 |
Some common questions that may arise when contemplating selling your practice |
What are Current Accounting & Tax Practices Selling For In Today’s Market?
The current market price for accounting firms can vary greatly depending on a wide variety of factors. The price and the terms of the deal can also vary. There are 3 common examples of how tax and accounting practices are sold in today’s market. The overall price of the accounting practice will sell for whatever the market is willing to pay and by using a professional accounting business brokerage and consulting firm like Naab Consulting, you can rest assure that you are getting a fair deal for your firm.
Client Retention Clause – Naab Consulting Method
Advantage: Buyer & Seller
This method is the one most often used by Naab Consulting in our transactions. We feel that this is the fairest way to sell an accounting firm as it holds both the seller and the buyer responsible for a smooth and successful transition after closing. This is similar to the percentage of collections method however the retention period is shorter (usually 1 or 2 years). The shorter client retention clause helps to ensure that the seller transitions the clients effectively if they are interested in receiving the entire purchase price. The buyer will obviously want to retain the clients in order to pay for and grow the practice. Few clients may move, retire, or leave for a variety of different reasons but a most will trust their current CPA’s or accountant’s decision making and give the new buyer a chance to earn their business. Assuming the same professional service is provided by the new buyer, clients should stay with the new owner and thus the transition will be successful.
Percentage of Collections over Time:
Advantage: Buyer
This method of selling price used to be the standard measure of how accounting firms were sold historically until the emergence of accounting business brokers and an increasing public demand for accounting practices for sale. There is no real reasoning behind the percentage of collections method as to why it was used to sell accounting practices. Our only guess is it was similar to the ways other service type businesses were sold. This method involves a percentage of the purchase price due at closing or sometimes after the initial year in business. The same percentage to be paid over the years until the initial purchase price is achieved.
Fixed Price:
Advantage: None
This method involves selling the practice for a predetermined amount of money. The purchase price on fixed price deals tend to be far less than practices sold based on a retention clause. The reasoning is simple, the buyer is at risk for 100% of the client retention once the practice is sold. Basically, if the client decides to leave for any reason, the buyer has paid for nothing. We would not recommend selling or buying a practice this way, there is too much risk for the buyer and the seller will never received fair market value for his or her firm.
How Will Naab Consulting Sell Your Accounting or Tax Practice? What Will Be The Price & Terms of the Deal?
Old Way:
Historically accounting firms were sold for around 1.0 x’s annual revenues. They were typically sold on a percentage of collections over time. For example, a firm grossing $500,000 in annual revenues could be sold for 1.0 x’s $500,000 with payments equaling 20% of the annual collections for 5 years. This allows the buyer to pay for the practice over time and with the cash flow of the practice. This method would usually be 100% seller financed. The seller would be at risk for retaining all of the clients for up to 5 years if he or she wanted to collect the proposed purchase price. Not only is the seller bearing all the risk, but the buyer is at liberty to “cherry pick” the client list. The buyer will have sole discretion of the clients they choose to retain. This is not fair to the seller, don’t become a horror story and sell for a percentage of collections over time.
Naab Consulting Way:
Typically the practices that we sell will be based on a multiple of the gross billings and generally be based on a 1 year client retention clause. Depending on market conditions and a variety of other factors our practices are sold for much greater than 1.0 x’s revenues. This method of selling your practice, we believe, is fair for the seller and the buyer.
We also offer outside bank financing for the buyer. This will allow the buyer to put down a sizable down payment at closing (typically 50-100%) so you can cash out at closing. It also allows the buyer to be able to make payments to a lender and not the seller.
The 1 year client retention clause assures that both the seller and the buyer have a common interest in a making sure the firm is properly transitioned to the new buyer. The seller is looking to obtain a maximum purchase price by retaining all of the current clientele and the buyer is looking at keeping the clients to service the debt. This can be explained in greater detail by any of our staff if you are interested in discussing in further details.
What is the Current Market Price for Accounting & Tax Practices For Sale?
