How Much Can You Afford When Buying A CPA, EA, Accounting or Tax Practice.

Buying a CPA, accounting, or tax practice is one of the most exciting—and intimidating—financial decisions a professional can make. Unlike purchasing a car or a home, acquiring a practice isn’t just about the sticker price. It’s about understanding the true cost of ownership, how much financing you can qualify for, and how the practice’s recurring cash flow supports your investment.

The question every buyer must answer early on is deceptively simple:
“How much practice can I afford to buy?”

The answer depends on more than your savings. It involves your financial strength, the practice’s earnings, the structure of the deal, and how much risk you’re willing to carry.

In this article, we’ll walk through how to determine your buying power—from personal finance assessment to loan qualification and cash-flow forecasting—so you can pursue the right practice opportunity with confidence.

Why Affordability Matters in Practice Acquisitions

Before diving into numbers, it’s important to understand why determining affordability is crucial.

When you overextend financially to buy a practice, you limit your ability to invest in its growth, weather slow tax seasons, or respond to unexpected costs like client transitions. Underestimating affordability can lead to cash shortages—one of the most common causes of post-acquisition failure.

By contrast, buyers who calculate what they can safely afford position themselves for long-term success. They can:

• Negotiate confidently with sellers and lenders.

• Evaluate financing options realistically.

• Protect cash flow for operations and client retention.

• Avoid taking on unmanageable debt.

Simply put, knowing your limits empowers smarter deals.

Step One: Assess Your Personal Financial Position

Start with an honest evaluation of your personal financial situation. Lenders—and sellers offering financing—will look closely at your personal financial strength to gauge risk.

Key factors include:

• Personal Liquidity
  How much liquid capital (cash, savings, or easily convertible investments) can you contribute? Most lenders require buyers to put down 10–30% of the purchase price. For SBA-backed loans, the minimum is often around 10%, though 20% is more typical for conventional loans.
  If you’re buying a $500,000 practice, you should expect to invest at least $50,000 to $150,000 in cash equity.

• Net Worth
  Your net worth (assets minus liabilities) signals your financial resilience. While lenders don’t require a specific number, a positive net worth demonstrates you have personal stability to manage debt and unforeseen challenges.

• Personal Credit Score
  Your credit score plays a major role in determining eligibility and loan terms. A score above 680 is ideal for SBA or bank financing; below that, you may face higher rates or need a co-signer.

• Personal Debt-to-Income Ratio (DTI)
  This measures how much of your income already goes toward debt payments. Lenders prefer to see a DTI below 40–45%, ensuring you have capacity for new practice-related debt.

When you know where you stand in these areas, you’ll have a clearer picture of your financial readiness and how much leverage you can responsibly take on.

Step Two: Understand Practice Valuation vs. Affordability

Many first-time buyers assume that if a practice is valued at $1 million, they simply need $1 million to buy it. In reality, valuation and affordability are connected but distinct concepts.

Practice Valuation
Valuation determines what the practice is worth—based on recurring revenue, client retention, services offered (tax, consulting, bookkeeping), and transition risk. Common methods include:

• Seller’s Discretionary Earnings (SDE) multiple for small practices (often 1.5–3x SDE).

• Revenue multiple for tax/consulting practices (e.g., 0.8–1.5x gross revenue).
  If a practice generates $250,000 in SDE and the market multiple is 2.5x, its estimated value is $625,000.

Affordability
Affordability measures how much you personally can pay and finance based on your capital, loan eligibility, and comfort level with debt service.
You might find a practice valued at $625,000, but depending on financing terms, you may only be able to afford $500,000 safely—or comfortably afford $800,000 if cash flow supports it.

Step Three: Calculate Your Available Capital

Now, quantify what you can realistically invest without jeopardizing your personal security.

Start with:

• Liquid savings (checking, savings, money market accounts).

• Marketable securities (stocks, bonds, mutual funds).

• Retirement funds (only if accessible without major penalties).

• Equity in real estate or other assets you could leverage or sell.

Avoid overextending personal finances—you’ll need reserves post-acquisition for working capital, payroll, marketing, and client retention efforts.

A good rule of thumb:
Keep at least 10–20% of your total net worth as a safety buffer after closing the deal.
So, if you have $200,000 in available cash, avoid committing all of it as a down payment.

Step Four: Evaluate Loan Qualification and Leverage

Most practice purchases involve a combination of buyer equity and borrowed funds. The exact structure depends on the lender, the practice’s stability, and your credit profile.

