We look at some sale and mergers guidelines for accounting firms
Negotiating the terms of a merger or sale of an accounting firm usually includes several factors ranging from client retention and the initial down payment to the buyer’s expected profitability and duration of the payout period.
Merging or selling your accounting firm may be a decision you’re making as a baby boomer who has decided it’s time to retire. You might also be a younger entrepreneur who is seeking the security of a well-established practice. In both scenarios, you’re likely interested in understanding the typical terms associated with this type of deal and what you can expect to get paid for your accounting firm.
Figuring this value requires an analysis of several factors, which can include size, anticipated profitability, location, and nature of your practice. Negotiating and determining the terms of a deal is more straightforward and easier to understand when the following factors are examined:
- Client Retention
- Initial Down Payment
- Buyer’s Expected Profitability
- Payout Period Duration
One of the main factors considered when you want to merge your accounting firm is the post-closing client retention rate. It can be challenging to know for sure if the acquired clients will continue to stay or not. To protect all interests in a merger, we might structure it as a collection deal where you are paid based on the retention rate each year for a specific period.
Terms might include a price lock based on a minimum of two or more years. This figure is dependent on various factors, which will need to be examined. Incorporating these sales or mergers guidelines helps reduce the risk considerably for an accounting firm looking to acquire other accounting firms.
The amount of an initial down payment is another factor dependent on several different aspects of a deal. The time of the year and the nature of a business may play a significant role in determining the upfront cash investment. For example, acquiring a firm specializing in tax assistance might require a higher down payment if it’s closed directly before tax season.
The initial down payment can also depend on the size of the deal. If a significant investment is required for a down payment, we may need to utilize part of your working capital to help offset the negative cash flow this type of transaction creates.
Profitability is another factor associated with the terms for a merger or sale for an accounting firm looking to acquire other firms. Examining this factor can show a significant difference between your historical profit and the expected profitability after your accounting practice is acquired.
While synergies are created, some costs may need to be absorbed that may offset profits negatively. Offsetting future benefits may be made by adjusting other terms. When you merge your accounting firm with Fusion CPA, we take a thorough look at each variable of your business to help ensure we both feel like it’s a win-win situation.
We also suggest having your financial adviser examine profitability to help preserve the quality of your accounting firm’s value.
The duration of a payout period often depends on the size of your firm.
Cash flow can play a significant role in determining the duration of a payout period. A merger providing a high initial cash flow is going to be attractive for an accounting business looking to acquire other businesses. It might also be more lucrative for you as a seller to accept a more extended payout period, depending on the structure of the deal.
By examining these aspects of your business and following some mergers guidelines, it can help streamline negotiations, spotlight each specific variable, and make it easier to determine the terms of a deal when you merge your accounting firm with Fusion CPA.
_________________________
This blog article is not intended to be the rendering of legal, accounting, tax advice, or other professional services. Articles are based on current or proposed tax rules at the time they are written and older posts are not updated for tax rule changes. We expressly disclaim all liability in regard to actions taken or not taken based on the contents of this blog as well as the use or interpretation of this information. Information provided on this website is not all-inclusive and such information should not be relied upon as being all-inclusive.
