You’ve identified a great practice that you want to acquire. The seller wants all cash up front. You want to hold on to your cash. How do you make this happen?
It can be a challenge for someone who is in the early stages of practice ownership to have the necessary cash on hand and a shortage of working capital is the major cause of business failure in the nation. Over the past fifteen years of accounting practice sales, we’ve seen this scenario many times. One answer to this situation is obtaining outside financing for your practice acquisition.
Why Consider Outside Financing? There are many benefits to using outside financing:
Preservation of available cash: Securing a loan from an outside lender is the most reliable and successful method of funding an accounting practice acquisition without using all of your cash reserves.
Enhance your offer to the Seller: The seller, like you, desires to preserve cash. You honor this when you take the burden of funding off the seller, which means the acquisition is more likely to close and be successful. If you were selling your business, how much would you want up front?
Gain autonomy: By providing a larger down payment through outside financing, you reduce the seller’s sense of risk and investment in the practice after transfer of ownership. This will result in more autonomy of ownership and decision making for you as the new owner, and enable the seller to focus on the transitional role of "advisor" rather than "creditor."
Extend loan terms/improve cash flow: Anyone who owns a business knows the importance of cash flow. Through outside financing you can secure up to 10 year repayment terms which will dramatically reduce cash requirements compared to the 3 to 5 year terms required on most seller
Insure sufficient capitalization: In any business, particularly one with seasonality, having sufficient cash reserves to carry you through slower times is critical. This is even more important in the months following an acquisition. Depending on the circumstances we can sometimes secure working capital in addition to an acquisition loan to help new owners through those first few months.
Not all lenders are equal. Lenders all have different areas of expertise and it is rare that a lender who is not experienced with practice acquisition financing for accountants is going to come through with a loan approval for you. If they do, it will typically be secured by other assets you have.
This is an area in which a broker can be of assistance to you. They will typically have relationships with suitable lenders. They will be experienced in the accounting practice sales process and be able to help you navigate any challenges that occur.
You can contact our offices, or even comment below, for information on accounting practice acquisition financing. You can also attend our webinar Financing Practice Acquisitions: Why Third Party Financing makes Sense.