Common Financing Structures

Leverage Considerations
The more you borrow, the higher your debt obligations—and risk.
Financial advisors recommend targeting a Debt Service Coverage Ratio (DSCR) of at least 1.25, meaning the practice generates $1.25 in cash flow for every $1 of debt payment.
For example, if your annual loan payment is $100,000, the practice should produce at least $125,000 in net operating cash flow.

Step Five: Analyze the Practice’s Cash Flow

When buying a practice, affordability isn’t just about your finances—it’s also about the practice’s ability to pay for itself.

Lenders and buyers alike look at cash flow to determine if the practice can support debt service and provide a livable income for the new owner.

Seller’s Discretionary Earnings (SDE)
SDE represents the total financial benefit the owner takes home—typically:
SDE = Net Profit + Owner’s Salary + Add-Backs (non-recurring expenses, owner perks)
If a practice reports $150,000 in net profit and the owner’s salary and perks total $100,000, its SDE is $250,000.

Debt and Income Allocation
You’ll need to divide SDE among three key priorities:

• Debt Service: Loan principal and interest payments.

• Owner’s Salary: What you need for living expenses.

• Reinvestment/Reserves: Funds for operations, growth, and contingencies.

If SDE isn’t sufficient to cover all three comfortably, the practice may be beyond your financial reach—or you may need to renegotiate the price or financing terms.
A healthy acquisition typically leaves 20–30% of annual cash flow as a cushion after debt and salary.

Step Six: Factor in Transaction and Transition Costs

Beyond the purchase price, buyers must plan for a host of additional expenses that affect affordability.

Common Hidden Costs Include:

• Due diligence and professional fees: Accountants, lawyers, and consultants.

• Closing costs: Loan origination fees, appraisals, and document filing.

• Working capital: Cash needed to operate the practice until client collections stabilize (often 1–3 months of expenses).

• Client retention incentives: Bonuses or transition support for key clients.

• Equipment upgrades or repairs: Particularly for older software or hardware.

Example:
If you buy a practice for $600,000, your total “all-in” cost might reach $660,000 after fees, working capital, and early improvements.
Build a 10–15% margin into your budget to accommodate these items.

Step Seven: Run Affordability Scenarios

With your capital, loan terms, and practice cash flow in mind, it’s time to model affordability under different conditions.

Example Scenario:
Purchase price: $600,000
Down payment: $120,000 (20%)
Loan amount: $480,000
Interest rate: 9%
Term: 10 years
Annual loan payment: ≈ $73,000

If the practice produces $200,000 in annual SDE:

This structure leaves a 19% cushion—generally healthy and sustainable.
If tax season revenue dips or client retention lags, that cushion shrinks—which is why running multiple scenarios helps determine true affordability.

Step Eight: Get Prequalified or Preapproved

Before making offers, consider getting prequalified by lenders. This shows sellers you’re serious and provides an objective measure of what you can borrow.

A prequalification letter typically includes:

• Maximum loan amount.

• Required down payment.

• Estimated interest rate and terms.

• Conditions for final approval.

It’s similar to a mortgage preapproval in home buying—giving you a realistic purchase range and negotiating power.

Step Nine: Protect Yourself with Conservative Assumptions

It’s easy to fall in love with a practice’s potential, but affordability should be based on realistic projections, not best-case scenarios.

Consider these conservative guidelines:

• Assume client retention at 80–90% during the first year.

• Assume profits may drop 10–15% during the transition period.

• Avoid maxing out financing; maintain a liquidity buffer.

• Treat seller projections as optimistic—verify with historical performance and client lists.

Your goal isn’t to stretch every dollar but to build a financial cushion that keeps you in control, even during slower months.

Step Ten: Seek Professional Guidance

Determining how much practice you can afford involves both art and science. While formulas help, every deal is unique.

Work with:

• Accountants to verify the practice’s financial health and client retention trends.

• Lenders or financing brokers to assess borrowing power.

• Business advisors or M&A consultants to evaluate risk and deal structure.

• Legal counsel to protect your interests in purchase agreements and non-competes.

These experts not only refine your affordability estimate but also identify hidden costs and deal terms that could affect your bottom line.

Final Thought: Buy Within Your Means, Build Beyond Them

Determining how much practice you can afford isn’t about limiting ambition—it’s about setting a foundation for success. The best acquisitions are not the biggest or flashiest, but the ones you can comfortably sustain, grow, and improve.

When your financing, cash flow, and capital align, your practice purchase becomes more than an investment—it becomes a launchpad for long-term wealth and freedom.

So, before you sign on the dotted line, take the time to do the math. Buy smart. Borrow wisely. And build boldly—within your means today, for a stronger practice tomorrow.