Who is buying firms right now?
Currently, the buyer’s market consists of both individuals and existing practice owners. Individuals could be accountants working for another CPA, or possibly in industry, who are looking to go out on their own. There are also individual buyers looking to move into a particular practice area, as well as those looking to relocate to be near family. Essentially, these individuals are seeking to purchase an already established practice rather than start from scratch. Existing firms are looking to grow in a different area of a city or state, and sometimes they have staff who aren’t at capacity and need more revenues or work to keep them busy. Existing firms will also sometimes pursue a practice purchase in order to add staff; we constantly hear comments about the difficulty of finding “good staff.”
Who is selling?
Sellers are primarily either burned out or ready to retire. In this profession, practice owners will often work much later than age 65 since they like having a steady income and know what to expect from their clients.
What has changed over the past few years?
It seems more and more practitioners are no longer performing audit work in their practice. The resources required to do audits, as well as the time and liability, seem to affect owners’ interest in providing these services. The general feeling is that fewer sole proprietors want to maintain an audit practice.
What are you seeing in 2019, and what do you think will happen in 2020 and the coming years?
Practice owners continue to retire and are seeking value from the business and legacy they’ve built over the years. Buyers continue to be interested in purchasing, but it seems there are more buyers than there are practices available for purchase. I don’t see much changing in the next few years, outside the need for practice owners to continue to grow their practices with different age groups and new businesses.
Are there any shortages in the market for either firms or CPAs?
There are shortages of practitioners who want to purchase audit practices. There’s also a shortage of buyers in their 20s and 30s. It seems more of them don’t necessarily have the drive to become entrepreneurs in public practice. They seem to enjoy working at larger public accounting firms or in industry.
Have most of the good firms been picked over?
Not necessarily. It’s not a matter of if, but rather when the timing is right, since every practice owner will be getting out at some point. A practice owner is generally only selling one time, and the timing of this sale differs from owner to owner. Many are working longer, past 65.
In addition, “good” is a relative idea. What makes a firm “good?” Is it the location? The gross revenue size? The mix of services offered? The cash flow back to the owner? Competent staff? Desirable billing rates? There are several factors that help drive buyer interest and demand in a practice. We continue to see what we feel are “good practices” available for sale on the market, and buyers see this as they review the details. When a buyer considers a practice good, the owner tends to receive not only multiple offers, but also strong and competitive offers for consideration.
We continue to see what we feel are “good practices” available for sale on the market, and buyers see this as they review the details.
Can you compare the New York and national markets?
Location does make a difference with regard to practice value in the minds of buyers. Practices located in more rural areas with smaller populations can sometimes take longer to sell. This holds true if the practice owner is looking for an outside buyer versus someone already established locally. New York, like many other states, has several large metropolitan areas, which tend to generate more interest and demand for an available practice on the market. Higher demand for a firm generally means the seller will have not only multiple offers, but also various buyer personalities to consider. These transactions are much more personal than real estate sales, as the practice owner is not only looking at the price and terms offered, but also the right “fit” with the staff and clientele. Many sellers want to feel as if they are putting their clients in good hands, because often these clients have been with a practice for many years. Sellers want their legacies to be continued in a positive way, so they look for someone similar when reviewing potential buyers.
What are partner buyouts today like? Do they want guarantees or earnouts? If the latter, what are the terms? Are people borrowing to buy?
The words “guarantee” and “earnout” tend to be synonymous in people’s minds. Essentially they mean the final sales price of a practice is to be based on some sort of client retention guarantee. Every buyer is looking to purchase based on an earnout; every seller is looking for cash at closing. These are extreme opposites.
There’s always going to be a risk of client retention in these transactions. Either the buyer, the seller, or both will need to take on this client retention risk. Across the country, practices can and do sell with no seller guarantees. Some transactions will have some sort of client retention tied to the sales price, but not the majority. And just because a practice sells for a fixed price with no revenue guarantees does not mean that the seller has to take a discount. Again, sometimes the demand for a practice will allow the seller to receive various offers with a fixed price.
If a practice’s sales price is tied to a revenue guarantee or earnout, then there are three things to look at in the offer: 1) the amount of revenue the seller has to guarantee, 2) the time frame the seller has to guarantee the income, and 3) the payback period for the buyer to make all of the payments. If the buyer is asking for a revenue guarantee, then most often sellers are being asked to guarantee the income for only one or two years following closing. Keep in mind that sellers will want to see the buyer have some “skin in the game” (i.e., a down payment) if they are going to finance the deal or guarantee revenues. Most sellers who are willing to finance part of the sales price will want at least 25% to 50% paid down at closing.
There are lenders available to help buyers with the needed financing to purchase a practice. Often these are SBA [Small Business Administration] lenders, but every once in a while a buyer is able to receive conventional financing. For the most part, SBA lenders will ask the buyer to put down anywhere from 10% to 15% of the sales price with the bank at closing. The buyer can also receive working capital in the loan to help with cash flow needs after taking over. This is great news for buyers who don’t have the cash to make the purchase outright. These transactions don’t have a lot of assets included in the purchase price, but are more based on goodwill. Many banks shy away from making loans to practices with no hard assets, but there are definitely banks that understand the profession and are willing to lend.
Are bonuses offered for staff who stay on?
People do not like change; many buyers wish to keep as much the same as possible after taking over a practice. They want to create as little change in the staff and clients’ minds to help with retention. Sometimes, however, there are changes made with staffing and the practice’s location shortly after closing. Putting noncom-pete agreements into place with staff prior to selling helps mitigate some fear of a business culture change.
Staff age and gender don’t tend to make much of a difference to buyers. Buyers love when the staff are well trained or have worked in the practice for a while. If a practice has staff who are willing to continue working, then a buyer has stepped into a turnkey situation. Retention bonuses could be an option depending on the buyer’s desire to keep staff on board.
How much impact does the economic and political environment have on the M&A market?
I feel it has been a seller’s market for the past several years, and I believe this will continue for at least a while. There are generally more buyers out there than practices available for sale, which can lead to competition among buyers. Elections tend to not make much of a difference when it comes to tax and accounting practice sales, but there are always some who would rather wait and see before entering the market.
What are common differences in firms’ succession plans?
Not everyone has a succession plan in place for if something happens to them and they’re unable to work or run the practice for a short or indefinite period of time. If nothing else, I strongly suggest practice owners talk with their heirs, loved ones, another CPA, or an attorney about their wishes if they are not able to continue in ownership. Lay out a game plan for the staff, the clients, and the business, because something could happen at any time.
Every year I hear cases of a seller becoming incapacitated in the middle of tax season. When this happens, family members and heirs aren’t too involved in the day-to-day functions of the practice and don’t know where to begin to make sure clients are still taken care of. Word spreads very quickly, and clients begin looking for another accountant if they don’t know the backup plan. Having staff or another CPA who can step in and continue the work while the seller is out will help with client retention. How many CPAs are telling their clients to be prepared, but aren’t taking the necessary actions to protect their own practices if something happens to them?