Buying selling a practice?

Two Members Share Their Experiences from Both Sides of the Equation

At some point in their careers-if not at many points-a CPA's thoughts turn to the future as they attempt to answer questions about their practice. An aging firm without a successor might look to be acquired. A small- or mid-sized

The following are some pointers from CalCPA members with experience from both sides of the equation.

Shopping Around:

Finding the Right Match

By Joseph C. Kovar, CPA/PFS

There are many reasons you might decide to buy a practice: to expand services, establish a succession plan or simply because it makes economic sense, are just a few. Sweeney Kovar Investment Advisers has acquired and merged four CPA firms into our practice over the past 15 years. Whatever your reason may be to buy a practice, one thing to keep in mind is patience. Each deal our firm has been involved in has taken anywhere from one to three months, depending on the seller's motivation.

While each deal is different, the following factors are critical to a successful merger:

1. To determine whether there's a match, review the seller's tax and accounting files for quality control, and review the billing files to determine if the firm bills similar amounts for similar services. Historically, our firm has looked for CPA firms that are smaller than we are and offer similar services.

2. Look for a CPA firm that is located in the same geographic area as your firm. This will allow moving the practice into your office without causing a major disruption to the new clients. There's also an economic benefit in an acquisition when you can avoid adding overhead costs for a new location.

3. Look for a seller that is willing to spend the time to ensure the hand-off goes smoothly. Sellers must understand it's in their financial interest to spend enough time, be it days or weeks, to provide proper introductions between staffs and clients, and to ensure that the former clients are comfortable with the new CPA. This helps the seller because the final purchase price is dependent on the billings that can be transferred to the acquiring company.

4. If possible, structure the timing of the purchase for the fall to allow enough time to prepare the office and tax software for new clients. This also provides sufficient cash flow as tax season brings in the majority of the cash receipts.

5. Look for firms with clients that can benefit from other services your firm may provide, such as financial planning or advisory services.

Structuring the Purchase Price

We generally use the following method:

1. The seller will typically represent the annual billings of the practice. As the acquirer, verify the reasonableness of this amount by reviewing financial statements, tax returns and the like. Based on the representation of the billings, a conditional purchase contract can be established (the final purchase price will be calculated based on collectable billings as described below). In our experience, the purchase price is typically calculated using a multiplier of between 1-1.2 times (but can reach as high as 1.5) the annual billings, depending on whether the seller is using the services of a broker. Note that these multipliers may not be appropriate for larger size firms, in which case the multiplier would be smaller.

2. Typically, the seller will request a down payment of 30 percent to 50 percent of the total purchase price. The seller then carries a note (with market rate interest) for the balance of the purchase price, generally over a three to five year period. The purchase price is adjusted based on the actual amount on collectable billings over the subsequent 12-month period.

For example: A seller represents that his practice has $300,000 in annual billings. Using a multiplier of 1.1, this results in a total purchase price of $330,000. In addition, the seller requests a down payment of $150,000, leaving a note payable to the seller of $180,000. If the collectable billings over the subsequent 12 months amount to $270,000, the purchase price would be adjusted downward to $297,000. Finally, since the seller has already received a cash payment of $150,000, the note payable to the seller would be adjusted from the original $180,000 to $147,000.

3. It's important to note that any subsequent loss of clients after the first 12 months does not affect the contract price. So, establish a good relationship and reasonable fee structure with the new clients during the first year.

Acquiring or merging another CPA firm can be an effective way to grow and introduce new services to clients. However, the acquiring firm needs to do its homework to determine if the firms and clients are compatible.

Joseph C. Kovar, CPA/PFS is a partner with Sweeney Kovar Investment Advisers. You can reach him at joe@cpask.com.

On the Block

By Brenda Calkins, CPA

Selling your CPA practice may be the most difficult career decision you make. It was for me. After investing so much of yourself into building your practice you have a deep sense of commitment and attachment to your clients. Therefore, knowing when the time is right to sell is as important as knowing where and how to start.

A Personal Choice

You may want to sell your practice and, after a minimal amount of transition time, no longer be involved. Or you may be a sole practitioner looking for more of a partnership, where your new partner will eventually buy you out after an agreed upon amount of time. Or you may want to sell your practice and work for the CPA firm that acquires it. These are just three options to consider. Which one you choose will be unique to you and your buyer.

The most important thing to remember when starting a negotiation with a potential buyer is to get a letter of intent so both parties clearly understand what's happening. Don't leave it to chance with a verbal understanding. Also, if you're going to be involved in the practice after the sale, you'll want to consider the buyer's practice philosophy, work ethic and personality to make sure it will be a good fit.

The Price is ... Right?

The next decision you'll need to make is deciding upon your selling price-and if you're going to adjust that price over a specific time period.

For example, you may initially sell for 1.2 times the first year's gross receipts and then adjust it at one year after the sell date. (The multiplier can vary between 1-1.5.) Another option is to sell at a percentage of each year's gross receipts over an agreed upon time period following the sale. Or, more simply, you could fix the selling price as of the date of sale.

For the seller, I would recommend fixing it as of the date of sale-you never know what the buyer could end up doing with the client base and you don't want those decisions to affect you.

The next matter to consider is what financial terms you desire. Again, you can have as many choices or as much creativity as you and your buyer agree upon. You will most likely need to provide your buyer with a set of financial statements, probably for the immediately preceding one to three years, depending on the buyer. Before providing a potential buyer with proprietary information, however, you should get a signed non-disclosure document. I would also recommend getting a credit report on your buyer, which could assist you in determining their credit worthiness in case you decide to sell with financing terms and carry a note receivable.

At this point in the process you should involve a practice broker, who can assist you with the paperwork and make recommendations regarding terms, selling price and any other matters involving the sale such as an employment agreement, promissory note or a buy-sell agreement. I strongly recommend that you use an attorney to review all documents before finalizing the deal.

Passing on Unfinished Business

Something else to consider is what the buyer will owe you for any work in process. When I sold my practice I made sure there was little or no work in process as of the closing date to facilitate a smoother transition and not delay the deal.

Moreover, you will need to provide the buyer with the list of assets you are selling, as well as any prorated reimbursements you are owed for prepaid expenses like advertising, memberships in local organizations, software licenses, insurance, etc. The reimbursement for these costs should be separate from the selling of the goodwill except for the fixed assets.

The Walking Papers

After you decide to sell your practice, find a buyer, determine an asking price and decide how you want to finance the sell, all that is left is the paperwork, which typically included the buy/sell agreement, closing documents and promissory note. I recommend using a CPA practice broker and an attorney who has experience in the sale or purchase of businesses to prepare the documents.

After the legal documents have been completed, notify your clients of the sale and introduce the buyer. The communication, whether in person or in a letter, should be written in such a way to relate to the clients how positive the change can be for them.

Brenda Calkins, CPA is a manager at Smith Marion & Co CPAs. You can reach her at bcalkinscpa@verison.net.