What are your funding options when buying an accounting practice? You have your own cash (in assets or liquid), if you own a practice you have its cash reserves and cash flow, there is bank financing, there is seller financing, and there is outside financing from investors. The state of the economy during the past two years has required some adjustments in funding accounting practice sales and acquisitions.
Two years ago, we saw a heavy mix of buyer financing and bank financing with a smaller portion in seller financing. In the past 24 months, we have seen a substantial decline in buyer capability to finance, tighter lending policies from banks and, therefore, an increase in the portion of an accounting practice sale that is financed by the seller. But what if you cannot fund any of the acquisition, you cannot secure a loan and the seller is not willing to finance more than 50 or 60 percent?
I worked with a buyer this past Fall in exactly this situation. He was young, very capable and a great fit with the seller and the selling practice, but he wasn’t financially capable and was not able to secure a loan. So, he worked with friends, family and associates to set up a small investment group to support his acquisition effort. Not an easy proposition to achieve, but he was motivated to buy this accounting practice and saw the value of the acquisition.
The good news was he achieved his goal by receiving initial pledges equal to 33% of the purchase price.
The bad news was his primary two investors became skittish when he discussed the details of his offer with them. The problem here was they were both from a different professional service industry; both had bought and sold practices in that industry which like most industries has its own unique valuation criteria, and neither understood that they were comparing apples and oranges. A further point of contention was that the standard in their industry is 10 year seller financing, not the three to five years we typically see in the accounting industry.
So, the buyer’s offer, which was not the seller’s ideal but met his needs (a bit above one times gross, seller carrying over 60% of financing on a seven year term), was seen as too risky by these two investors.
My point. If two parties want to get a deal done, there are always creative ways to finance the deal. However, the more people that are added to the decision process the more difficult it will become.