There are many steps involved in purchasing an accountancy practice, but they can be summarised in two simple statements – do you understand what you are buying and do you really understand the vendor? These sound obvious, but it is surprising how often acquirers fail to plan properly because they have not fully covered off these points.
The first question involves suitable due diligence. This needs to be tailored to the circumstances, but you need to make sure that you ask the current owner a series of questions to ensure that you are making a fully informed decision.
The second question is about the motivation of the vendor – do you know why they are selling, what they see as important and how they expect you to protect the business they have worked so hard to build? Understanding the vendor’s mindset is critical to being chosen as the right buyer and successfully completing a transaction.
How much should I pay for an accounting practice?
The value of an accounting practice can vary depending on a variety of factors. These include the size of the firm, its profitability, the location, the client base, and the quality of the services being offered. In general, the price for an accounting firm can range from 0.7 to 1.4 times the firm’s gross recurring fees but it can be higher in some cases where there is strong profitability or a good strategic fit.
To determine a fair price for an accounting firm, it is recommended that you conduct thorough due diligence, benchmark against examples in the market if possible and work with experienced professionals. They can help you assess the value of the accounting practice and identify any potential risks or issues, which will help you to negotiate a fair price.
In addition to the purchase price, there may be additional costs associated with acquiring an accounting firm, such as legal fees and other transaction costs. It is important to factor in these costs when determining the total cost of the acquisition. Also remember the headline price is only part of the negotiation – you will also need to consider deferred payments, clawback mechanisms and any other assets/liabilities you are taking on. Again, working with experienced advisors can help you with this.
What due diligence should I undertake before buying an accounting practice?
Due diligence is an essential step when looking at acquiring an accounting practice and ensures you can deal with the question above – do you understand what you are buying? It needs to be tailored for each transaction as circumstances will often differ, but usually it involves a review of the financial, legal, operational and risk aspects of the practice you are looking to buy.
Here are some of the key aspects you should consider when producing a due diligence plan:
Financial
This involves reviewing the financial statements and records of the target practice and analysing its financial health. Your review should include revenue and profit margins, client retention rates and cash flow. It is also essential to understand the balance sheet if you are buying a company rather than a fee bank – make sure you fully understand all assets and liabilities, including any outstanding loans and tax obligations. Also consider any liabilities that may not be on the balance sheet as yet, such as ongoing disputes or legal challenges. Be careful to structure the deal in a way that reflects any concerns you may have, with suitable indemnities and warranties introduced to protect you.
Legal
Legal due diligence includes reviewing contracts, licences, and any legal obligations or liabilities that the accounting practice may have. You will also need to review compliance with relevant regulations, professional obligations and industry standards, such as AML and GDPR requirements.
Operational
You need to understand how the practice operates on a day-to-day basis. This involves reviewing processes and procedures, as well as the infrastructure and technology they use. Your review should include controls over workflow, the suitability of staffing structures and management practices.
You may also want to review the practice’s client base and assess their reputation in the industry. Bear in mind that a practice may not want its team members to know that a sale is in progress, so meeting the employees is not always possible.
Technology
This is an increasingly important aspect of due diligence. An assessment of the software being used within the practice will be essential to understand its suitability and your own familiarity with the software suite in place.
Alternatively, if you already have a practice and, therefore, an established software suite, you will want to consider how you will transition the acquired practice into your existing processes. You need to consider whether you will move all clients and data across on day one or run separate systems for a period of time, allowing for a smooth transition.
Clients
It is essential to review the accounting practice’s client base and assess the relationships it has with its clients. You may want to review client letters of engagement and client retention rates to assess the risk of losing clients after the acquisition. Critically, you need to consider who the main client contact is and whether they will be leaving as a result of the sale – this will help you plan a communication and handover process.
You should also look at the services currently being provided to clients. You may conclude that you can provide a more comprehensive service offering, which could help retain clients and generate additional fee income quickly. Bookkeeping, management reporting, tax planning and financial planning services are often avoided by smaller practices who do not have the confidence to deliver them.
Resourcing
The team involved in the accounting practice is an important aspect to consider, as it is likely to be responsible for the day-to-day operations of the business. You will want to assess the qualifications and experience of the staff, as well as any existing employment contracts and any current compensation and benefit plans.
Building a strong relationship with the team in an acquired practice is critical as they usually have valuable knowledge and client relationships. Retaining them will help to maintain continuity of client service which in turn will help with client retention.
Culture
It is also crucial to understand the firm’s culture and values, as this will significantly impact the success of the acquisition. You will want to ensure that it reflects your own values and goals.
Should I engage with a solicitor before buying an accountancy practice?
It is highly recommended that you engage with a solicitor before buying an accountancy practice. A solicitor can provide valuable legal advice and guidance throughout the entire acquisition process, helping you to navigate complex legal issues and avoid potential risks.
A solicitor can assist with reviewing contracts and agreements, conducting due diligence, negotiating terms, and drafting legal documents, such as the purchase agreement and employment contracts. They can also advise you on any regulatory or compliance issues related to the acquisition. You can decide how much you involve a solicitor to manage your costs carefully.
Working with a solicitor can help ensure the acquisition is structured in a way that is legal, fair, and beneficial to all parties involved. They can also help identify any potential liabilities or risks associated with the acquisition and advise you on how to mitigate them.
Engaging with a solicitor is therefore an important step in the acquisition process, and it can help to protect your interests and ensure that the acquisition is successful.
Do you have any TaxAssist Accountants practices for sale?
We hope you’ve found this article useful to support your research into buying an accountancy business and if you hadn’t previously considered buying a franchise then we do have a range of opportunities available which can be accessed here. We also have an FAQ section and a guide to the franchise resale process to help with your research and due diligence.
About the author:
Daren Moore, FCCA
Daren Moore is The TaxAssist Group Chief Executive Officer. With a solid knowledge of the accounting and taxation industry, in which he is a well-known and respected figure, Daren brings his 30 years of expertise to his role, to ensure the continued success and growth of the TaxAssist network in the UK and internationally.
His Management Board role involves a number of strategic planning functions, looking at business growth, acquisition opportunities, investment analysis, team building and incentive initiatives, innovation in technology and cloud services and broader operational planning.
Please note; This guidance has been prepared based on our experience and knowledge, no responsibility can be taken for any action taken or not taken as a result of reading this document. It does not provide detailed tax or legal advice and should not be seen to replace the need to seek separate advice in these areas.
