lot of traditional accounting practices,” Albert notes. “Some practices are doing a complete digital transformation before selling, while others are selling with a basement full of archives, which can affect resale value.”
While it’s never too late to invest (even a little) to get up to speed, Akhter points out that tools invested in a few years ago may already be obsolete. “Some owners need to realize that the value of their practice could fall if they don’t do something,” he says.
Akhter adds, however, that a change doesn't need to be complicated; “Even going paperless can have a big impact on the value of a business,” he says.
Good employees are also priceless. “The labour shortage has created a situation where CPAs are often selling their practices because the workload is too heavy,” says Albert. “And large firms that are struggling to retain employees are buying up small firms just to get their hands on their employees.”
FINDING THE RIGHT BUYER
It’s a mistake to think that selling a practice is all about numbers, says Truscott. “Most people are very committed to their clients. I’ve been with some of mine for 30 or 40 years, sometimes until they die. That’s why the seller will want to find a buyer with whom they have an affinity. It may be one or more partners, for example, from another firm who want to go independent or merge.”
While some owners prefer to get the highest price by selling to another firm, others favour continuity, even if it means accepting a lower offer from an independent buyer, such as one or more employees of the firm. “Sometimes employees would like to buy the firm they work for, but they may not have the experience or the means and are considering leaving out of frustration,” Albert says.
Truscott went through a broker for the sale of his practice and was happy with the quality of the potential buyers he was referred to. The buyer he chose is younger and more tech-savvy than he is, which he saw as a big benefit. “He’s going to take the firm to the next level. The employees are excited.”
SETTING THE TERMS
According to Albert, the terms of the sale are critical to a successful transaction. “The buyer needs to have an understanding of the workplace, the culture, the employees and how they are treated. Can they work from home? Is the atmosphere relatively relaxed or strict? Some people may be unhappy about the sale of the firm, so they need to be reassured, especially since employees have been known to leave with client accounts.”
Indeed, the transaction is not without risk and it’s important to organize a smooth transition to avoid worrying clients. “If you’ve provided them with good service and support the buyer, most will stay because leaving would mean a lot of change for them,” says Truscott, who chose to personally share the news of the sale with his most important clients.
Of course, the ideal outcome (at least for the seller) is to get the full amount agreed upon at closing. But there are many other options, often with contingent considerations. For example, some buyers like to spread their payments over a few years and adjust them based on revenues.
Whatever the transaction (sale, merger, internal succession, etc.), the seller must be present during a transition period, which can range from a few months to a few years.
As Akhter points out, they can do this as a consultant or with certain clients only. But the goal is always the same: to ensure a smooth transition.
In Truscott's case, he was involved with the business for quite a while after the sale was arranged, which meant retirement was a bit more gradual. “For that reason, I haven’t taken the time to develop any more new hobbies than those I already have,” he says. “But now that everything is finalized, I plan to retire soon and take on my next challenge—offering specialized income tax services.”
LEARN MORE
Find out more about selling an accounting practice with these six expert tips. And be sure tor check out CPA Canada’s publication The Purchase and Sale of an Accounting Practice, which provides a comprehensive overview of the process.