Are you thinking about buying an accounting practice? It can be a great investment. Many people and other business owners turn to CPAs and other accounting experts to help them manage their finances or, at the very least, file their annual tax returns. But before you purchase an accounting firm, you do want to make certain you’re making a good investment. Here are some questions you should ask before you purchase an accounting practice.
How Much Money Can You Invest?
Before you start asking questions related to the accounting firms you’re considering, you need to take a good look at your own financials. Knowing how much you have to invest will affect your purchase in a few ways. First, you may be able to immediately pass on some practices because they will simply be asking more than you have to invest. You can always take out a loan, of course, but it’s a good idea to have at least a third of the purchase price in cash. This will help you keep your loan payments more reasonable.
This does lead to a related question: are you looking to make an all-cash purchase, or will you need to borrow money? If you need to borrow, you will want to work with a lender first before you start looking at firms to purchase. Just like with a mortgage, they can often pre-approve you for a loan, helping you understand how much money you can borrow.
Your budget may need to cover more than your initial purchase, too. Depending on what accounting practices are available, you may need to invest in updating their offices, technology, or even hire additional employees. All of that will take additional money. You’ll also need to have a budget in place to cover all of the practice’s expenses until income begins to roll in. Be sure you take this into account when planning out your budget.
Is There a Specific Geographical Location or Area You’re Looking in?
Another question to ask yourself before you start looking at buying an accounting practice
is if you’re looking for a specific area or if you’re up for managing a firm remotely or relocating. You may be very established in your current community and have no desire to relocate. However, there may not be many accounting practices available in the area. You can manage your new firm remotely, but that does bring with it a number of challenges. You’ll likely have to travel to the practice regularly, especially during the first few years if you plan on restructuring. If you don’t plan on making major changes, though, you may be able to appoint an employee to handle the day-to-day operations and only visit now and then.
On the other hand, you may be okay with relocating to where your new acquisition is located. This, of course, comes with its own challenges. You’ll need to rent or buy a new place to live, handle moving all of your belongings, and more. You will likely need to learn about specific business regulations and operating laws in your new area, too, especially if you have moved states.
What Do You NOT Want?
Many people do sit down and create a list of what they want to get out of an accounting firm they purchase, but it can be just as helpful to make a list of what you don’t want. Are you looking for a healthy firm that you can simply invest in and reap the rewards, or do you want something that requires a more hands-on approach? Creating a list of what you don’t want will help you easily pass on some options.
You may even want to create a tiered list of things that you want to avoid. For example, items that are absolute deal-breakers would go on one list. If a practice fits any of these items, it’s an automatic pass. However, there may be some things you really don’t want to take on but would in some situations. Those would go on a different list and would require a little more research into the available practice and some further thought on your part.
What Is the Firm’s Client List?
Now that you’ve answered a few questions related to your financials and location, it’s time to look at questions to ask about the various accounting practices for sale. First, you should look into their client list. How many clients do they have? Are these clients mainly individuals or businesses? What’s the average income from each client? You need to get a good idea of what kinds of clients you can expect and what the practice’s typical clientele look like. This can also give you key insight into how to market the firm to grow its base. By evaluating the firm first before you buy, you can save yourself from making what could be a costly mistake.
Do you want to buy a large accounting practice with multi-million-dollar clients, or are you looking for a firm that’s smaller so you can have a hand in growing it? If you’re comfortable with running accounting practices, you may want to invest in a larger firm. If you’re new to the accounting industry, though, starting smaller may be a better option. Ask yourself what you’re comfortable with.
What Fee Structure Is in Place?
Another item to tick off your due diligence checklist is to look into the firm’s fee structure. Existing clients may expect to maintain their current fee structure and may not easily accept any increase in what they’re paying without an increase in services rendered. Does the practice charge hourly, or do they offer a set price for certain services? Are there clients that have the firm on retainer? Learning how the fee structure works will give you more insight into potential income.
If you determine that you want to change the fee structure, that leads to a number of additional questions. What new structure do you want to put into place? Will you allow current clients to continue operating on their current fee structure, or will you ask them to move to the new one? How will you handle clients who resist this?
What Do Past Financial Records Look Like?
While there are many important questions to ask before buying an accounting practice regarding their current client roster and financial documents, you also need to be sure you go over the practice’s past records. Has the practice been slowly but steadily gaining clients over the years, or are they losing clients? What clients are leaving, and what new ones are coming on board? If there’s a difference between these clients, it can be a reflection of the overall changes going on in the practice’s location.
You’ll also want to look deeper into the records to see if the firm’s billable hours have changed, if they’re spending more or less per client, and other factors. If the practice appears to be losing revenue and clients and has done so for a number of years, you may want to consider buying a different firm. On the other hand, if you’ve experience in running accounting practices and research shows this firm could be profitable, you may enjoy the challenge it brings.
What Does the Competition Look Like?
How much competition is in the area? If there are a good number of other accounting practices nearby, it may be very challenging to grow the business. This is especially true if one or more of these other practices is targeting the same client base your potential purchase targets. You’ll want to get an idea of what competition is there and how the practice works to maintain and grow their client base against these other firms, if they do at all.
When looking at competition, don’t limit yourself to brick and mortar accounting practices. A good number of businesses are online now. There may be CPAs that work virtually in the area, doing all or most of their work with clients online. There may even be some national online accounting firms working with clients in the area. Keep this in mind.
What Does the Overall Market Look Like?
In addition to looking at your competition, you also need to look at the overall market. Do past financial records indicate that there’s a larger market out there? What about local demographics? If there are a good number of new businesses opening up or moving into the area, you may have a change to increase your business-to-business clients. On the other hand, if more people are moving to the area, it can be a sign that you can increase that client base.
On the downside, if businesses are closing or the overall population of the area is dropping, it can indicate that you may lose clients. This is why you should research more than just the practice itself. By gathering this information before buying an accounting firm, you’ll have a more well-rounded idea of what you’re getting into.
By answering these questions, you’ll have a good idea of what type of accounting practice you’re looking to buy. Take your time and gather all of the relevant information before you decide to make your purchase. If you do, your investment will pay off in the long run.