Financing the Sale of a CPA Practice with an SBA Loan
If you own a CPA practice, at some point, you will be looking to sell and move on. This is the position many Baby Boomers are in today. Whether you want to sell the practice to another partner or employee, a family member, or list it for sale to the general public, one of the most important issues that should be addressed ahead of time is how to finance the sale of a CPA firm.
Many CPAs who have tried to sell their accounting firm in the past have run into trouble with buyers being unable to obtain financing. The problem is not necessarily that the buyer is not qualified, they may have no problem at all getting approved for a home mortgage for example. The challenge is the type of financing.
Many lenders do not finance CPA firms, because they consider them too much of a risk. The firm may have positive cash flow, but there is very little hard collateral to secure this type of loan. This scares conventional lenders, causing them to ask for a high down payment (such as 50% or more) or decline the loan altogether.
The difficulty obtaining conventional financing for an accounting firm creates a conundrum for sellers. They want to receive a price that fully represents the hard work they have put in over many years to build a strong client base. And this means putting the purchase of their firm within reach of the largest possible number of qualified buyers.
To do that, however, they often need to be willing to finance a large percentage of the purchase price. This, of course, is not something most CPA practice owners are crazy about. Seller financing means maintaining a vested interest in the viability of the firm, and this is risky when you are turning it over to a new owner and no longer have control over its operation.
There is a way for CPA firm sellers to solve this dilemma. In many cases, buyers can finance the purchase of an accounting firm through a bank loan backed by the Small Business Administration (SBA). Under the SBA’s 7(a) Loan Program, buyers can finance up to $5 million for this type of purchase.
How Does the SBA 7(a) Loan Program Work: While conventional financing is difficult to obtain for a CPA practice due to lack of available tangible collateral, SBA financing approval is based largely on other factors; such as the historical cashflow of the firm, the buyer’s experience and qualifications to operate the firm, and the buyer’s credit history.
Lenders still carry some of the risk for SBA 7(a) loans, so terms and conditions tend to be quite different from one lender to another, and they can sometimes be negotiated between the borrower and the lender. The required down payment is typically between 15% and 25%, and there is also a fee of 3% of the SBA-backed portion of the loan for amounts between $150,000 and $750,000, or 3.5% to 3.75% for larger amounts. Interest rates are usually variable and adjusted quarterly based on the prime rate plus 2.75%, and borrowers are sometimes allowed to make interest-only payments for the first two years of the loan to help them transition into their new business.
Choosing the Right SBA Lender: As mentioned earlier, terms and conditions of SBA lenders can vary widely. Some lenders are participants of the SBA’s Preferred Lender Program (PLP). This program allows lenders to make their own credit decisions, rather than having to send the application to the SBA for approval. This provides a faster and smoother approval process.
One word of caution, however. Even if a bank is a Preferred SBA Lender, this does not necessarily mean the loan process will go smoothly. Some banks are Preferred Lenders, but they only do occasional SBA loans. So, when an applicant comes in looking for a loan to buy a CPA practice, they might say they can do it with no problem at first, but later significantly tighten the terms and conditions because of the inherent risk.
If you are a seller or buyer of a CPA firm looking for a viable financing solution, it is best to work with a professional who has extensive experience helping others who have been in your shoes obtain this type of financing. At Berkshire Business Sales & Acquisitions, we are experts in the marketing and sale of CPA practices and accounting firms in the Phoenix area. We have worked with countless buyers and sellers over the years, and we have in-depth knowledge of all aspects of the sales process. We also work closely with Preferred SBA Lenders who specialize in CPA practice financing.