Purchasing a Practice
Frequently Asked Questions
Q. How available is the purchase of an accounting practice?
A. The supply and demand of purchasing a practice clearly rests with the seller. There are at least 10 purchasers for every practice that goes on the market making it a sellers market.
Q. How do I determine the value of a practice?
A. As they say, beauty is in the eye of the beholder, but there are some basic guidelines to follow:
- Profitability is one of the more important aspects. Net profit margins, before taxes, will range between 20% of gross too as high as 60%. Normal range tends to fall between 30 & 40%. Obviously firms with higher margins tend to sell for higher multiples. Most practices sell between 100 to 150% of gross annual billing with most occurring in the 125% range.
- Client mix is another important factor. Audit and review work tends to be less desirable nowadays because of the exposure associated with conducting these engagements. Compilation and tax work are usually more desirable. Another hot area today is in computer consulting, but a key consideration is how much of the consulting work in non-recurring. Personal income tax practice, I.E. 1040 work tends to sell at lower multiples between 75% to 100% of gross.
- Location, not only in the market, but also in the US. Fast growing markets lend more value to future growth opportunities hence consideration should be given to this as well.
Q. What are the normal terms to purchase a practice?
A. You can expect to pay between 20 to 40% down payment with the balance paid over 2 to 7 years. More often than not, traditional lending institutions shy away from financing this type of transaction, however, New Clients, Inc. has a source for financing accounting practice sales.
Q. Can I get financing to purchase a practice?
A. Yes. New Clients, Inc. now has a source that in many cases will finance up to 80% of the purchase price. All that’s required is a good credit history, a reasonable net worth in relation to the purchase price and a cash flow from the practice that will support the debt service.
Q. How do I apply?
A. We will provide you with information once you contact us and submit a confidentiality agreement and financial statement.
Q. What about equipment, is it included in the sale?
A. Sometimes, each situation is different. Our financing source will provide equipment financing if it is not included in the purchase price.
Q. What about transition periods, what can I expect?
A. Again, it varies. Normally the first 30 days after closing the owner will provide full time assistance in transferring the practice. Anything over 30 days there is normally an agreed upon hourly rate to be paid to the seller for his time in continuing to provide service. Some transactions occur over many months, in which the seller than becomes an employee of the firm at an agreed upon salary and duration.
Q. Are there any guarantees the clients will remain with me?
A. Yes, in most cases the sales that we’ve been involved with include a one-year guarantee.
Q. How does that work?
A. At the end of one year, or actually 13 months from the date of closing, all the fees collected by you are totaled up. If they do not equal the amount of gross annual billing you purchased; you then will receive a refund based on the deficiency and using the exact same multiple that was applied to determine the purchase price.
EXAMPLE: You paid 125% of gross to purchase a $100,000 accounting practice equaling a purchase price of $125,000. At the end of 13 months you have collected only $90,000 leaving a $10,000 shortfall. You would receive $12,500 refund of the purchase price.
Q. How do I get paid in the event a refund is due under the guarantee?
A. If the owner is financing, an adjustment will be made to the remaining balance of your note. If it was an outright purchase there is normally an escrow account set up equaling 10% of the purchase price. This amount is used to cover any shortfall via the guarantee. Should the shortfall exceed the escrow amount, you would then be paid back directly by the seller.
Q. Who pays the brokers fees if we buy a practice through New Clients, Inc.?
A. All of our fees are paid by the seller, however, it is partially your responsibility to make sure we receive our commission at closing or you could become responsible for our fee if we are not paid.
Q. Is there an agreement or something that spells this out?
A. Yes, in order to proceed forward you need to sign a confidentiality agreement which fully sets forth all your responsibilities.
Q. What is the next step?
A. Download the buyers agreement form from our web site and return it along with a personal financial statement. Also, fill out our on-line form telling us which practices you would like more information on. Once we have received this, one of our representatives will contact you and set up a meeting to talk with the seller.
Q. Does New Clients, Inc. provide any other services under this transaction?
A. Yes, our goal is to help negotiate an acceptable transaction that is fair and reasonable to all parties. While we work for and represent the seller, we are here to answer all questions and mediate any disputes that may arise during negotiation. Additionally, if you buy a practice through New Clients, Inc. we will provide to you, free of charge, our Online Academy, an easy to digest online format that allows you direct access whenever you need it. With our online academy you will learn the most effective sales and marketing system for Accountants, including our newly developed digital marketing strategies. The Academy normally sells for $1,995.00.