The market for CPA, accounting and tax practices has definitely changed over the years. While the deal structure and terms have changed, the factors that go into deriving fair market value for the practice has not. Historically practices were sold for around 1.0 x’s annual revenues, this is no longer the case. A variety of different factors will ultimately determine the final purchase price but all the factors listed below will have a significant impact on the final selling price.
Current Market Conditions:
While the asking price and terms can help be set through Naab Consulting, the ultimate selling price of the practice will be dictated by the market. Tax and Accounting practices are sold no differently than any other product on the market; this is simple economics, supply and demand 101. More buyers interested in a practice will generate a higher asking price. Our job at Naab Consulting is bringing forward only the most qualified and capable candidates to buy your practice, typically yielding a higher selling price than and FSBO or for sale by owner practice. While you may have a buyer or two lined up already, think of how the purchase price can be driven up by multiple offers. Naab Consulting does this every day and we regularly have multiple offers on CPA, accounting and tax practices we represent generating a higher selling price at the end of the day.
Location:
Generally speaking a major metropolitan area practice is going to generate a higher selling price than a more rural setting. Some major metro areas will sell higher than other major metro areas due to the number of buyers and demand for the practice. Location has a huge impact on purchase price and asking price of the practice. We typically see a 10-50% higher selling price in the more desirable areas. Our job is to help you established a fair asking price based on current market conditions in your area, this is our business and this is what we know. Call us anytime for a free consultation on current market conditions in your area.
Services Provided:
Strictly tax clients are generally seen only a few times per year while corporate accounting clients are seen more often. Accounting clients also provide a steady stream of cash flow throughout the year while the tax client revenue is generally made during the tax season months. This visibility can help the buyer feel more comfortable with the client and ease with the transitioning period. Each buyer is a little different and obviously each practice is a little different and will ultimately sell for market value and what the buyer is willing to pay for the practice. We speak with buyers who are looking for all tax, some want all accounting plus audits, reviews and compilations. There are no real hard numbers on whether a primarily tax practice will sell for more or less than a broader mix of revenue type practice.
Annual Revenues:
The firms annual revenues can also be a strong indicator on purchase price. We go back to supply and demand and what the current market will bear for an accounting practice. The higher the annual revenues, the smaller the buyer pool. The lower the revenues, the higher the interest level and more affordable it can be for a larger group of accountants. Generally the practices we help sell range from annual revenues of around $100,000 to under $3,000,000 in revenues.
Numbers:
We are all accountants and the most important factor for any successful business is the bottom-line. Firms with desirable profit margins (40%+) tend to sell at a faster rate than their less profitable counterparts. This is not to say that if your firm is netting less than 40% that we cannot sell it, because we can. There also needs to be some due diligence performed by the buyer in order to add back all the non discretionary items that may be hidden in the profit and loss statement. Generally speaking, the higher the average fees per client, per return, higher net income practices, etc. will sell and command a higher purchase price and sell quicker.
Asking Price & Terms:
Owners need to be aware of current market prices for accounting and tax practices in their area. There is no better way to help you with this than hiring a professional accounting broker such as Naab Consulting. No seller wants to leave money on the table but at the same time does not want to drag out the sale of the firm for months at a time. A fair price will enable the owner to get his or her desired price and terms and at the same time allowing the buyer to make a purchase which will work financiallyl for them. Practices that are overpriced can sit on the market too long and without current confidentiality agreements in place for prospects, the seller can run a huge risk of letting clients, competitors and most importantly employees privy to the fact that the firm is for sale.
For Sale By Owner (FSBO) or Naab Consulting?
Selling your accounting or tax practice can be a daunting task in which probably the seller has very little if any experience in selling. Using a professional accounting business broker such as Naab Consulting can alleviate these worries and help the transaction flow smoothly. Selling your firm for sale by owner can lead to inexperience and an overall bad deal in which the price and terms do not reflect what today accounting market will bear. Owners that have a current exit strategy should also consider advice from a professional accounting broker just to make sure that nothing is left uncovered.
